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DEPARTMENT OF TREASURY requirements related to the covered and Katherine Hsu, Office Chief, or fund provisions of the rules. Benjamin Meeks, Special Counsel at Office of the Comptroller of the DATES: Effective date: The final rule is (202) 551–3850, Office of Structured Currency effective October 1, 2020. Finance, Division of Corporation FOR FURTHER INFORMATION CONTACT: Finance, U.S. Securities and Exchange 12 CFR Part 44 OCC: Roman Goldstein, Risk Commission, 100 F Street NE, Washington, DC 20549. [Docket No. OCC–2020–0002] Specialist, Treasury and Market Risk Policy, (202) 649–6360; Tabitha Edgens, SUPPLEMENTARY INFORMATION: RIN 1557–AE67 Counsel; Mark O’Horo, Senior Attorney, Table of Contents Chief Counsel’s Office, (202) 649–5490; SYSTEM for persons who are deaf or hearing I. Background impaired, TTY, (202) 649–5597, Office II. Notice of Proposed Rulemaking 12 CFR Part 248 III. Overview of the Final Rule of the Comptroller of the Currency, 400 IV. Summary of the Final Rule [Docket No. R–1694] 7th Street SW, Washington, DC 20219. A. Qualifying Foreign Excluded Funds Board: Flora Ahn, Special Counsel, B. Modifications to Existing Covered Fund RIN 7100–AF70 (202) 452–2317, Gregory Frischmann, Exclusions Senior Counsel, (202) 452–2803, Kirin 1. Foreign Public Funds FEDERAL DEPOSIT INSURANCE Walsh, Attorney, (202) 452–3058, or 2. CORPORATION Sarah Podrygula, Attorney, (202) 912– 3. Public Welfare and Small Business 4658, Legal Division, Elizabeth Funds 12 CFR Part 351 MacDonald, Manager, (202) 475–6316, C. Additional Covered Fund Exclusions Cecily Boggs, Senior Financial 1. Credit Funds RIN 3064–AF17 2. Funds Institution Policy Analyst, (202) 530– 3. Family Wealth Management Vehicles COMMODITY FUTURES TRADING 6209, Brendan Rowan, Senior Financial 4. Customer Facilitation Vehicles COMMISSION Institution Policy Analyst, (202) 475– D. Limitations on Relationships With a 6685, Christopher Powell, Senior Covered Fund 17 CFR Part 75 Financial Institution Policy Analyst, E. Ownership Interest (202) 452–3442, Nathaniel Grant, Lead F. Parallel Investments RIN 3038–AE93 Financial Institution Policy Analyst, G. Technical Amendments V. Administrative Law Matters SECURITIES AND EXCHANGE (202) 452–3105, David McArthur, Senior Economist, (202) 452–2985, A. Use of Plain Language COMMISSION B. Paperwork Reduction Act Division of Supervision and Regulation; C. Regulatory Flexibility Act Analysis 17 CFR Part 255 Board of Governors of the Federal D. Riegle Community Development and Reserve System, 20th and C Streets NW, Regulatory Improvement Act [Release No. BHCA–9; File No. S7–02–20] Washington, DC 20551. E. OCC Unfunded Mandates Reform Act FDIC: Bobby R. Bean, Associate F. SEC Economic Analysis RIN 3235–AM70 Director, [email protected], Andrew D. G. Congressional Review Act Prohibitions and Restrictions on Carayiannis, Senior Policy Analyst, I. Background [email protected], or Brian Cox, and Certain 1 Senior Policy Analyst, [email protected], Section 13 of the BHC Act, also Interests in, and Relationships With, known as the Volcker Rule, generally Hedge Funds and Private Equity Funds Capital Markets Branch, (202) 898–6888; Michael B. Phillips, Counsel, prohibits any banking entity from AGENCY: Office of the Comptroller of the [email protected], Benjamin J. Klein, engaging in proprietary trading or from Currency, Treasury (OCC); Board of Counsel, [email protected], or Annmarie acquiring or retaining an ownership Governors of the Federal Reserve H. Boyd, Counsel, [email protected], interest in, sponsoring, or having certain System (Board); Federal Deposit Legal Division, Federal Deposit relationships with a or 2 Insurance Corporation (FDIC); Securities Insurance Corporation, 550 17th Street private equity fund (covered fund). The and Exchange Commission (SEC); and NW, Washington, DC 20429. statute expressly exempts from these Commodity Futures Trading CFTC: Cantrell Dumas, Special prohibitions various activities, Commission (CFTC). Counsel, (202) 418–5043, cdumas@ including, among other things: • Underwriting and market making- ACTION: Final rule. cftc.gov, Division of Swap Dealer and Intermediary Oversight; Mark Fajfar, related activities; • Risk-mitigating hedging activities; SUMMARY: The OCC, Board, FDIC, SEC, Assistant General Counsel, (202) 418– • Activities on behalf of customers; and CFTC (together, the agencies) are 6636, [email protected], Office of the • Activities for the general account of adopting amendments to the regulations General Counsel; Stephen Kane, insurance companies; and implementing section 13 of the Bank Research Economist, (202) 418–5911, • Trading and covered fund activities Holding Company Act (BHC Act). [email protected], Office of the Chief and investments by non-U.S. banking Section 13 contains certain restrictions Economist; Commodity Futures Trading entities solely outside the United on the ability of a banking entity or Commission, Three Lafayette Centre, States.3 nonbank financial company supervised 1155 21st Street NW, Washington, DC In addition, section 13 of the BHC Act by the Board to engage in proprietary 20581. contains an exemption that permits trading and have certain interests in, or SEC: Juliet M. Han, Senior Counsel, banking entities to organize and offer, relationships with, a hedge fund or William Miller, Senior Counsel, including sponsor, covered funds, private equity fund (covered funds). Benjamin A. Tecmire, Senior Counsel, subject to certain restrictions, including These final amendments are intended to or Jennifer Songer, Branch Chief at (202) improve and streamline the regulations 551–6787 or [email protected], 1 12 U.S.C. 1851. implementing section 13 of the BHC Act Investment Adviser Regulation Office, 2 Id. by modifying and clarifying Division of Investment Management, 3 12 U.S.C. 1851(d)(1).

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that banking entities do not rescue covered fund provisions beyond those proposal would have codified an investors in those funds from loss, and changes for which specific rule text was existing policy statement by the Federal are not themselves exposed to proposed.9 The 2019 amendments banking agencies (the OCC, Board, and significant losses due to investments in finalized those changes to the covered FDIC) that addresses the potential issues or other relationships with these funds.4 fund provisions for which specific rule related to a foreign banking entity Authority under section 13 of the text was proposed in the 2018 controlling qualifying foreign excluded BHC Act for developing and adopting proposal.10 The agencies indicated they funds. regulations to implement the would issue a separate proposal The 2020 proposal also would have prohibitions, restrictions, and addressing and requesting comment on made modifications to several existing exemptions of section 13 is shared the covered fund provisions of the rule exclusions from the covered fund among the Board, the FDIC, the OCC, and other fund-related issues, and, in provisions to provide clarity and the SEC, and the CFTC (individually, an February 2020, the agencies issued a simplify compliance with the agency, and collectively, the agencies).5 separate notice of proposed rulemaking requirements of the implementing The agencies originally issued a final that specifically addressed those areas regulations. First, the 2020 proposal rule implementing section 13 in (the 2020 proposal).11 would have revised certain restrictions in the foreign public funds exclusion to December 2013 (the 2013 rule), and II. Notice of Proposed Rulemaking those provisions became effective on more closely align the provision with April 1, 2014.6 In the 2020 proposal, the agencies the exclusion for similarly-situated U.S. The agencies published a notice of proposed revisions to a number of the registered investment companies. proposed rulemaking in July 2018 (the provisions regarding covered fund Second, the 2020 proposal would have 2018 proposal) that proposed several investments and activities as well as to permitted loan securitizations excluded amendments to the 2013 rule.7 These other provisions of the implementing from the definition of covered fund to proposed revisions sought to provide regulations related to the treatment of hold a small amount of non-loan assets, greater clarity and certainty about what funds. The proposed changes, which consistent with past industry practice, activities are prohibited under the 2013 were based on comments received in and would have codified existing staff- rule—in particular, under the response to the agencies’ questions in level guidance regarding this exclusion. prohibition on proprietary trading—and the 2018 proposal and the agencies’ In addition, the 2020 proposal would to better tailor the compliance experience with the implementing have revised the exclusion for small requirements based on the risk of a regulations, were intended to reduce the business investment companies to banking entity’s trading activities. The extraterritorial impact of the account for the life cycle of those agencies issued a final rule implementing regulations, improve and companies and requested comment on implementing amendments to the 2013 streamline the covered fund provisions, whether to clarify the scope of the rule in November 2019 (the 2019 and provide clarity to banking entities exclusion for public welfare and other amendments), and those provisions regarding the provision of financial investments to include rural business became effective in January 2020.8 services and the conduct of permissible investment companies and qualified As part of the 2018 proposal, the activities in a manner that is consistent opportunity funds. Finally, the 2020 agencies proposed targeted changes to with the requirements of section 13 of proposal would have addressed the provisions of the 2013 rule relating the BHC Act. concerns about certain components of To better limit the extraterritorial to acquiring or retaining an ownership the preamble to the 2013 rule related to impact of the implementing regulations, interest in, sponsoring, or having certain calculating a banking entity’s ownership the 2020 proposal would have exempted relationships with a fund and sought interests in covered funds. the activities of certain funds that are comments on other aspects of the The agencies also included in the organized outside of the 2020 proposal several new exclusions and offered to foreign investors 4 12 U.S.C. 1851(d)(1)(G). Other restrictions and from the covered fund definition in requirements include: (1) The banking entity (qualifying foreign excluded funds) from order to more directly align the provides bona fide trust, fiduciary, or investment the restrictions of the implementing regulation with the purpose of the advisory services; (2) the fund is organized and regulations. Under the 2013 rule, in statute. For example, the agencies offered only to customers in connection with the certain circumstances, some foreign recognized that the implementing provision of such services; (3) the banking entity does not have an ownership interest in the fund, funds that are not ‘‘covered funds’’ may regulations have inhibited banking except for a de minimis investment; (4) the banking be subject to the implementing entities’ ability to extend credit by entity complies with certain marketing restrictions regulations as ‘‘banking entities,’’ if they restricting their relationships with related to the fund; (5) no director or employee of are controlled by a foreign banking credit funds, and the 2020 proposal the banking entity has an ownership interest in the fund, with certain exceptions; and (6) the banking entity, and thus could be subject to would have created a new exclusion for entity discloses to investors that it does not more onerous compliance obligations such funds. Under the 2020 proposal, guarantee the performance of the fund. Id. than are imposed on similarly-situated banking entities would have been able 5 12 U.S.C. 1851(b)(2). U.S. covered funds, even though the to invest in and have certain 6 Prohibitions and Restrictions on Proprietary foreign funds have limited nexus to the relationships with credit funds that Trading and Certain Interests in, and Relationships with, Hedge Funds and Private Equity Funds; Final United States. Accordingly, the 2020 extend the type of credit that a banking Rule, 79 FR 5535 (Jan. 31, 2014). entity may provide directly, subject to 7 Proposed Revisions to Prohibitions and 9 83 FR 33471–87. certain safeguards. Relatedly, the 2020 Restrictions on Proprietary Trading and Certain 10 In response to the 2018 proposal, the agencies proposal would have established an Interests in, and Relationships With, Hedge Funds received numerous comments related to covered exclusion from the definition of covered and Private Equity Funds, 83 FR 33432 (July 17, fund issues for which no specific rule text was 2018). proposed. However, in the preamble to the 2019 fund for venture capital funds. This 8 Prohibitions and Restrictions on Proprietary amendments, the agencies generally deferred public provision was intended to facilitate Trading and Certain Interests in, and Relationships consideration of such comments to a future banking entities’ abilities to engage in With, Hedge Funds and Private Equity Funds, 84 proposed rulemaking. 84 FR 62016. this important type of development and FR 61974 (Nov. 14, 2019). The regulations 11 Prohibitions and Restrictions on Proprietary implementing section 13 of the BHC Act, as Trading and Certain Interests in, and Relationships investment activity, which may amended through June 1, 2020, are referred With, Hedge Funds and Private Equity Funds, 85 facilitate capital formation and provide throughout as the ‘‘implementing regulations.’’ FR 12120 (Feb. 28, 2020). important financing for small

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businesses, particularly in areas where regulations’ aggregate fund limit and As described further below, the agencies such financing may not be readily covered fund deduction and provided have adopted many of the proposed available. In addition, the agencies clarity to banking entities regarding changes to the implementing believed that excluding such activities their permissible investments made regulations, with certain targeted would be consistent with the purpose of alongside covered funds.12 adjustments. the statute, as it would exclude fund The agencies invited comment on all To reduce the extraterritorial impact activities that do not present the risks aspects of the 2020 proposal, including of the implementing regulations, the that section 13 of the BHC Act was specific proposed revisions and final rule, similar to the 2020 proposal, intended to address. questions posed by the agencies. The exempts the activities of certain funds The 2020 proposal also would have agencies received approximately 40 that are organized outside of the United allowed a banking entity to provide unique comments from banking entities States and offered to foreign investors certain traditional financial services to and industry groups, public interest (qualifying foreign excluded funds) from its customers via a fund structure, groups, and other organizations and certain restrictions of the implementing subject to certain safeguards and individuals. In addition, the agencies regulations. Specifically, the final rule limitations. First, the 2020 proposal received six letters related to the subject codifies an existing policy statement by would have excluded from the matter considered in the 2020 proposal the Federal banking agencies that definition of covered fund an entity prior to the formal comment period. The addresses the potential issues related to created and used to facilitate customer agencies are now finalizing the 2020 a foreign banking entity controlling a exposures to a transaction, investment proposal, with certain changes based on qualifying foreign excluded fund. The strategy, or other service. Second, the public comments, as described in detail final rule contains some modifications 2020 proposal would have excluded below.13 to the proposed exemption—the anti- from the covered fund definition wealth evasion provision and compliance III. Overview of the Final Rule management vehicles that manage the program requirements—to address investment portfolio of a family and Similar to the 2020 proposal, the final comments that the proposed exemption certain other closely related persons. rule clarifies and simplifies compliance would have unintentionally continued Both of these provisions were intended with the implementing regulations, to subject qualifying foreign excluded to allow a banking entity to provide refines the extraterritorial application of funds to these requirements. such services in the manner best suited section 13 of the BHC Act, and permits The final rule also revises, as to its customers. additional fund activities that do not proposed, but with some modifications, In addition, the 2020 proposal would present the risks that section 13 was several existing exclusions from the have permitted a banking entity to intended to address. The agencies covered fund provisions, to provide engage in a limited set of covered received comments from a diverse set of clarity and simplify compliance with transactions with a covered fund that commenters: Comments from banking the requirements of the implementing the banking entity sponsors or advises entities and financial services industry regulations. First, the final rule revises or with which the banking entity has trade groups were generally supportive certain restrictions in the foreign public certain other relationships. The of the 2020 proposal and recommended funds exclusion to more closely align implementing regulations generally additional modifications, while several the provision with the exclusion for prohibit all covered transactions organizations and individuals were similarly situated U.S. registered between a covered fund and its banking generally opposed to the 2020 proposal. investment companies. Second, the final entity sponsor or investment adviser. rule permits loan securitizations The agencies, in the 2020 proposal, 12 Separately, the agencies proposed various excluded from the definition of covered recognized that the existing restrictions technical edits to the implementing regulations. See fund to hold a small amount of debt infra Section IV.G (Technical Amendments). have prevented banking entities from 13 Comments are generally discussed in the securities, consistent with past industry providing certain traditional banking relevant sections, infra. The agencies also received practice, and codifies existing staff-level services to covered funds, such as several miscellaneous comments. One commenter guidance regarding this exclusion. In standard payment, clearing, and suggested revising § ll.21 (Termination of addition, the final rule revises the activities or investments; penalties for violations) of settlement services. the implementing regulations to provide for exclusion for small business investment Lastly, the 2020 proposal would have mandatory prison time for violations of the companies to account for the life cycle clarified certain aspects of the definition implementing regulations. Anonymous. The of those companies and clarifies the of ownership interest. Currently, due to agencies believe that this comment is beyond the scope of the exclusion for public welfare the broad definition of ownership scope of the current rulemaking. Another commenter encouraged the agencies to exempt from and other investments to include rural interest, some by banking entities the implementing regulations international banks business investment companies and to covered funds could be deemed with a small presence in the United States. Institute qualified opportunity funds. Finally, the ownership interests. The 2020 proposal of International Bankers (IIB). The agencies believe final rule clarifies the calculation of that this comment is beyond the scope of the included a safe harbor for bona fide current rulemaking. A third commenter claimed ownership interests in covered funds senior loans or senior debt instruments that the 2020 proposal improperly assumed that the that are attributed to a banking entity. to make clear that an ‘‘ownership implementing regulations have certain burdens and The final rule adopts—as proposed, interest’’ in a fund would not include that it did not adequately assess the costs and with some modifications—several new benefits of the proposed revisions to the such credit interests in the fund. In implementing regulations. Occupy the SEC exclusions from the covered fund addition, the 2020 proposal would have (Occupy). Contrary to the commenter’s suggestions, definition to more closely align the clarified the types of creditor rights that the Federal Register notice for the 2020 proposal regulation with the purpose of the may attach to an interest without contained extensive discussion of the costs and statute. First, the final rule establishes a benefits of the 2020 proposal. See 85 FR 12151–76. necessarily causing such an interest to This final rule contains similar analyses. See infra, new exclusion for funds that extend fall within the scope of the definition of Section IV (Administrative Law Matters). Several credit to permit the same credit-related ownership interest. Finally, the 2020 commenters expressed support for the comment activities that banking entities can proposal would have simplified letters submitted by other organizations. E.g., IIB; engage in directly. In addition, the final European Banking Federation (EBF); Goldman compliance efforts by tailoring the Sachs Group, Inc. (); and Canadian rule creates an exclusion for venture calculation of a banking entity’s Bankers Association (CBA). Finally, one comment capital funds to help ensure that compliance with the implementing was not relevant. See Charity Colleen Crouse. banking entities can indirectly facilitate

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this important type of development and previously issued staff FAQs, unless The effective date for the final rule investment activity to the same degree otherwise specified.17 will be October 1, 2020, to that banking entities can do so directly. accommodate the requirements of the Comment Period Finally, the final rule adopts two Riegle Community Development and exclusions for family wealth Since the issuance of the 2020 Regulatory Improvement Act.24 The management and customer facilitation proposal, the COVID–19 global agencies do not believe an extended vehicles to provide banking entities pandemic has substantially disrupted compliance or transition period is flexibility to provide advisory and other activity in the United States and in necessary because the final rule largely traditional banking services to other countries. The effects of the tailors the regulations implementing customers through a fund structure. COVID–19 disruptions have created section 13 of the BHC Act rather than In an effort to clarify and simplify many challenges for households and increases compliance burdens. compliance with the implementing businesses, and the agencies received IV. Summary of the Final Rule regulations, the final rule adopts comments requesting that the agencies revisions to the provisions that govern extend the comment period for the 2020 A. Qualifying Foreign Excluded Funds the relationship between a banking proposal or delay the rulemaking more Since the adoption of the 2013 rule, entity and a fund and the definition of generally.18 In contrast, one commenter a number of foreign banking entities, ownership interest. Specifically, the expressed support for the rapid foreign government officials, and other final rule permits established, codified approval of the 2020 proposal, to market participants have expressed categories of limited low-risk provide banking entities regulatory concerns regarding instances in which transactions between a banking entity relief during a period of financial certain funds offered and sold outside of and a related fund, including riskless stress.19 The agencies announced on the United States are excluded from the principal transactions, and allows a April 2, 2020, that they would consider covered fund definition but still could banking entity to engage in certain comments submitted before May 1, be considered banking entities in certain transactions with a related fund in 2020.20 The agencies, however, do not circumstances (foreign excluded connection with payment, clearing, and believe that further delay of the rule is funds).25 This situation may occur if a settlement activities. In addition, the warranted, given the volume, depth, and foreign banking entity controls the final rule would provide an express safe diversity of comments submitted. The foreign fund. A foreign banking entity harbor for senior loans and senior debt agencies believe, as well, that the final could be considered to control the fund and provide clarity about the types of rule may provide clarity to banking based on common corporate governance creditor rights that would be considered entities that will enable banking entities structures abroad, such as where the within the scope of the definition of to engage in financial services and other fund’s sponsor selects the majority of ownership interest. Finally, the agencies permissible activities in a manner that the fund’s directors or trustees, or the are adopting revisions, as proposed, to both is consistent with the requirements foreign banking entity otherwise provide clarity regarding a banking of section 13 of the BHC Act and will controls the fund for purposes of section entity’s permissible investments in the facilitate capital formation and 13 of the BHC Act. As a result, such a same investments as a covered fund economic activity. fund would be subject to the organized or offered by such banking Effective and Compliance Dates requirements of section 13 and the entity. implementing regulations, including Frequently Asked Questions The Federal Register notice restrictions on proprietary trading, accompanying the finalization of the The staffs of the agencies have restrictions on investing in or 2019 amendments provided for a rolling addressed several questions concerning sponsoring covered funds, and compliance system.21 The effective date the implementing regulations through a compliance obligations. of the amendments was January 1, 2020, series of staff Frequently Asked The Federal banking agencies released and firms are required to comply with a policy statement on July 21, 2017 (the Questions (FAQs).14 In the 2020 the revisions by January 1, 2021. Until policy statement), to address concerns proposal, the agencies indicated that the the mandatory compliance date, about the possible unintended proposed rule would not modify or banking entities are required to comply consequences and extraterritorial revoke any previously issued staff with the 2013 rule, or alternatively, a impact of section 13 and the FAQs, unless otherwise specified.15 banking entity may voluntarily comply, implementing regulations for foreign Several commenters recommended in whole or in part, with the 2019 excluded funds.26 codifying specific FAQs and making The policy statement amendments prior to the compliance explicit that other FAQs would continue noted that the Federal banking agencies date. would not take action against a foreign to be in effect, unmodified.16 Consistent banking entity 27 with the 2020 proposal and Several commenters on the 2020 based on attribution of commenters’ suggestions, the final rule proposal suggested that the agencies 24 See infra, Section V.D (Riegle Community does not modify or revoke any provide for voluntary early compliance with the final rule.22 One commenter Development and Regulatory Improvement Act). 25 The implementing regulations generally 14 See https://www.occ.treas.gov/topics/ also suggested establishing a transition exclude covered funds from the definition of capitalmarkets/financial-markets/trading- period of at least one year.23 ‘‘banking entity.’’ 2013 rule § ll.2(c)(2)(i). volckerrule/volcker-rule-implementation-faqs.html However, because foreign excluded funds are not (OCC); https://www.federalreserve.gov/bankinforeg/ covered funds, they can become banking entities 17 85 FR 12122–23. volcker-rule/faq.htm (Board); https://www.fdic.gov/ through affiliation with other banking entities. 18 E.g., Better Markets, Inc. (Better Markets) and regulations/reform/volcker/faq.html (FDIC); https:// 26 Statement regarding Treatment of Certain Kathy Bowman. www.sec.gov/divisions/marketreg/faq-volcker-rule- Foreign Funds under the Rules Implementing 19 section13.htm (SEC); https://www.cftc.gov/ American Bankers Association (ABA). Section 13 of the Bank Holding Company Act (July LawRegulation/DoddFrankAct/Rulemakings/DF_ 20 https://www.federalreserve.gov/newsevents/ 21, 2017), available at https:// 28_VolckerRule/index.htm (CFTC). pressreleases/bcreg20200402a.htm. www.federalreserve.gov/newsevents/pressreleases/ 15 85 FR 12122–23. 21 84 FR 61974. files/bcreg20170721a1.pdf. 16 E.g., Securities Industry and Financial Markets 22 E.g., SIFMA; FSF; Japanese Bankers 27 ‘‘Foreign banking entity’’ was defined for Association (SIFMA); Financial Services Forum Association (JBA); and ABA. purposes of the policy statement to mean a banking (FSF); and IIB. 23 JBA. Continued

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the activities and investments of a exemption from the section 13 provision of the qualifying foreign qualifying foreign excluded fund to a restrictions on proprietary trading and excluded funds definition so that it foreign banking entity, or against a investing in or sponsoring covered would only apply to the specific foreign qualifying foreign excluded fund as a funds for the activities of qualifying banking entity, in a manner consistent banking entity, for a period of one year foreign excluded funds. The proposed with the policy statement.35 One of while staffs of the agencies considered exemption generally included the same these commenters suggested, as an alternative ways in which the eligibility criteria from the policy alternative, revising the provision so implementing regulations could be statement, although it included a that it would only apply to ‘‘any amended, or other appropriate action modified version of the anti-evasion affiliated banking entities.’’ 36 could be taken, to address the issue. The provision such that, in order to qualify, One commenter requested an anti- policy statement has since been a fund could not be operated in a evasion safe harbor and changes to extended and is currently scheduled to manner that enables ‘‘any other banking allow a fund to be a qualifying foreign expire on July 21, 2021.28 entity’’ (rather than ‘‘the foreign banking excluded fund when a non-U.S. banking For purposes of the policy statement, entity’’) to evade the requirements of entity serves as a management company a ‘‘qualifying foreign excluded fund’’ section 13 or the implementing to the fund and is approved to provide means, with respect to a foreign banking regulations. fund management in accordance with entity, an entity that: The agencies requested comment on local law.37 This commenter also (1) Is organized or established outside all aspects of this exemption. requested that the agencies limit the the United States and the ownership Commenters were generally supportive requirements in the proposed qualifying interests of which are offered and sold of the 2020 proposal to exempt foreign excluded funds definition to solely outside the United States; qualifying foreign excluded funds from only those set forth in § ll.13(b) of the (2) Would be a covered fund were the certain requirements of the 29 rule for covered fund activities entity organized or established in the implementing regulations. Two conducted by foreign banking entities United States, or is, or holds itself out commenters expressed opposition to the 30 solely outside the United States, and as being, an entity or arrangement that proposed exemption. treat as qualifying foreign excluded Some commenters requested that raises money from investors primarily funds those funds for which the foreign qualifying foreign excluded funds be for the purpose of investing in financial banking entity cannot exercise voting instruments for resale or other excluded from the definition of banking entity.31 One commenter expressed rights. disposition or otherwise trading in Pursuant to their authority under financial instruments; concern that the 2020 proposal would require qualifying foreign excluded section 13(d)(1)(J) of the BHC Act, the (3) Would not otherwise be a banking agencies are adopting the exemption for entity except by virtue of the foreign funds to establish section 13 of the BHC Act compliance programs, imposing the activities of qualifying foreign banking entity’s acquisition or retention costs on qualifying foreign excluded excluded funds substantially as of an ownership interest in, or funds.32 This commenter noted that proposed, but with modifications to the sponsorship of, the entity; there may be situations under section 13 anti-evasion provision and compliance (4) Is established and operated as part of the BHC Act where a foreign banking program requirements. Specifically, the of a bona fide asset management entity controls a qualifying foreign agencies are exempting the activities of business; and excluded fund, but under foreign law qualified foreign excluded funds from (5) Is not operated in a manner that does not have the necessary authority to the restrictions on proprietary trading enables the foreign banking entity to require it to adopt a section 13 and investing in or sponsoring covered evade the requirements of section 13 or compliance program. As such, this funds, if the acquisition or retention of implementing regulations. commenter advocated for either the ownership interest in, or To be eligible for this relief, the excluding this type of fund from the sponsorship of, the qualifying foreign foreign banking entity’s acquisition or definition of banking entity or excluded fund by the foreign banking retention of any ownership interest in, exempting this type of fund from the entity meets the requirements for or sponsorship of, the qualifying foreign compliance program requirements permitted covered fund activities and excluded fund must meet the under the rule.33 One commenter investments conducted solely outside requirements for permitted covered expressed concern that a qualifying the United States, as provided in fund activities and investments solely foreign excluded fund would still need § ll.13(b) of the rule.38 Under the outside the United States, as provided to comply with various restrictions final rule, a qualifying foreign excluded in section 13(d)(1)(I) of the BHC Act and under section 13, including the fund has the same meaning as in the § ll.13(b) of the implementing provisions of § ll.14 of the policy statement as described above and regulations, as if the qualifying foreign implementing regulations (i.e., Super in the 2020 proposal, except for the excluded fund were a covered fund. To 23A) and the compliance program modification to the anti-evasion provide greater clarity and certainty to requirements.34 provision, as described below. banking entities and qualifying foreign Some commenters requested that the Section 13(d)(1)(J) of the BHC Act excluded funds, and to limit the agencies change the anti-evasion gives the agencies rulemaking authority extraterritoriality of the rule, the 2020 to exempt activities from the proposal included a permanent 29 SIFMA; Bank Policy Institute (BPI); prohibitions of section 13, provided the Bundesverband Investment und Asset Management agencies determine that the activity in entity that is not, and is not controlled directly or e.V. (BVI); American Investment Council (AIC); indirectly by, a banking entity that is located in or ABA; European Fund and Asset Management question would promote and protect the organized under the laws of the United States or Association (EFAMA); Shareholder Advocacy safety and soundness of the banking any State. Id. Forum (SAF); IIB; JBA; CBA; and . 30 entity and the financial stability of the 28 Statement regarding Treatment of Certain Occupy and Data Boiler Technologies LLC Foreign Funds under the Rules Implementing (Data Boiler). 31 35 Section 13 of the Bank Holding Company Act (July IIB; JBA; CBA; Credit Suisse; and EBF. IIB; JBA; Credit Suisse; and EBF. 17, 2019), available at https:// 32 JBA. 36 Credit Suisse. www.federalreserve.gov/newsevents/pressreleases/ 33 JBA. 37 JBA. files/bcreg20190717a1.pdf. 34 Credit Suisse. 38 See final rule § ll.13(b).

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United States.39 For the reasons markets, which could generate spillover excluded funds through their exemptive described below, the agencies have effects in the U.S. financial system. rulemaking authority. determined that exempting the activities In response to comments regarding The agencies are not making any of qualifying foreign excluded funds the anti-evasion provision, the final rule change regarding the applicability of promotes and protects the safety and specifies that the qualifying foreign § ll.14 of the implementing soundness of banking entities and U.S. excluded fund must not be operated in regulations, which imposes limitations financial stability. a manner that enables the banking entity on relationships with covered funds, This relief is expected to promote and that sponsors or controls the qualifying with respect to qualifying foreign protect the safety and soundness of such foreign excluded fund, or any other excluded funds. The agencies believe it funds and their foreign banking entity affiliated banking entity (other than a is appropriate to retain the application sponsors by putting them on a level qualifying foreign excluded fund), to of § ll.14 to qualifying foreign playing field with their foreign evade the requirements of section 13 of excluded funds to limit risks that may competitors that are not subject to the the BHC Act or the final rule. This be borne by banking entities located in implementing regulations. If the change is meant to clarify the scope of the United States through transactions activities of these foreign funds were the anti-evasion provision and provide with such funds.40 Further, given the subject to the restrictions applicable to certainty for banking entities that limited set of circumstances in which banking entities, their asset management sponsor or control the qualifying foreign § ll.14 would apply (i.e., a transaction activities could be significantly excluded fund. between a foreign excluded fund and a disrupted, and their foreign banking Consistent with feedback from several covered fund that is sponsored or entity sponsors may be at a competitive commenters, the agencies also have advised by the same banking entity), the disadvantage to other foreign bank and modified compliance requirements with agencies do not believe that it is overly non-bank market participants respect to qualifying foreign excluded burdensome for a banking entity that conducting asset management business funds. While, under the final rule, the sponsors or controls a qualifying foreign outside of the United States. Exempting activities of a qualifying foreign excluded fund to ensure that it is not in the activities of these foreign funds excluded fund are exempted from the violation of § ll.14. allows their foreign banking entity proprietary trading restrictions of B. Modifications To Existing Covered sponsors to continue to conduct their § ll.3(a) and the covered fund Fund Exclusions asset management business outside the restrictions of § ll.10(a) of the final United States as long as the foreign rule, the qualifying foreign excluded In the preamble to the 2013 rule, the banking entity’s acquisition of an agencies acknowledged that the covered fund is still a banking entity. Absent any 41 ownership interest in or sponsorship of additional changes, the qualifying fund definition was expansive. To the fund meets the requirements in foreign excluded fund could become effectively tailor the covered fund § ll.13(b) of the implementing subject to the compliance requirements provisions to the types of entities that regulations. Thus, the exemption is of § ll.20. However, since these section 13 of the BHC Act was intended expected to have the effect of promoting qualifying foreign excluded funds are to cover, the 2013 rule excluded various the safety and soundness of these types of entities from the covered fund exempted from the proprietary trading 42 foreign funds and their sponsors, while requirements of § ll.3(a) and covered definition. In response to comments at the same time limiting the fund restrictions of § ll.10(a) of the received on the 2020 proposal, and extraterritorial impact of the final rule, the agencies believe that based on experience implementing the implementing regulations, consistent requiring a compliance program for the rule, the agencies are modifying certain with the purposes of sections fund itself is overly burdensome and of the existing exclusions, as described 13(d)(1)(H) and (I) of the BHC Act. unnecessary. The requirements in below, to make them more appropriately The exemption is also expected to § ll.20 are intended to ensure and structured to effectuate the intent of the promote and protect U.S. financial monitor compliance with the statute and its implementing stability. While qualifying foreign proprietary trading and covered fund regulations. excluded funds have a very limited provisions, and there would be no 1. Foreign Public Funds nexus to the U.S. financial system, the benefit to applying these requirements 2013 Rule exemption would promote U.S. to an entity that is exempt from those financial stability by providing provisions. Therefore, under the final To provide consistent treatment for additional capital and liquidity to U.S. rule, qualifying foreign excluded funds U.S. registered investment companies capital markets without a concomitant are not required to have compliance and their foreign equivalents, the increase in risk borne by U.S. entities. programs or comply with the reporting implementing regulations exclude Because the exemption requires that the and additional documentation foreign public funds from the definition foreign banking entity’s acquisition of requirements under § ll.20. However, of covered fund.43 A foreign public fund an ownership interest in or sponsorship any banking entity that owns or of the fund meets the requirements in sponsors a qualifying foreign excluded 40 A U.S. banking entity’s exposure to a fund that ll would be a qualifying foreign excluded fund with § .13(b) of the final rule, the fund will still be required to have in respect to a foreign banking entity may still be a exemption will help ensure that the place appropriate compliance programs covered fund with respect to a U.S. banking entity risks of investments made by these for itself and its other subsidiaries and under § ll.10(b)(1)(iii) of the implementing foreign funds will be booked at foreign provide reports and additional regulations. A U.S. banking entity’s investment in ll and relationship with such a fund could therefore entities in foreign jurisdictions, thus documentation as required by § .20. be subject to the entirety of the applicable promoting and protecting U.S. financial The final rule does not amend the prohibitions and restrictions of Subpart C of the stability. Additionally, subjecting such definition of ‘‘banking entity’’ as implementing regulations. funds to the requirements of the requested by several commenters. 41 See 79 FR 5677. implementing regulations could Because ‘‘banking entity’’ is specifically 42 See id. 43 precipitate disruptions in foreign capital defined in section 13 of the BHC Act, In adopting the foreign public fund exclusion, the agencies’ view was that it was appropriate to the agencies find it appropriate to exclude these funds from the ‘‘covered fund’’ 39 12 U.S.C. 1851(d)(1)(J). address concerns related to foreign Continued

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is generally defined under the 2013 rule outside of the United States, the sufficiently similar to U.S. registered as any issuer that is organized or agencies generally expect that a foreign investment companies. Additionally, established outside of the United States public fund would satisfy this the 2020 proposal would have only and the ownership interests of which additional condition if 85 percent or applied the condition that the are (1) authorized to be offered and sold more of the fund’s interests are sold to distribution comply with all applicable to retail investors in the issuer’s home persons other than the sponsoring U.S. requirements in the jurisdiction where it jurisdiction and (2) sold predominantly banking entity and the specified persons is made to instances in which the through one or more public offerings connected to that banking entity.49 banking entity acts as the investment outside of the United States.44 The 2020 Proposal manager, investment adviser, agencies stated in the preamble to the commodity trading advisor, commodity In the 2020 proposal, the agencies 2013 rule that they generally expect that pool operator, or sponsor. This acknowledged that some of the an offering is made predominantly proposed change was intended to conditions of the 2013 rule’s foreign outside of the United States if 85 address the potential difficulty that a percent or more of the fund’s interests public fund exclusion may not be necessary to ensure consistent treatment banking entity investing in a third-party are sold to investors that are not sponsored fund may have in 45 of foreign public funds and U.S. residents of the United States. The determining whether the distribution of 2013 rule defines ‘‘public offering’’ for registered investment companies. such fund complied with all the purposes of this exclusion to mean a Moreover, some conditions may make it requirements in the jurisdiction where it ‘‘distribution,’’ as defined in difficult for a non-U.S. fund to qualify was made. § ll.4(a)(3) of subpart B, of securities for the exclusion or for a banking entity in any jurisdiction outside the United to validate whether a non-U.S. fund To simplify the requirements of the States to investors, including retail qualifies for the exclusion, resulting in exclusion and address concerns investors, provided that the distribution certain non-U.S. funds that are similar described by banking entities with the complies with all applicable to U.S. registered investment companies difficulty in tracking the sale of requirements in the jurisdiction in being treated as covered funds. ownership interests to employees and which such distribution is being made; To address these concerns, the 2020 their immediate family members, the the distribution does not restrict proposal would have made certain 2020 proposal would have eliminated availability to only investors with a modifications to the foreign public fund the limitation on selling ownership minimum level of net worth or net exclusion. First, the agencies proposed interests of the issuer to employees investment assets; and the issuer has to replace the requirement that the fund (other than senior executive officers) of filed or submitted, with the appropriate be authorized to be offered and sold to the sponsoring banking entity or the regulatory authority in such retail investors in the issuer’s home issuer (or affiliates of the banking entity jurisdiction, offering disclosure jurisdiction (the home jurisdiction or issuer). This change was intended to documents that are publicly available.46 requirement) and the requirement that help align the treatment of foreign The 2013 rule places an additional the fund interests be sold public funds with that of U.S. registered condition on a U.S. banking entity’s predominantly through one or more investment companies, as the exclusion ability to rely on the foreign public fund public offerings outside of the United for U.S. registered investment exclusion with respect to any foreign States, with a requirement that the fund companies has no such limitation. The fund it sponsors.47 The foreign public is authorized to offer and sell ownership 2020 proposal would have continued to interests, and such interests are offered fund exclusion is only available to a limit the sale of ownership interests to and sold, through one or more public U.S. banking entity with respect to a directors or senior executive officers of offerings outside of the United States. foreign fund sponsored by the U.S. the sponsoring banking entity or the This change would have permitted banking entity if, in addition to the issuer (or their affiliates), as the agencies foreign funds to qualify for the requirements discussed above, the believed that such a requirement would exclusion if they are organized in one fund’s ownership interests are sold be simpler for a banking entity to track. jurisdiction but only authorized to be predominantly to persons other than the Finally, the 2020 proposal requested sponsoring banking entity, the issuer (or sold to retail investors in another comment on the appropriateness of the affiliates of the sponsoring banking jurisdiction, as this is a fairly common expectation stated in the preamble to entity or issuer), and employees and way for foreign retail funds to be the 2013 rule that, for a U.S. banking directors of such entities.48 The agencies organized. Also, no longer requiring a entity-sponsored foreign fund to satisfy stated in the preamble to the 2013 rule fund to be sold predominantly through the condition that it be that, consistent with the agencies’ view one or more public offerings was ‘‘predominantly’’ sold to persons other concerning whether a foreign public intended to reduce the difficulty that than the sponsoring U.S. banking entity fund has been sold predominantly banking entities have described in determining and monitoring the and certain persons connected to that banking entity, at least 85 percent of the definition because they are sufficiently similar to distribution history and patterns of a U.S. registered investment companies. 79 FR 5678. third-party sponsored fund or a ownership interests in the fund should 44 2013 rule § ll.10(c)(1); see also 79 FR 5678. sponsored fund whose interests are sold be sold to such other persons. 45 79 FR 5678. through third-party distributors. 46 2013 rule § ll.10(c)(1)(iii). The agencies also proposed modifying Discussion of Comments and the Final 47 Although the discussion of this condition the definition of ‘‘public offering’’ from Rule generally refers to U.S. banking entities for ease of the implementing regulations to add a reading, the condition also applies to foreign The agencies are adopting all of the subsidiaries of a U.S. banking entity. See 2013 rule new requirement that the distribution be proposed changes and are making § ll.10(c)(1)(ii) (applying this limitation ‘‘[w]ith subject to substantive disclosure and certain adjustments in response to respect to a banking entity that is, or is controlled retail investor protection laws or comments received, as discussed below. directly or indirectly by a banking entity that is, regulations, to help ensure that foreign located in or organized under the laws of the United Commenters on the 2020 proposal States or of any State and any issuer for which such funds qualifying for this exclusion are banking entity acts as sponsor’’). generally supported the proposed 48 See 2013 rule § ll.10(c)(1)(ii). 49 79 FR 5678. changes to the foreign public funds

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exclusion.50 Specifically, commenters to be sold through a public offering.58 investor protection requirements. supported the elimination of the home These commenters generally viewed Similar to the reasons for retaining the jurisdiction requirement and the this requirement as burdensome and requirement that a foreign public fund requirement that the fund be sold difficult to administer and noted that actually be sold through one or more predominantly through one or more U.S. registered investment companies public offerings, the agencies believe public offerings.51 Commenters are not required to be sold in public that retaining this requirement is supported the proposed change to the distributions. The agencies do not necessary to ensure that funds ‘‘public offering’’ definition to include a consider the fact that there is no qualifying for this exclusion are requirement that a distribution be requirement for U.S. registered sufficiently similar to U.S. registered subject to substantive disclosure and investment companies to be actually investment companies. In fact, one of retail investor protection laws or sold through public offerings as a the identifying characteristics of a regulations,52 but did not recommend sufficient rationale for removing this covered fund is that its offerings are further specifying what substantive requirement from the foreign public limited to investors with minimum net disclosure and investor protection fund exclusion. Requiring foreign public worth or net investment assets.59 The requirements should apply because they funds to be sold through one or more agencies therefore believe that foreign generally viewed it as unnecessary and public offerings is intended to ensure funds that limit their offerings to overly prescriptive.53 Commenters also that such funds are in fact public funds investors with a minimum net worth or supported eliminating the restriction on and thus sufficiently similar to U.S. net investment assets are generally not share ownership by employees (other registered investment companies. While sufficiently similar to U.S. registered than senior executives and directors) of there may be certain limited scenarios investment companies, and thus the the U.S. banking entity that sponsors the where a U.S. registered investment agencies are not adopting this suggested foreign public fund.54 In response to a company is not sold to retail investors, change to the ‘‘public offering’’ specific question in the 2020 proposal, the agencies believe that the vast definition. one commenter indicated that the majority of U.S. registered investment One commenter opposed the proposed changes to the foreign public companies are sold to retail investors. proposed elimination of the requirement funds exclusion would not increase the Furthermore, U.S. registered investment in the ‘‘public offering’’ definition that risk of evasion of the requirements of companies are subject to robust a distribution comply with all section 13 and the implementing registration, reporting, and other applicable requirements in the regulations, and thus no additional anti- requirements that are familiar to the jurisdiction in which such distribution evasion measures were necessary.55 agencies, whereas foreign public funds is being made for a banking entity that Another commenter stated that the are subject to a differing array of does not serve as the fund’s investment proposed changes were less than ideal requirements depending on the manager, investment adviser, jurisdiction where they are authorized commodity trading advisor, commodity but were acceptable after balancing 60 compliance costs and benefits.56 to be sold. These other jurisdictions may pool operator, or sponsor. The final Commenters also recommended have less developed requirements for rule adopts this modification as additional changes to further align the retail funds, which may increase the proposed, because the agencies believe treatment of foreign public funds with likelihood of a fund seeking the other eligibility criteria for a fund to that of U.S. registered investment authorization for public distribution in qualify under the foreign public fund companies or to prevent evasion of the certain foreign jurisdictions solely as a exclusion are sufficient to appropriately identify these funds. In addition, the rule.57 Specifically, some commenters means of avoiding the covered fund agencies recognize that it may be recommended eliminating the prohibition. The agencies believe that difficult or impossible for a banking requirement that a fund actually be sold eliminating this requirement would entity that invests in a third-party fund through a public offering and, instead, increase the risk of evasion by to know whether the fund’s distribution only require that a fund be authorized permitting foreign funds that may be authorized for sale to retail investors in complied with all applicable 50 IIB; SIFMA; BPI; ABA; EBF; EFAMA; FSF; a foreign jurisdiction—but are only sold requirements in the jurisdiction where it Investment Company Institute (ICI); BVI; CBA; through private offerings where no was distributed. Committee on Capital Markets Regulation (CCMR); substantive disclosure or retail investor One commenter recommended that Data Boiler; Goldman Sachs; Investment Adviser protections exist—to qualify for the the agencies require 85 percent of a Association (IAA); JBA; SAF; and U.S. Chamber of foreign public fund’s ownership Commerce Center for Capital Markets exclusion. Such funds would not be Competitiveness (CCMC). comparable to U.S. registered interests be sold to and owned by ‘‘bona 51 IIB; SIFMA; BPI; ABA; EBF; EFAMA; FSF; ICI; investment companies and would not be fide’’ retail investors in the fund’s home BVI; and CBA. the type of fund that foreign public fund jurisdiction.61 However, for the same 52 IIB; EFAMA; FSF; ICI; and BVI. exclusion was intended to address. reasons that the agencies are eliminating 53 IIB; ICI; and CBA. One commenter supported Accordingly, the agencies are not the home jurisdiction requirement and this assertion by stating that 95 percent of the world’s securities markets, including all major adopting this suggested modification. the requirement that a fund be sold emerging markets, have substantive disclosure and One trade association commenter predominantly through public offerings, retail investor protection rules that are guided by suggested eliminating a provision in the the International Organization of Securities ‘‘public offering’’ requirement that 59 Under the Investment Company Act, certain Commissions’ common principles for retail funds prohibits a distribution from being funds whose offerings are limited to investors with and the detailed policy work that informs those limited to investors with a minimum net minimum net worth or net investment assets are principles. ICI. exempt from registration as investment companies. 54 FSF. worth or net investment assets because See 15 U.S.C. 80a–3(c)(7). These funds are generally 55 SIFMA. some of its members distribute funds, treated as covered funds under section 13 of the 56 Data Boiler. including mutual funds, in offerings BHC Act and the implementing regulations. See 12 57 One commenter recommended that the that do not meet this requirement but U.S.C. 1851(h)(2); implementing regulations ll agencies create an exclusion from the ‘‘proprietary that are nonetheless subject to § .10(b)(1)(i). trading’’ definition for the activities of regulated 60 Data Boiler. funds, including foreign public funds, under certain substantive disclosure and retail 61 Oleh Zadorestskyy. This commenter also circumstances. ICI. The agencies note that such a suggested that the agencies require proof that the change is not within the scope of this rulemaking. 58 IIB; SIFMA; and EBF. investors were non-U.S. persons.

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the agencies are not adopting this than the U.S. banking entity sponsor, sponsored by U.S. affiliates of foreign requirement. the fund, affiliates of such sponsoring banking entities, the agencies exclude Some commenters suggested that the banking entity or fund, and the directors the sponsoring U.S. banking entity’s agencies identify common foreign fund and senior executive officers of such non-U.S. affiliates and their directors types that are presumed to qualify for entities (collectively, ‘‘U.S. banking and employees from the restrictions on the exclusion for foreign public funds entity sponsor and associated parties’’). share ownership, provided that such for the purpose of improving efficiency Relatedly, some commenters non-U.S. affiliates are not controlled by and simplifying compliance with the recommended that the agencies modify a U.S. banking entity.71 This commenter rule.62 Other commenters recommended their expectation of the level of asserted that there is no U.S. financial that issuers listed on an internationally- ownership of a foreign public fund that stability or safety and soundness benefit recognized exchange and available in would satisfy the requirement that a to applying this restriction to such non- retail-level denominations should fund be ‘‘predominantly’’ sold to U.S. affiliates and their directors and automatically qualify for the exclusion persons other than its U.S. banking employees, as the risks of any such for similar reasons.63 Although the entity sponsor and associated parties,68 investments are borne solely outside the agencies expect many such funds will which, in the preamble to the 2013 rule, United States. However, with the qualify for the exclusion, the agencies the agencies stated was 85 percent or change described above, which permits decline to adopt either of these more (which would permit the U.S. a U.S. banking entity sponsor and suggested changes, as both would banking entity sponsor and associated associated parties to hold less than 25 require the agencies’ review and on- parties to own the remaining 15 percent of a foreign public fund, the going monitoring of foreign laws and percent). These commenters asserted agencies do not believe that this change regulations to ensure that the types of that the relevant ownership threshold is necessary. Even if the requirement funds that would qualify under these for U.S. registered investment were modified as the commenter provisions are sufficiently similar to companies is 25 percent, and that, for suggested, the banking entity and its U.S. registered investment companies foreign public funds, the threshold affiliates would still be limited to and that their exclusion as foreign should be the same. The agencies agree owning less than 25 percent of the fund public funds would continue to be that the permitted ownership level of a without the fund becoming a banking appropriate. foreign public fund by a U.S. banking entity. Some commenters recommended that entity sponsor and associated parties One commenter requested that the the agencies entirely eliminate the should be aligned with the functionally agencies modify § ll.12(b)(1) of the restrictions on share ownership by equivalent threshold for banking entity implementing regulations, which parties affiliated with a U.S. banking investments in U.S. registered governs attribution of ownership entity sponsor of a foreign public investment companies, which is 24.9 interests in covered funds to banking fund.64 Other commenters suggested percent.69 Accordingly, the agencies entities, to clarify that the banking that, if the restrictions on share have amended this provision in the final entity ‘‘or an affiliate’’ can provide the ownership by banking entities affiliated rule to require that more than 75 percent advisory, administrative, or other with the sponsor were retained, the of the fund’s interests be sold to persons services required in § ll.12(b)(1)(ii)(B) restrictions on share ownership by other than the U.S. banking entity for the non-attribution rule to apply. senior executives and directors should sponsor and associated parties.70 The commenter requested this be removed.65 The commenters One commenter recommended that, clarification because generally viewed these requirements as with respect to foreign public funds § ll.12(b)(1)(ii)(B) is cross-referenced unnecessary and burdensome to track by FAQ 14, which, as discussed above, and monitor. As discussed in the 68 BPI; FSF; ICI; and CCMC. states that a foreign public fund will not preamble to the 2013 rule, these 69 Although the implementing regulations do not be treated as a banking entity if it explicitly prohibit a banking entity from acquiring complies with the test in requirements are intended to prevent 25 percent or more of a U.S. registered investment 66 § ll.12(b)(1)(ii) (i.e., the banking evasion of section 13 of the BHC Act. company, a U.S. registered investment company Additionally, the agencies note that U.S. would become a banking entity if it is affiliated entity holds less than 25 percent of the banking entity sponsors of foreign with another banking entity (other than as voting shares in the foreign public fund ll public funds would need to track the described in § .12(b)(1)(ii) of the implementing and provides advisory, administrative, regulations). See 79 FR 5732 (‘‘[F]or purposes of or other services to the fund). The ownership of such funds by their section 13 of the BHC Act and the final rule, a affiliates and management officials even registered investment company . . . will not be agencies confirm that the requested if the requirements were eliminated in considered to be an affiliate of the banking entity interpretation is correct and, order to determine whether they control if the banking entity owns, controls, or holds with accordingly, have amended the power to vote less than 25 percent of the voting § ll.12(b)(1)(ii) of the implementing such funds for BHC Act purposes.67 shares of the company or fund, and provides Thus, for a U.S. banking entity relying investment advisory, commodity trading advisory, regulations to clarify that the ownership on this exclusion with respect to a fund administrative, and other services to the company limit applies to the banking entity and or fund only in a manner that complies with other its affiliates, in the aggregate, and the that it sponsors, the agencies are limitations under applicable regulation, order, or retaining the requirement that the fund requirement that the banking entity other authority.’’). provide advisory or other services can be sold predominantly to persons other 70 For a U.S. banking entity that sponsors a foreign public fund, crossing the 24.9 percent be satisfied by the banking entity or its 62 IIB and EBF. ownership threshold (other than during a permitted affiliates. seeding period) would cause the fund to be a 63 IIB; SIFMA; BPI; ABA; FSF; and CBA. One commenter noted that FAQ 16, covered fund (if no other exclusion applied), in 64 which relates to the seeding period for SIFMA and FSF. which case the banking entity would be in violation 65 SIFMA; BPI; ICI; and CCMC. of the 3 percent per-fund investment limit. See foreign public funds, uses 3 years as an 66 79 FR 5678–79. implementing regulations § ll.12(a)(2)(ii)(A). The example of the duration of such a 67 See 12 CFR 225.2(e); 12 CFR 225.31(d)(2)(ii). If agencies believe that such a strict prohibition seeding period, and requested that the a foreign public fund is controlled by a banking against a U.S. banking entity acquiring 25 percent agencies confirm that a foreign public entity for BHC Act purposes, such fund could also or more of a foreign public fund that it sponsors is be being treated as a banking entity under section appropriate because of the elevated risk of evasion fund’s seeding period can be longer than 13. See implementing regulations § ll.2(c); FAQ by the sponsoring banking entity, which may be 14. able to control the investments made by the fund. 71 IIB.

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3 years.72 Another commenter requested participants in the loan permitted securities, the staffs of the that the agencies codify the 3-year industry have commented that the agencies released the Loan seeding period in the implementing limited set of permissible assets has Securitization Servicing FAQ. The FAQ regulations.73 The agencies believe that, inappropriately restricted their ability to clarified that a servicing asset may or depending on the facts and use the loan securitization exclusion. In may not be a security, but if the circumstances of a particular foreign the 2018 proposal, the agencies asked servicing asset is a security, it must be public fund, the appropriate duration of several questions regarding the efficacy a permitted security under the rule. its seeding period may vary and, under and scope of the exclusion and the Loan The 2020 proposal would have certain facts and circumstances, may Securitization Servicing FAQ.78 codified the Loan Securitization exceed three years. The agencies believe Comments focused on permitting small Servicing FAQ in the implementing that this flexibility is appropriate and amounts of non-loan assets and regulations to clarify the scope of the thus decline to further specify such a clarifying the treatment of leases and servicing asset provision.84 Commenters limit. Another commenter requested related assets. generally supported the codification of that the agencies codify the foreign In response to these concerns, the the Loan Securitization Servicing FAQ, public fund seeding FAQ,74 FAQ 14, 2020 proposal would have codified the indicating that such a codification and FAQ 16, both described above, in Loan Securitization Servicing FAQ and would promote transparency and ensure the implementing regulations.75 The permitted loan securitizations to hold a continued use of the loan securitization agencies decline to codify these FAQs at small amount of non-loan assets. The exclusion.85 For the above reasons, the this time but note that the final rule agencies requested comment on all final rule adopts the codification of the does not modify or revoke any aspects of the proposed changes to the Loan Securitization Servicing FAQ as previously issued staff FAQs, unless loan securitization exclusion, and proposed. otherwise specified. comments were generally supportive of In the final rule, the agencies are the proposed revisions.79 Several Cash Equivalents adopting the amendments to the foreign commenters also suggested revisions to The loan securitization exclusion public funds exclusion as proposed, the 2020 proposal.80 Comments are permits issuers relying on the exclusion with the additional modifications discussed in detail below.81 to hold certain types of contractual described above. The agencies believe Servicing Assets rights or assets related to the loans the revised requirements will make the underlying the securitization, including foreign public fund exclusion more The implementing regulations permit cash equivalents. In response to effective by expanding its availability, loan securitizations to hold rights or questions about the scope of the cash providing clarity, and simplifying other assets (servicing assets) that arise equivalents provision, the Loan compliance with its requirements, while from the structure of the loan Securitization Servicing FAQ stated that continuing to ensure that the funds that securitization or from the loans ‘‘cash equivalents’’ means high quality, 82 qualify are sufficiently similar to U.S. supporting a loan securitization. highly liquid investments whose registered investment companies. Rights or other servicing assets are maturity corresponds to the assets designed to facilitate the servicing 2. Loan Securitizations securitization’s expected or potential of the underlying loans or the need for funds and whose currency Section 13 of the BHC Act provides distribution of proceeds from those corresponds to either the underlying that ‘‘[n]othing in this section shall be loans to holders of the asset-backed loans or the asset-backed securities.86 83 construed to limit or restrict the ability securities. In response to confusion To promote transparency and clarity, of a banking entity . . . to sell or regarding the scope of the provisions the 2020 proposal would have codified securitize loans in a manner otherwise permitting servicing assets and a this additional language in the Loan permitted by law.’’ 76 To effectuate this separate provision limiting the types of Securitization Servicing FAQ regarding statutory mandate, the 2013 rule the meaning of ‘‘cash equivalents.’’ 87 78 excluded from the definition of covered 83 FR 33480–81. The agencies did not propose requiring fund loan securitizations that issue 79 E.g., SIFMA; BPI; Managed Funds Association (MFA); PNC Financial Services Group, Inc. (PNC); ‘‘cash equivalents’’ to be ‘‘short term,’’ asset-backed securities and hold only Goldman Sachs; Loan Syndications and Trading because the agencies recognized that a loans, certain rights and assets that arise Association (LSTA); and Structured Finance loan securitization may need greater from the structure of the loan Association (SFA). flexibility to match the maturity of high 80 securitization or from the loans E.g., SIFMA; CCMC; BPI; and IIB. quality, highly liquid investments to its supporting a loan securitization, and a 81 One commenter suggested that some jurisdictions’ risk retention rules may vary from the expected or potential need for funds. small set of other financial instruments regulations implementing section 15G of the Commenters generally supported the 77 (permissible assets). Exchange Act (15 U.S.C. 78o–11), which requires a codification of the definition of ‘‘cash Since the adoption of the 2013 rule, banking entity to retain and maintain a certain equivalents’’ in the loan securitization several banking entities and other minimum interest in certain asset-backed securities. See IIB. This commenter recommended allowing banking entities to hold certain investments in 84 The 2020 proposal also clarified that special 72 IAA. compliance with certain foreign laws (e.g., units of beneficial interest and collateral certificates 73 CCMC. European risk retention rules). The agencies meeting the requirements of paragraph (c)(8)(v) of 74 The foreign public fund seeding FAQ states understand that rules for risk retention vary across the exclusion that are securities need not meet the that staffs of the agencies would not advise that a jurisdictions. However, the agencies believe that the requirements of paragraph (c)(8)(iii) of the seeding vehicle that is operated pursuant to a requested action is outside the scope of the current exclusion. See 2020 proposal § ll.10(c)(8)(i)(B). written plan to become a foreign public fund and rulemaking. In addition, another commenter The agencies are adopting this revision, as that meets certain conditions be treated as a covered requested that the agencies clarify the definition of proposed. fund during such seeding period. asset-backed securities as used in the loan 85 E.g., SIFMA; PNC; and SFA. One commenter 75 IIB. securitization exclusions. See Arnold & Porter Kaye indicated that the current Loan Securitization 76 12 U.S.C. 1851(g)(2). Scholer LLP (Arnold & Porter). The agencies discuss Servicing FAQ was sufficient and that codifying the 77 See 2013 rule § ll.10(c)(8). Loan is further the definition of asset-backed securities in Section FAQ was not necessary; however, the commenter defined as any loan, lease, extension of credit, or IV.C.1.iii (Credit Funds), infra. did not elaborate on or justify this position. Data secured or unsecured receivable that is not a 82 §§ ll.2(t); ll.10(c)(8)(i)(D); ll.10(c)(8)(v). Boiler. security or . Implementing regulations 83 See, e.g., FASB Statement No. 156: Accounting 86 See supra, n.14. § ll.2(t). for Servicing of Financial Assets, ¶ 61 (FAS 156). 87 2020 proposed rule § ll.10(c)(8)(iii)(A).

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exclusion.88 The final rule adopts the fundamentally alter the characteristics qualifying assets over the issuer’s codification of ‘‘cash equivalents’’ as and risks of securitizations or otherwise aggregate capital commitments plus its proposed. increase risks in banking entities or the subscription based credit facility.103 A financial system.93 Limited Holdings of Certain Debt third commenter suggested having a Several commenters recommended Securities separate valuation mechanism for equity against limiting the type of assets that securities, which the commenter In the preamble to the 2013 rule, the could be held per the non-loan asset suggested should be market value upon agencies declined to permit loan provision.94 For example, one acquisition.104 securitizations to hold a certain amount commenter stated that allowing Finally, two commenters opposed of non-loan assets.89 The agencies excluded loan securitizations to invest allowing excluded loan securitizations supported a narrow scope of permissible in any class of asset would allow those to hold non-loan assets and suggested assets in loan securitizations, suggesting vehicles to achieve investment goals that such a change would be contrary to that such an approach would be during periods of constrained loan the purpose of section 13 of the BHC consistent with the purpose of section supply, while another commenter 90 Act or would result in loan 13 of the BHC Act. indicated that such a restriction would securitizations with differing risk Several commenters on the 2018 be unnecessary given that the low limit proposal disagreed with the agencies’ characteristics, potentially increasing on non-loan assets would constrain 105 views and supported expanding the risks.95 In contrast, one commenter monitoring costs on investors. In range of permissible assets in an suggested limiting the type of addition, a commenter claimed that the excluded loan securitization. After permissible assets to securities with risk 2020 proposal to allow excluded loan considering the comments received on characteristics similar to loans.96 securitizations to hold non-loan assets the 2018 proposal, the 2020 proposal Numerous commenters suggested would be contrary to section 13 of the 106 would have allowed a loan raising the cap on non-loan assets from BHC Act. Specifically, this securitization vehicle to hold up to five five percent of assets to ten percent of commenter suggested that the rule of percent of the fund’s total assets in non- assets,97 while one commenter construction in 12 U.S.C. 1851(g)(2) loan assets. The agencies indicated that indicated that a five percent cap would only permits the securitization or sale of authorizing loan securitizations to hold be sufficient.98 Commenters that loans and that legislative history small amounts of non-loan assets could, supported an elevated limit on non-loan supports this reading of the statute. consistent with section 13 of the BHC assets generally argued that a ten The agencies previously concluded Act, permit loan securitizations to percent limit would further reduce and continue to believe they have legal respond to investor demand and reduce compliance burdens while not authority to adopt the proposed compliance costs associated with the materially increasing risk.99 allowance for a limited amount of non- securitization process without Several commenters also suggested a loan assets.107 Section 13(g)(2) of the significantly increasing risk to banking method for calculating the cap on non- 91 BHC Act states, ‘‘[n]othing in this entities and the financial system. The loan assets: The par value of assets on section shall be construed to limit or agencies requested comment on, among the day they are acquired.100 These restrict the ability of a banking entity or other things, the maximum amount of commenters suggested that relying on nonbank financial company supervised permitted non-loan assets, the par value is accepted practice in the by the Board to sell or securitize loans methodology for calculating the cap on loan securitization industry and would in a manner otherwise permitted by non-loan assets, and whether the obviate concerns related to tracking law.’’ 108 This rule of construction is agencies should limit the type of assets amortization or prepayment of loans in permissive—it allows the agencies to that could be held under the non-loan 101 a securitization portfolio. One of design the regulations implementing asset provision. Specifically, the these commenters further specified that section 13 in a way that accommodates agencies requested comment on whether the limit should be calculated (1) and does not unduly ‘‘limit or restrict’’ the non-loan asset provision should be according to the par value of the the ability of banking entities to sell or limited to debt securities or should acquired assets on the date of securitize loans. Contrary to the exclude certain financial instruments investment over the securitization’s commenter’s argument, this provision such as derivatives and collateralized total collateral pool and (2) only at the does not mandate that any loan debt obligations. 102 time of investment. Another securitization exclusion only relate to Commenters were generally commenter indicated that the cap supportive of allowing loan loans. As discussed in this section and should be calculated as the lower of the the preamble to the 2020 proposal,109 securitizations to hold a limited amount purchase price and par value of the non- of non-loan assets.92 These commenters the agencies believe that allowing excluded loan securitizations to hold indicated that the requirements for the 93 E.g., LSTA and Goldman Sachs. limited amounts of non-loan assets current loan securitization exclusion are 94 E.g., MFA; LSTA; and SFA. One commenter too restrictive and excessively limit use also requested that the agencies make clear that the would, in fact, promote the ability of of the exclusion and prevent issuers non-loan assets would not be subject to the other from responding to investor demand, provisions of the loan securitization exclusion. 103 Goldman Sachs. LSTA. 104 SFA. and suggested that a limited bucket of 95 SFA and LSTA. 105 JBA and Data Boiler. non-loan assets would not 96 JBA. 106 Occupy. 97 SIFMA; CCMC; ABA; Credit Suisse; MFA; 107 See 79 FR 5688–92 (stating, for example, that 88 E.g., LSTA; PNC; and SIFMA. One commenter Goldman Sachs; LSTA; and SFA. ‘‘[t]he [a]gencies also do not believe that they lack expressed opposition to this codification but did 98 PNC. Another commenter who generally the statutory authority to permit a loan not elaborate or justify this position. See Data supported the proposed modifications to the loan securitization relying on the loan securitization Boiler. securitization exclusion did not urge the agencies exclusion to use derivative[s,] as suggested by 89 79 FR 5687–88. to raise the cap on non-loan assets. See BPI. [Occupy]’’ and that, more broadly, the agencies 90 79 FR 5687. 99 E.g., LSTA; SIFMA; and Goldman Sachs. have the authority to allow excluded loan 91 85 FR 12128–29. 100 SIFMA; BPI; ABA; and LSTA. securitizations to hold non-loan assets). 92 E.g., SIFMA; CCMC; ABA; Credit Suisse; MFA; 101 SIFMA and BPI. 108 12 U.S.C. 1851(g)(2). Goldman Sachs; LSTA; BPI; and SFA. 102 BPI. 109 85 FR 12128–29.

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banking entities to sell or securitize non-loan assets was appropriate or limit that could arise if the issuer held loans. necessary to ensure flexibility, and it is more volatile assets.114 After considering the foregoing not clear what benefit would accrue to In the final rule, this measurement is comments, the agencies are revising the issuers who could hold debt securities based only on the value of the loans and loan securitization exclusion to permit a of, for example, seven or ten percent debt securities held under loan securitization to hold a limited versus five percent. The amount of non- §§ ll.10(c)(8)(i)(A) and (E) and the amount of debt securities. Loan loan assets held by a fund should not be cash and cash equivalents held under securitizations provide an important so significant that it fundamentally § ll.10(c)(8)(iii)(A) rather than the mechanism for banking entities to fund changes the character of the fund from aggregate value of all of the issuing lending programs. Allowing loan one that is engaged in securitizing loans entity’s assets. The purpose of the five securitizations to hold a small amount to one that is engaged in investing in percent limit is to ensure the investment of debt securities in response to other types of assets. pool of a loan securitization is customer and market demand may The agencies are also clarifying the composed of loans. Therefore, the increase a banking entity’s capacity to methodology for calculating the five calculation takes into account the assets provide financing and lending. To percent limit on non-convertible debt that should make up the issuing entity’s minimize the potential for banking securities.111 The 2020 proposal only investment pool and excludes the value entities to use this exclusion to engage provided that ‘‘the aggregate value of of other rights or incidental assets, as in impermissible activities or take on any such other assets must not exceed well as derivatives held for risk excessive risk, the final rule permits a five percent of the aggregate value of the management. This further simplifies the loan securitization to hold debt issuing entity’s assets’’ and requested calculation methodology by excluding securities (excluding asset-backed comment about how the agencies assets that may be more complex to securities and convertible securities), as should calculate this limit.112 As value and that are ancillary to the loan opposed to any non-loan assets, as the suggested by several commenters, the securitization’s investment activities. 2020 proposal would have allowed.110 final rule specifies that the limit on non- This straightforward calculation Although several commenters convertible debt securities must be methodology will ensure that the loan supported allowing a loan securitization calculated at the most recent time of securitization exclusion remains easy to to hold any non-loan asset to provide acquisition of such assets. Specifically, use and will facilitate banking entities’ flexibility and allow the issuer’s the aggregate value of debt securities compliance with the exclusion. investment manager to respond to held under § ll.10(c)(8)(i)(E) of the The agencies recognize that a loan changing market demands, the agencies final rule may not exceed five percent securitization’s transaction agreements believe that limiting the assets to debt of the aggregate value of loans held may require that some categories of securities is more consistent with the under § ll.10(c)(8)(i)(A), cash and loans, cash equivalents, or debt activities of an issuer focused on cash equivalents held under securities be valued at fair market value securitizing loans, rather than engaging § ll.10(c)(8)(iii)(A), and debt for certain purposes. To accommodate in other activities. The agencies have securities held under such situations, the exclusion provides determined, consistent with the views § ll.10(c)(8)(i)(E), where the value of that the value of any loan, cash of another commenter, that non-loan the loans, cash and cash equivalents, equivalent, or permissible debt security assets with materially different risk and debt securities is calculated at par may be based on its fair market value if characteristics from loans could change value at the time any such debt security (1) the issuing entity is required to use the character and complexity of an is purchased.113 the fair market value of such loan or issuer and raise the type of concerns The agencies have chosen the most debt security for purposes of calculating that section 13 of the BHC Act was recent time of acquisition of non- compliance with concentration intended to address. Moreover, as convertible debt securities as the limitations or other similar calculations described further below, limiting the moment of calculation to simplify the under its transaction agreements and (2) assets to those with risk characteristics manner in which the 5 percent cap the issuing entity’s valuation that are similar to loans will allow for applies. This would permit an issuer methodology values similarly situated a simpler and more transparent that, at some point in its life, held debt assets, for example non-performing calculation of the five percent limit, securities in excess of five percent of its loans, consistently. This provision is which will facilitate banking entities’ assets to qualify for the exclusion if it intended to provide issuers with the compliance with the exclusion. For the came into compliance with the five flexibility to leverage existing same reasons, the final rule does not percent limit prior to a banking entity calculation methodologies while permit a loan securitization to hold relying on the exclusion with respect to preventing issuers from using asset-backed securities or convertible such issuer. The agencies believe that a inconsistent methodologies in a manner securities as part of its five percent continuous monitoring obligation could to evade the requirements of the allowance for debt securities. This helps impose significant burdens on excluded exclusion. to ensure that a loan securitization will issuers and could cause an issuer to be Leases not be exposed to complex financial disqualified from the loan securitization A commenter on the 2018 proposal instruments and will retain the general exclusion based on market events not suggested that the loan securitization characteristic of a loan securitization under its control. It is also unnecessary exclusion be expanded to cover leases issuer. to require this calculation at other Similarly, to reduce potential risk- and related assets, including operating intervals because limiting permissible or capital leases.115 In response, in the taking and to ensure that the fund is assets to those that have similar composed almost entirely of loans with 2020 proposal the agencies stated that characteristics as loans addresses the they were ‘‘not proposing to separately minimal non-loan assets, the final rule potential for evasion of the five percent retains the 2020 proposal’s five percent limit on non-loan assets. Commenters 114 The agencies also have authority to address 111 Final rule § ll.10(c)(8)(i)(E)(1)–(2). acts that function as an evasion of the requirements differed on whether raising the limit on 112 2020 proposal § ll.10(c)(8)(i)(E); 85 FR of the exclusion. See implementing regulations 12129. § ll.21. 110 Final rule § ll.10(c)(8)(i)(E). 113 Final rule § ll.10(c)(8)(i)(E)(1)–(2). 115 See 85 FR 12128.

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list leases within the loan securitization The 2020 proposal noted that the Commenters generally supported exclusion because leases are included in OCC’s regulations implementing 12 clarifying that funds that make the definition of loan and thus are U.S.C. 24(Eleventh) provide that investments that qualify for permitted assets for loan securitizations investments that receive consideration consideration under the CRA qualify for under the current exclusion.’’ 116 That as qualified investments under the the public welfare investment same commenter made a comment on regulations implementing the exclusion.128 Commenters noted that the 2020 proposal urging the agencies to Community Reinvestment Act (CRA) are this clarification would be consistent reconsider explicitly including public welfare investments for national with the OCC’s regulations concerning operating leases and leased properties in banks.120 The 2020 proposal requested public welfare investments and the the loan securitization exclusion.117 comment on whether any change should CRA, provide greater certainty, and This commenter asserted that unless the be made to clarify that all permissible avoid unnecessarily chilling public agencies specifically revise the public welfare investments, under any welfare investment activities.129 One definition of ‘‘rights or other assets’’ to agency’s regulation, are excluded from commenter stated that some banking explicitly include leased property, then the covered fund restrictions.121 The entities have been reluctant to invest in securitization vehicles with operating 2020 proposal specifically asked certain community development funds leases that rely on the residual property whether investments that would receive due to uncertainty as to whether these value after expiration of the lease to consideration as qualified investments funds were covered funds.130 This support their asset-backed securities under the CRA should be excluded from commenter stated that explicitly would not be able to qualify under the the definition of covered fund, either by excluding funds that qualify for loan securitization exemption, despite incorporating these investments into the consideration under the CRA from the the 2013 rule’s provisions for special public welfare investment exclusion or definition of covered fund would units of beneficial interest and collateral by establishing a new exclusion for eliminate this uncertainty and would certificates. CRA-qualifying investments.122 help support the type of community Consistent with the 2020 proposal, In addition, the 2020 proposal development efforts that the public welfare investment exclusion was the agencies are not separately listing requested comment on whether Rural 131 leases within the loan securitization Business Investment Companies (RBICs) designed to promote. In addition, some commenters recommended exclusion because leases are included in are typically excluded from the excluding funds that qualify for the the definition of loan and thus are definition of ‘‘covered fund’’ because of public welfare investment exclusion permitted assets for loan securitizations the public welfare investment exclusion from the definition of ‘‘banking under the current exclusion. The or another exclusion and on whether the 132 agencies are also not modifying the entity.’’ agencies should expressly exclude Commenters also generally favored definition of ‘‘rights or other assets’’ to RBICs from the definition of covered explicitly excluding RBICs and QOFs explicitly include leased property, as 123 fund. RBICs are licensed under a from the definition of ‘‘covered fund,’’ any residual value of such leased program designed to promote economic either by adopting new exclusions, or by property upon expiration of an development and job creation in rural clarifying the scope of the public operating lease should meet the communities by investing in companies welfare investment exclusion.133 requirements to constitute an asset that involved in the production, processing, Commenters stated that explicitly is related or incidental to purchasing or and supply of food and agriculture- excluding these funds from the 124 otherwise acquiring and holding loans. related products. definition of ‘‘covered fund’’ would be 3. Public Welfare and Small Business The Tax Cuts and Jobs Act established consistent with the statutory provision Funds the ‘‘opportunity zone’’ program to permitting public welfare investments. provide tax incentives for long-term Commenters stated that RBICs and i. Public Welfare Funds investing in designated economically QOFs must make investments that are Section 13(d)(1)(E) of the BHC Act distressed communities.125 The program clearly designed primarily to promote permits, among other things, a banking allows taxpayers to defer and reduce the public welfare because they are entity to make and retain investments taxes on capital gains by reinvesting required to invest primarily in ways that that are designed primarily to promote gains in ‘‘qualified opportunity funds’’ promote job creation in rural the public welfare of the type permitted (QOF) that are required to have at least communities (which may have under 12 U.S.C. 24(Eleventh).118 90 percent of their assets in designated significant low- and moderate-income Consistent with the statute, the low-income zones.126 The 2020 populations or be economically implementing regulations exclude from proposal requested comment on disadvantaged and in need of the definition of ‘‘covered fund’’ issuers whether many or all QOFs would meet revitalization or stabilization) and in that make investments that are designed the terms of the public welfare economically distressed communities, primarily to promote the public welfare, investment exclusion and on whether respectively.134 Commenters stated that of the type permitted under paragraph the agencies should expressly exclude 11 of section 5136 of the Revised QOFs from the definition of covered 128 See SIFMA; FSF; BPI; ABA; PNC; Community fund.127 Development Venture Capital Alliance (CDVCA); Statutes of the United States (12 U.S.C. IIB; and Data Boiler (stating that incorporating the 24), including the welfare of low- and CRA public welfare exemption may ease some moderate-income communities or 120 See 85 FR 12130; 12 CFR 24.3. challenges faced by communities during the current families (such as providing housing, 121 See 85 FR 12130 (noting that such a change COVID pandemic, but all PWI should not be services, or jobs) (the public welfare could provide additional certainty regarding excluded). community development investments made 129 119 See SIFMA; FSF; and CDVCA. investment exclusion). through fund structures). 130 See CDVCA. 122 See id. 131 See id. 116 Id. 123 See id. 132 See SIFMA; BPI; ABA; and IIB. 117 SFA. 124 See id. 133 See SIFMA; FSF; ABA (addressing QOFs); and 118 See 12 U.S.C. 1851(d)(1)(E). 125 See id. Small Business Investor Alliance (SBIA) 119 Implementing regulations 126 See id. (addressing RBICs). § ll.10(c)(11)(ii)(A). 127 See id. 134 See SIFMA and FSF.

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certain RBICs and QOFs qualify for the of covered fund for RBICs and QOFs in assets) after such termination.145 public welfare investment exclusion, § ll.10(c)(11) of the final rule. These Likewise, under the final rule, a covered but providing an express exclusion for types of funds were created by Congress fund does not include an issuer that is these funds would reduce uncertainty to promote development in rural and a QOF, as defined in 26 U.S.C. 1400Z– and associated compliance burdens and low-income communities, and, due to 2(d).146 would encourage banking entities to their similarity to SBICs and public The final rule does not exclude funds provide capital to projects that promote welfare investments, the agencies that qualify for the public welfare believe that section 13 of the BHC Act economic development in rural and investment exclusion from the 135 was not intended to restrict the types of low-income communities. One definition of ‘‘banking entity’’ as funds that engage in those activities. commenter stated that RBICs and QOFs requested by some commenters.147 The RBICs are companies licensed under the engage in investments that are term ‘‘banking entity’’ is specifically Rural Business Investment Program, a substantively similar or identical to defined in section 13 of the BHC Act.148 those of public welfare investment program designed to promote economic development and the creation of wealth In addition, the agencies do not believe funds that are already excluded from the that applying the definition of banking definition of covered fund and of the and job opportunities among entity places an undue burden on type that Congress recognized that individuals living in rural areas and to banking entities’ public welfare section 13 of the BHC Act was not help meet the equity capital investment investments. The agencies believe that designed to prohibit.136 Another needs primarily of smaller enterprises banking entities are able to design their commenter stated that explicitly located in such areas.142 Likewise, permissible public welfare investments excluding RBICs would result in the QOFs were developed as part of a so as not to cause the investment fund provision of valuable expertise and program to promote long-term investing to become a banking entity. For public services to RBICs and provide funding in designated economically distressed welfare investment funds that are and assistance to small businesses and communities and are required to have at banking entities, the agencies believe low- and moderate-income least 90 percent of their assets in 143 that the burden-reducing amendments communities.137 One commenter designated low-income zones. adopted in this final rule and the 2019 expressed skepticism about providing a Congress created RBICs and QOFs to new exclusion for RBICs and QOFs but encourage investment in rural areas, amendments should mitigate concerns suggested that certain of these funds small enterprises, and low-income about compliance burdens. may currently qualify for the public areas. Providing an explicit exclusion ii. Small Business Investment welfare investment exclusion.138 for these funds in the implementing Companies Another commenter stated that it is not regulations gives effect to section 13 of necessary to expressly exclude QOFs the BHC Act’s provision permitting Consistent with section 13 of the BHC from the definition of covered fund, public welfare investments and avoids Act,149 the implementing regulations noting that these funds should be of the chilling the activities of funds that were exclude from the definition of ‘‘covered type primarily intended to promote the not the target of section 13 of the BHC fund’’ SBICs and issuers that have 144 public welfare of low- and moderate- Act. Although many of these funds received notice from the Small Business income areas and should therefore may already qualify for the public Administration to proceed to qualify for qualify for the current public welfare welfare investment exclusion, the a license as an SBIC, which notice or investment exclusion.139 agencies are explicitly excluding these license has not been revoked.150 The After carefully considering the funds from the definition of covered agencies proposed revising the comments received, the agencies are fund to reduce uncertainty and exclusion for SBICs to clarify how the revising the public welfare investment compliance burden. Thus, under the exclusion would apply to SBICs that exclusion to explicitly incorporate final rule, a covered fund does not surrender their licenses during wind- funds, the business of which is to make include an issuer that has elected to be down phases.151 Specifically, the investments that qualify for regulated or is regulated as a RBIC, as agencies proposed revising the consideration under the Federal banking described in 15 U.S.C. 80b–3(b)(8)(A) or exclusion for SBICs to apply explicitly agencies’ regulations implementing the (B), or that has terminated its to an issuer that has voluntarily CRA.140 Explicitly excluding these types participation as a RBIC in accordance surrendered its license to operate as an of investments from the definition of with 7 CFR 4290.1900 and does not SBIC in accordance with 13 CFR covered fund clarifies and gives full make any new investments (other than 107.1900 and does not make new effect to the statutory exemption for investments in cash equivalents, which, investments (other than investments in public welfare investments.141 In for the purposes of this paragraph, cash equivalents) after such voluntary addition, this clarification will reduce means high quality, highly liquid investments whose maturity uncertainty and will facilitate public 145 ll corresponds to the issuer’s expected or Final rule § .10(c)(11)(iii). As with SBICs, welfare investments by banking entities. discussed below, the final rule contemplates that an The agencies are also adopting potential need for funds and whose issuer that ceases to be a RBIC during wind-down currency corresponds to the issuer’s may continue to qualify for the exclusion from the explicit exclusions from the definition definition of ‘‘covered fund’’ for RBICs if the issuer satisfies certain conditions designed to prevent 142 See, e.g., Rural Business Investment Company 135 See SIFMA and FSF. abuse. (RBIC) Program, 85 FR 16519, 16520 (Mar. 24, 136 146 ll See SIFMA. 2020). Final rule § .10(c)(11)(iv). As with other 137 types of issuers excluded from the covered fund See SBIA. 143 See 26 U.S.C. 1400Z–2(d). 138 definition, a banking entity must have independent See Data Boiler. 144 See 12 U.S.C. 1851(d)(1)(E); 156 Cong. Rec. authority to invest in a QOF. 139 See PNC. S5896 (daily ed. July 15, 2010) (Statement of Sen. 147 See SIFMA and BPI. 140 Final rule § ll.10(c)(11)(ii)(A). Merkley) (noting that Section 13(d)(1)(E) permits 148 141 See 12 U.S.C. 1851(d)(1)(E). A banking entity investments ‘‘of the type’’ permitted under 12 12 U.S.C. 1851(h)(1). must have independent authority to make a public U.S.C. 24 (Eleventh), including ‘‘a range of low- 149 See 12 U.S.C. 1851(d)(1)(E) (permitting welfare investment. For example, a banking entity income community development and other investments in SBICs). that is a state member bank may make a public projects,’’ but ‘‘is flexible enough to permit the 150 See implementing regulations welfare investment to the extent permissible under [agencies] to include other similar low-risk § ll.10(c)(11)(i). 12 U.S.C. 338a and 12 CFR 208.22. investments with a public welfare purpose’’). 151 See 85 FR 12131.

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surrender.152 The agencies explained will provide greater certainty to banking for the reasons articulated in the that applying the exclusion to an issuer entities, give full effect to the provision preamble to the 2013 rule.169 that has surrendered its SBIC license is of section 13 of the BHC Act that 1. Credit Funds appropriate because of the statutory permits investments in SBICs, and exemption for investments in SBICs and support capital formation for small i. Background and 2020 Proposal because banking entities may otherwise businesses. In response to one In the preamble to the 2013 rule, the become discouraged from investing in commenter’s concerns regarding the agencies declined to establish an SBICs due to concerns that an SBIC may exclusion for SBICs,162 the agencies exclusion from the definition of covered become a covered fund during its wind- note that a banking entity’s investment 153 fund for funds that make loans, invest down phase. The agencies further in an SBIC must comply with all in debt, or otherwise extend the type of noted that the proposed revisions applicable laws and regulations, credit that banking entities may provide included a number of requirements including the prohibition against directly under applicable banking law designed to ensure that the exclusion proprietary trading under section 13 of (credit funds).170 The agencies cited would not be abused.154 In particular, the BHC Act and its implementing concerns about whether credit funds the exclusion would apply only to an regulations. Furthermore, as noted could be distinguished from private issuer that voluntarily surrenders its above, the revised exclusion for SBICs equity funds and hedge funds and the license in accordance with 13 CFR includes safeguards designed to prevent possible evasion of the requirements of 107.1900 and that does not make any abuse or evasion. In particular, the section 13 of the BHC Act through the new investments (other than exclusion would only apply to an issuer availability of such an exclusion. In investments in cash equivalents).155 that has voluntarily surrendered its addition, the agencies suggested that Most commenters that directly license to operate as an SBIC in addressed the 2020 proposal’s revisions some credit funds would be able to accordance with 13 CFR 107.1900 and operate using other exclusions from the concerning SBICs supported the that does not make new investments proposed revisions, stating that the definition of covered fund in the 2013 (other than investments in cash rule, such as the exclusion for joint proposed revisions would provide equivalents) after such voluntary greater certainty to banking entities ventures or the exclusion for loan surrender. 171 wishing to invest in SBICs and would securitizations. increase investment in small C. Additional Covered Fund Exclusions However, commenters on the 2018 businesses.156 One commenter stated proposal noted that many credit funds that revising the exclusion for SBICs In addition to modifying certain have not been able to utilize the joint would prevent a banking entity from existing exclusions, the agencies are venture and loan securitization being forced to sell an interest in an creating four new exclusions from the exclusions. In response, the agencies SBIC that became a covered fund for definition of ‘‘covered fund’’ to better included in the 2020 proposal a specific reasons outside of the banking entity’s tailor the provision to the types of exclusion for credit funds. Under the control.157 Commenters further noted entities that section 13 was intended to 2020 proposal, a credit fund would have that the proposed revisions included cover. These exclusions are for credit been an issuer whose assets consist sufficient safeguards against evasion funds, venture capital funds, family solely of: and did not present safety or soundness wealth management vehicles, and • Loans; concerns.158 One commenter customer facilitation vehicles. • Debt instruments; • Related rights and other assets that recommended against revising the General Comments exclusion from the definition of covered are related or incidental to acquiring, fund for SBICs. This commenter Many commenters were broadly holding, servicing, or selling loans, or expressed concern about frequent supportive of the proposed new debt instruments; and buying and selling of SBICs and noted exclusions from the definition of • Certain interest rate or foreign that section 13 of the BHC Act and its ‘‘covered fund.’’ 163 Some commenters exchange derivatives.172 implementing regulations do not recommended adopting additional The proposed exclusion would have prohibit a banking entity from lending exclusions for an array of fund types been subject to certain additional to small businesses.159 The commenter and situations, including for tender requirements to reduce evasion further expressed concern that an SBIC bond vehicles,164 ownership interests concerns and help ensure that banking that surrenders its license may be doing erroneously acquired or retained,165 entities invest in, sponsor, or advise so because it has failed or no longer certain real estate funds,166 and funds in credit funds in a safe and sound wishes to comply with the Small their seeding period.167 The agencies are manner. For example, the proposed Business Administration’s declining to adopt these suggested exclusion would have imposed (1) 160 regulations. exclusions because the requested certain activity requirements on the After carefully considering the actions are outside the scope of the credit fund, including a prohibition on comments received, the agencies are current rulemaking. In addition, one proprietary trading; 173 (2) disclosure adopting the revisions to the exclusion commenter urged the agencies to and safety and soundness requirements from the definition of covered fund for on banking entities that sponsor or serve 161 redefine the definition of ‘‘covered SBICs, as proposed. The revisions fund,’’ to rely on a characteristics-based as an advisor for a credit fund; 174 (3) 168 safety and soundness requirements on 152 approach. The agencies decline to See id. revise the definition of ‘‘covered fund’’ all banking entities that invest in or 153 See id.; 12 U.S.C 1851(d)(1)(E). 154 See 85 FR 12131. have certain relationships with a credit 155 See id. 162 See Data Boiler. 156 See SIFMA; BPI; ABA; PNC; and SBIA. 163 E.g., SIFMA; JBA; Credit Suisse; and SAF. 169 See 79 FR 5671. 157 See SBIA. 164 SIFMA. 170 See 79 FR 5705. 158 See SIFMA; BPI; and SBIA. 165 SIFMA and BPI. 171 Id. 159 See SIFMA; BPI; and SBIA. 166 IAA. 172 2020 proposal § ll.10(c)(15)(i). 160 See Data Boiler. 167 ABA. 173 2020 proposal § ll.10(c)(15)(ii). 161 See final rule § ll10(c)(11)(i). 168 JBA. 174 2020 proposal § ll.10(c)(15)(iii).

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fund; 175 and (4) restrictions on the should be able to extend credit to the quantitative limit on the amount of banking entity’s investment in, and same degree as would be permitted for equity securities (or rights to acquire an relationship with, a credit fund.176 The the banking entity to extend directly.183 equity security) received on customary proposed exclusion also would have Another commenter encouraged the terms in connection with such loans or permitted a credit fund to receive and agencies to clarify and expand the debt instruments that could be held by hold a limited amount of equity definition of debt instrument and a credit fund, citing compliance costs securities (or rights to acquire equity derivatives, to include all tranches of and diminished flexibility,190 but some securities) that were received on debt, collateralized loan and commenters indicated that a limitation customary terms in connection with the collateralized debt obligations, and any of 20 or 25 percent of total assets could credit fund’s loans or debt derivatives related to hedging credit be acceptable if the agencies were to instruments.177 risk, such as credit default swaps and impose a limit.191 total return swaps.184 In addition, a Commenters supportive of allowing ii. Comments commenter suggested clarifying that no credit funds to hold certain related The agencies requested comment on specific credit standard applies to loans assets, such as equity, in connection all aspects of the proposed credit fund held by a credit fund.185 One with an extension of credit suggested exclusion. In addition, the agencies commenter also urged the agencies to that the provision would not raise solicited comment on specific establish a safe harbor to the permissible significant safety and soundness or provisions of the proposed exclusion, asset restrictions for banking entities evasion concerns. For example, one including the permissibility of certain that rely, in good faith, on a commenter claimed that such a assets and requirements related to the representation by the credit fund that provision would not raise the risk of activities of the credit fund and the the credit fund only invests in evasion, in part, because equity options relationship between a banking entity permissible assets.186 received as consideration generally and a credit fund.178 Two commenters recommended expire unexercised.192 Other limiting permissible assets to only loans General commenters argued that the activity or debt instruments, and not equity.187 requirements of the exclusion would Commenters were generally In contrast, a range of commenters prevent a credit fund from becoming supportive of adopting an exclusion for argued that allowing a credit fund to actively involved in the purchase and credit funds, and several commenters receive certain assets, like equity, sale of equity instruments.193 Another suggested specific revisions to the related to an extension of credit would commenter suggested that the agencies proposed exclusion.179 Several promote the sale of loans and extensions could impose a requirement that non- commenters supportive of the 2020 of credit.188 Some of these commenters loan or non-debt assets be acquired on proposal urged the agencies not to adopt suggested that taking equity as partial arms-length terms and adhere to bank any further limitations on the proposed consideration for extending credit is safety and soundness standards.194 exclusion and indicated that the commonplace in the debt and loan Separately, several commenters proposed exclusion would not increase markets and that such a provision could recommended allowing excluded credit the risk of evasion of the requirements ensure that credit funds are able to funds to hold any type of asset, up to of section 13 of the BHC Act.180 Two facilitate loan and debt workouts and a certain percentage of aggregate assets, commenters expressed general restructurings, a critical financial either 20 or 25 percent of a credit fund’s opposition to or concern about the intermediation function.189 Most total assets.195 These commenters proposed credit fund exclusion.181 commenters supportive of the 2020 asserted that permitting a credit fund to proposal were generally opposed to a Asset Requirements own equity securities and other assets would help the fund more effectively Commenters were generally 183 SIFMA. The same commenter also urged the provide credit, without altering the agencies to permit credit funds to hold commodity supportive of allowing a credit fund to character of the credit fund, and would invest broadly in loans and debt forward contracts, which the commenter argued may be an appropriate hedge for extensions of reduce compliance burdens associated instruments, certain related assets, and credit to agricultural businesses. SIFMA. 182 with launching and operating a credit certain derivatives. One commenter 184 Credit Suisse. See also Arnold & Porter fund.196 In addition, these commenters (recommending expanding the types of permissible recommended against delineating claimed that a limited bucket for non- between permissible and non- derivatives, to allow for more effective hedging and easier disposal of portfolio assets). loan and non-debt assets would be permissible types of loans and debt 185 ABA. consistent with the ability of banking instruments, arguing that credit funds 186 Arnold & Porter. entities and some business development 187 Data Boiler and Better Markets. One of these companies to invest in equity.197 175 2020 proposal § ll.10(c)(15)(iv). commenters argued that the inclusion of non-loan 176 2020 proposal § ll.10(c)(15)(v). instruments would be contrary to the purpose of Banking Entity and Issuer Requirements 177 2020 proposal § ll.10(c)(15)(i)(C)(1)(iii). section 13 of the BHC Act. Data Boiler. As indicated by the agencies in the preamble to the 2020 Generally, commenters either agreed 178 See 85 FR 12133. proposal, taking limited amounts of non-loan or 179 that certain restrictions to ensure that a E.g., CCMC; AIC; SIFMA; FSF; ABA; Arnold debt assets as consideration for an extension of & Porter; and Goldman Sachs. credit is common and is a permitted practice for credit fund is actually engaged in 180 E.g., SIFMA; Credit Suisse; Goldman Sachs; insured depository institutions. Therefore, the prudently providing credit and credit and Arnold & Porter. agencies believe it would not be inconsistent with 181 Better Markets and Data Boiler. One of these section 13 of the BHC Act to facilitate the sale of 190 SIFMA; FSF; CCMC; AIC; ABA; and Goldman commenters suggested that banking entities should loans by establishing a credit fund exclusion that Sachs. instead rely on the exclusions for joint ventures and allows a credit fund to hold a limited amount of 191 SIFMA and CCMC. loan securitizations. Data Boiler. certain equity instruments related to extensions of 192 Arnold & Porter. 182 E.g., SIFMA; Arnold & Porter; and ABA. One credit. See also the discussion about permitting 193 Goldman Sachs and FSF. commenter also noted that the permissible holding excluded loan securitizations to hold a small 194 period for debt previously contracted varies amount of non-loan assets, supra Section IV.B.2 ABA. depending on applicable regulations and suggested (Loan Securitizations). 195 SIFMA; FSF; Credit Suisse; ABA; and that the agencies specify the holding period for debt 188 E.g., SIFMA; Credit Suisse; ABA; and Arnold Goldman Sachs. One commenter also suggested a previously contracted assets owned by a credit fund & Porter. formula for determining the cap. Goldman Sachs. and provide for an extension process. Arnold & 189 E.g., SIFMA; Credit Suisse; and Arnold & 196 E.g., SIFMA and Goldman Sachs. Porter. Porter. 197 Id.

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intermediation and is not operated for inappropriate outcomes, such as Other Comments the purpose of evading the provisions of allowing a banking entity to invest in Commenters also submitted several section 13 of the BHC Act were the equity of a credit fund, but not the miscellaneous comments about the appropriate or did not object to the debt instruments issued by that same proposed exclusion for credit funds. 198 inclusion of these requirements. credit fund.203 That same commenter One commenter requested that the Several commenters, however, offered also recommended eliminating agencies clarify the definition of asset- revisions to the activities, sponsor or § ll.10(c)(15)(v)(B) of the 2020 backed securities as used in the advisor, banking entity, or investment proposal—which would have required proposed credit fund exclusion and the and relationship limit requirements. For that the banking entity’s investment in, current loan securitization exclusion.208 example, several commenters requested and relationship with, the credit fund be That same commenter also urged the clarification on the prohibition on conducted in compliance with, and agencies to revise the proposed credit proprietary trading by an excluded subject to, applicable banking laws and fund exclusion to allow banking entities credit fund contained in regulations—because applicable with more stringent credit requirements, § ll.10(c)(15)(ii)(A) of the 2020 banking laws and regulations apply such as insured depository institutions, proposal. One commenter suggested that regardless of the banking entity’s use of to invest in credit funds that hold the definition of proprietary trading for the credit fund exclusion.204 distressed debt.209 a credit fund should depend on the Finally, the 2020 proposal requested 199 In addition, a commenter argued that definition used by the banking entity. banking entities that serve as investment comment on whether to combine the Another commenter encouraged the advisers or commodity trading advisors proposed credit fund exclusion with the agencies to incorporate the exclusions to credit funds should not be subject to loan securitization exclusion. and exemptions from the prohibition on the disclosure and safety and soundness Commenters were generally opposed to proprietary trading into the credit fund requirements of § ll.10(c)(15)(iii) of combining the two exclusions, citing exclusion’s prohibition on proprietary the 2020 proposal since investment different classes of assets in which the trading.200 A third commenter advisers and commodity trading two types of issuers invest and a recommended making explicit that advisors who do not otherwise sponsor fundamental difference in structure exercising rights for certain related or invest in a fund are generally not (loan securitizations issue asset-backed assets, such as an equity warrant, is not securities, while credit funds do not).210 201 subject to section 13 of the BHC Act. proprietary trading. In addition, one commenter argued that Commenters also requested revisions The commenter argued that ll while combining the two exclusions to and clarification about the limits on § .10(c)(15)(iii) of the 2020 proposal would impose differing requirements on would increase the simplicity of the a banking entity’s investment in, and rule, such an amalgamated exclusion relationship with, a credit fund. One a credit fund depending on whether the investment adviser or commodity could result in increased compliance commenter argued that the imposition burdens for issuers who are accustomed ll trading advisor was an insured of § .14 of the implementing to the lack of credit requirements in the regulations (which imposes limitations depository institution or a bank holding current loan securitization exclusion.211 on the relationship between a banking company. That commenter also claimed entity and a fund it sponsors or advises) that the portfolio requirements in iii. Final Exclusion § ll.10(c)(15)(iv)(B) of the 2020 would be duplicative of (1) the After consideration of the comments, requirement that the banking entity not, proposal could require banking entities to establish complex compliance the agencies are adopting the credit directly or indirectly, guarantee, fund exclusion as proposed, with assume, or otherwise insure the programs to assess credit fund compliance with state and foreign laws certain modifications. The agencies obligations or performance of the credit believe that the credit fund exclusion in fund and (2) certain conflict of interest, and that the agencies should limit the scope of the provision to only federal the final rule (1) addresses the high-risk, and safety and soundness application of the covered fund 202 banking laws and regulations.205 restrictions. Another commenter provisions to credit-related activities claimed that there was little benefit to Finally, one commenter contended that certain banking entities are ll imposing the requirements of § .14 that the application of certain permitted to engage in directly and (2) ll (described above) and § .15 (which requirements in the exclusion is is consistent with Congress’s intent that imposes certain material conflicts of contingent on the type of banking entity section 13 of the BHC Act limit banking interest, high-risk investments, and that invests in or sponsors a credit fund entities’ investment in and relationships safety and soundness and financial and urged the agencies to make explicit with hedge funds and private equity stability requirements on permitted that only the identity of the sponsor of funds, but not limit or restrict banking covered fund activities) of the the credit fund, and not its affiliates or entities’ ability to extend credit.212 The implementing regulations in the context third-party investors, determines which agencies also believe that the credit of credit funds and suggested that the portfolio quality and safety and fund exclusion in the final rule, with partial application of § ll.14, in soundness requirements apply to the the eligibility criteria described below, particular, could lead to unexpected and 206 credit fund. More generally, this will address concerns the agencies commenter asked the agencies to make expressed in the preamble to the 2013 198 E.g., SIFMA; Better Markets; FSF; and explicit in the preamble to the final rule Goldman Sachs. One commenter also indicated that the disclosure requirement for banking entities that that the actions of unaffiliated, third- 208 Id. sponsor or advise funds is appropriate. Arnold & party banking entities do not affect 209 Id. Porter. whether a banking entity may invest in 210 SIFMA; FSF; CCMC; Credit Suisse; and Data 199 SIFMA. For example, the commenter a fund.207 Boiler. suggested that a credit fund sponsored by a banking 211 Arnold & Porter. entity subject to the market risk rule should be 212 See 12 U.S.C. 1851(g)(2), (h)(2). Paragraph 203 Arnold & Porter. permitted to use the definitions of proprietary (g)(2) of section 13 of the BHC Act makes clear that 204 trading and trading account in § ll.3(b)(1)(ii). Arnold & Porter. the Volcker rule is not intended to impede banking 200 FSF. 205 Id. entities’ ability to extend credit by, for example, 201 Arnold & Porter. 206 Id. selling loans or securitize loans. See 12 U.S.C. 202 SIFMA. 207 Id. 1851(g)(2).

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rule about the ability to administer an separate the credit fund exclusion and limited by the requirements that they be exclusion for credit funds and the the loan securitization exclusion (a) received on customary terms in potential evasion of section 13 of the because the structures and purposes of connection with the fund’s loans or debt BHC Act.213 Banking entities already those two types of issuers differ instruments and (b) related or incidental have experience using and complying sufficiently to warrant different to acquiring, holding, servicing, or with the loan securitization exclusion. requirements. For example, loan selling those loans or debt instruments. Establishing an exclusion for credit securitizations and credit funds have The agencies generally expect that the funds based on the framework provided different asset composition and different equity securities or rights satisfying by the loan securitization exclusion financing and legal structures. those criteria in connection with an allows banking entities to provide Therefore, the agencies are finalizing a investment in loans or debt instruments traditional extensions of credit credit fund exclusion separate from the of a borrower (or affiliated borrowers) regardless of the specific form, whether loan securitization exclusion. would not exceed five percent of the directly via a loan made by a banking value of the fund’s total investment in entity, or indirectly through an Asset Requirements the borrower (or affiliated borrowers) at investment in or relationship with a Under the final rule, a credit fund, for the time the investment is made. The credit fund that transacts primarily in the purposes of the credit fund agencies understand that the value of loans and certain debt instruments. exclusion, is an issuer whose assets those equity securities or other rights The credit fund exclusion limits the consist solely of: may change over time for a variety of universe of potential funds that can rely • Loans; reasons, including as a result of market on the exclusion by clearly specifying • Debt instruments; conditions and business performance, as the types of activities in which those • Related rights and other assets that well as more fundamental changes in funds may engage. Excluded credit are related or incidental to acquiring, the business and the credit fund’s funds can transact in or hold only loans; holding, servicing, or selling loans, or corresponding management of the debt instruments that would be debt instruments; and investment (e.g., exchanges of debt permissible for the banking entity • Certain interest rate or foreign instruments for equity in connection relying on the exclusion to hold exchange derivatives.214 with mergers and restructurings or a directly; certain rights or assets that are Several provisions of the exclusion disposition of all portion of the credit related or incidental to the loans or debt are similar to and modeled on investment without a corresponding instruments, including equity securities conditions in the loan securitization disposition of the equity securities or (or rights to acquire an equity security) exclusion to ease compliance burdens. rights due to differences in market received on customary terms in For example, any derivatives held by conditions or other factors). connection with such loans or debt the credit fund must relate to loans, Accordingly, the agencies can foresee instruments; and certain interest rate permissible debt instruments, or other various circumstances where the and foreign exchange derivatives. The rights or assets held and reduce the relative value of such equity securities credit fund exclusion, with these interest rate and/or foreign exchange or rights in a borrower (or affiliated eligibility criteria, should not raise risks related to these holdings.215 In borrowers) would over the life of the evasion concerns. Similarly, the addition, any related rights or other investment exceed five percent on a agencies’ expectations regarding the assets held that are securities must be basis consistent with the requirements. amount of permissible equity securities cash equivalents, securities received in Nonetheless, the agencies expect that (or rights to acquire an equity security) lieu of debts previously contracted with the fund’s exposure to equity securities held and the requirement that the credit respect to loans held or, unique to the (or other rights), individually and fund not engage in activities that would credit fund exclusion, equity securities collectively and when viewed over time, constitute proprietary trading should (or rights to acquire equity securities) would be managed on a basis consistent help to ensure that the extensions of received on customary terms in with the fund’s overall purpose. credit, whether directly originated or connection with the credit fund’s loans The agencies are also not imposing acquired from a third party, are held by or debt instruments.216 additional restrictions on the types of the credit fund for the purpose of In the 2020 proposal, the agencies equity securities (or rights to acquire an facilitating lending and not for the requested comment on whether to equity security) that a credit fund may purpose of evading the requirements of impose a limit on the amount of equity hold. The final rule prevents a banking section 13. Finally, the restrictions on securities (or rights to acquire equity entity from relying on the credit fund guarantees and other limitations should securities) that may be held by an exclusion unless any debt instruments eliminate the ability and incentive for excluded credit fund.217 After a review and equity securities (or rights to either the banking entity sponsoring a of the comments and further acquire an equity security) held by the credit fund or any affiliate to provide deliberation, the agencies are not credit fund and received on customary additional support beyond the adopting a quantitative limit on the terms in connection with the credit ownership interest retained by the amount of equity securities (or rights to fund’s loans or debt instruments are sponsor. Thus, the agencies expect that, acquire equity securities) that may be permissible for the banking entity to together, the criteria for the credit fund held by an excluded credit fund. Any acquire and hold directly and a sponsor exclusion will prevent a banking entity such equity securities or rights are of a credit fund must ensure that the from having any incentive to bail out credit fund complies with certain safety 218 such funds in periods of financial stress 214 Final rule § ll.10(c)(15)(i). and soundness standards. Combined or otherwise expose the banking entity 215 Final rule § ll.10(c)(15)(i)(D). with the prohibition on proprietary to the types of risks that the covered 216 Final rule § ll.10(c)(15)(i)(C). In a minor trading by a credit fund,219 these fund provisions of section 13 were change from the 2020 proposal, the agencies are limitations are expected to prevent intended to address. making clear that rights or other assets held under evasion of section 13 of the BHC Act Consistent with commenters’ paragraph (c)(15)(i)(C) of that section may not include any derivative, other than a derivative that and should be sufficient to prevent suggestions, the agencies are keeping meets the requirements of paragraph (c)(15)(i)(D) of that section. 218 Final rule § ll.10(c)(15)(iv)(B), (iii)(B). 213 See 79 FR 5705. 217 85 FR 12133. 219 Final rule § ll.10(c)(15)(ii)(A).

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banking entities from investing in or that only those instruments that The agencies decline to deviate from sponsoring credit funds that hold facilitate the extension of credit and these standards for any particular type excessively risky equity securities (or directly-related hedging activities of credit fund because doing so could rights to acquire an equity security).220 should be permitted under the permit activities that raise the type of The agencies are, however, clarifying exclusion. For example, allowing the concerns that section 13 of the BHC Act that the provision allowing related unlimited holding of credit default was intended to address. rights and other assets does not swaps by a majority owned or • Further specify the holding period separately permit the holding of sponsored credit fund could raise the for securities held in lieu of debts derivatives. The preamble to the 2020 risks that section 13 of the BHC Act was previously contracted held by a credit proposal made clear that ‘‘any intended to address. Moreover, fund. Generally, a banking entity may derivatives held by the credit fund must permitting excluded credit funds to not rely on this exclusion unless any relate to loans, permissible debt invest up to 25 percent of total assets in debt instruments and equity securities instruments, or other rights or assets any type of asset could turn the (or rights to acquire equity securities) held, and reduce the interest rate and/ exclusion for credit funds into an held by the fund would be permissible or foreign exchange risks related to exclusion for the type of funds that for the banking entity to acquire and these holdings.’’ 221 The agencies section 13 of the BHC Act was intended hold directly under applicable federal suggested then and currently believe to address. Such a result would be banking laws and regulations. However, that allowing a credit fund issuer to contrary to section 13 of the BHC Act. the requirement that a banking entity be hold derivatives not related to interest There are several additional changes able to hold a given asset directly does rate or foreign exchange hedging would recommended by commenters that the not apply to securities held in lieu of not be necessary to facilitate the indirect agencies are not including in the final debts previously contracted under the extension of credit by banking entities rule. Specifically, the final rule does final regulations. Because a banking and may pose the very risks that section not: • entity’s ability to invest in or sponsor an 13 of the BHC Act was intended to Allow excluded credit funds to excluded credit fund is not contingent reach. To ensure that the credit fund hold commodity forward contracts. on how long the credit fund holds exclusions does not inadvertently allow Although these contracts have securities held in lieu of debts the holding of certain derivatives legitimate value as hedging instruments, previously contracted, the agencies do unrelated to interest rate and/or foreign the agencies do not believe this type of not believe it is necessary to amend the exchange risks, the final rule explicitly hedging activity is consistent with the regulations to impose a specific holding excludes derivatives from permissible purpose of the exclusion for credit period on securities held by a credit related right and other assets.222 funds, which is to allow banking fund in lieu of debts previously The agencies are not adopting a broad entities to share the risks of their contracted.224 permissible lending activities or to expansion of permissible assets, as • Revise or expand on the definition recommended by several commenters. engage in permissible lending activities indirectly through a fund structure. of debt instrument. The agencies believe Contrary to commenters’ suggestions, • that the term debt instrument already allowing credit funds to hold unlimited Permit banking entities that are insured depository institutions or their has a general meaning that is used in the amounts of non-debt instruments or marketplace and by regulators and that derivatives, such as credit default or operating subsidiaries to invest in credit funds through a contribution to a credit a new definition is unnecessary given total return swaps, could present this widely understood meaning and evasion concerns and is not necessary fund of troubled loans and debt previously contracted assets from the could cause confusion. for effectuating the rule of • Adopt a safe harbor for banking construction.223 The agencies believe banking entity’s portfolio. The conditions in the final rule are intended entities that rely, in good faith, on a representation by the credit fund that it 220 One commenter suggested requiring that to ensure that a credit fund generally equity securities (or rights to acquire an equity engages in activities that the banking only invests in permissible assets. It is security) be acquired via arms-length market entity may engage in directly and that the responsibility of the banking entity transactions and adhere to bank safety and the banking entity’s investment in and to ensure that it complies with section soundness standards. See ABA. Under the final 13 of the BHC Act and the rule, a banking entity may not rely on the credit relationship with the fund are fund exclusion unless any equity securities (or conducted in a safe and sound manner. implementing regulations, and such rights to acquire an equity security) held by the responsibility cannot be substituted credit fund are permissible for the banking entity to counterparties or issuers of the underlying assets solely with a representation from a to acquire and hold directly under applicable referenced by these derivatives because the credit fund. federal banking laws and regulations. Final rule operation of derivatives, such as these, that expand ll § .10(c)(15)(iv)(B). In addition, the final rule potential exposures beyond the loans and other Activity Requirements requires that equity securities (or rights to acquire assets, would not in the Agencies’ view be an equity security) related or incidental to consistent with the limited exclusion contained in The agencies are adopting the activity acquiring, holding, servicing, or selling such loans the rule of construction under section 13(g)(2) of the requirements for issuers in the 2020 or debt instruments must be received on customary BHC Act, and could be used to circumvent the proposal without revision. Under the terms in connection with such loans or debt restrictions on proprietary trading and prohibitions ll instruments. Final rule § .10(c)(15)(i)(C)(1)(iii). in section 13(f) of the BHC Act. The Agencies final rule, a credit fund is not a covered Finally, a banking entity’s investment in, and believe that the use of derivatives by an issuing fund, provided that: relationship with, the issuer must comply with the entity for asset-backed securities that is excluded • ll The fund does not engage in limitations imposed in § .15, as if the issuer from the definition of covered fund under the loan were a covered fund. Final rule securitization exclusion should be narrowly activities that would constitute ll § .10(c)(15)(v)(A). tailored to hedging activities that reduce the interest proprietary trading, as defined in 221 85 FR 12132. rate and/or foreign exchange risks directly related § ll.3(b)(1)(i) of the rule, as if the fund 222 Final rule § ll.10(c)(15)(i)(C)(2). to the asset-backed securities or the loans were a banking entity; 225 and 223 The agencies’ rationale, in the preamble to the supporting the asset-backed securities because the 2013 rule, for limiting the permissible assets for the use of derivatives for purposes other than reducing loan securitization exclusion is particularly interest rate risk and foreign exchange risks would 224 The agencies note that banking entities must relevant. See 79 FR 5691 (‘‘Under the final rule as introduce credit risk without necessarily relating to otherwise comply with applicable law. See infra, adopted, an excluded loan securitization would not or involving a reduction of interest rate risk or Additional Banking Entity Requirements. be able to hold derivatives that would relate to risks foreign exchange risk.’’). 225 Final rule § ll.10(c)(15)(ii)(A).

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• The fund does not issue asset- respect to the exclusions from the to an excluded credit fund to provide backed securities.226 definition of proprietary trading prospective and actual investors the The agencies decline to adopt changes contained in § ll.3(d) of the disclosures specified in § ll.11(a)(8) recommended by commenters because implementing regulations, the agencies of the implementing regulations.231 the agencies believe the activity note that the trading activities identified Second, a banking entity that acts as requirements are clear and appropriate. in § ll.3(d) are by definition not a sponsor, investment adviser, or The first provision explicitly references deemed to be proprietary trading, such commodity trading advisor must ensure the prohibition on proprietary trading that the performance by an excluded that the activities of the credit fund are ll by a banking entity in § .3 of the credit fund of those activities would not consistent with safety and soundness implementing regulations and, in be inconsistent with the final credit standards that are substantially similar 228 particular, the short-term intent prong fund exclusion. to those that would apply if the banking ll contained in § .3(b)(1)(i). For the Finally, the agencies are not revising entity engaged in the activities avoidance of doubt, a credit fund would the definition of ‘‘asset-backed security’’ directly.232 The agencies note, contrary not be able to elect a different definition in the implementing regulations. The to the suggestion of a commenter, that of proprietary trading or trading definition of ‘‘asset-backed security’’ in this provision does not apply to any account. Varying the definition of the implementing regulations investment adviser or commodity proprietary trading depending on the specifically refers to the meaning trading advisor to a credit fund who type of banking entity that sponsors or specified in section 3(a)(79) of the does not also sponsor or acquire an invests in the credit fund, as suggested 229 Exchange Act (15 U.S.C. 78c(a)(79)). ownership interest in the credit fund. by a commenter, could result in This definition is used elsewhere in Rather, the requirements in conflicting requirements for credit funds 230 banking law, and banking entities § ll.10(c)(15) apply only to a sponsor, with multiple banking entity investors and others in the loan securitization investment adviser, or commodity and generally increase compliance industry have adapted their operations trading adviser that relies on the burdens on credit funds. The agencies in reliance of the definition contained in also note that activities permitted under exclusion to sponsor or acquire an the Exchange Act. Moreover, the 2013 ownership interest in the credit fund. § ll.10(c)(15) generally would not be rule included the requirement that the considered proprietary trading, The covered fund provisions in fund issue asset backed securities as § ll.10 of the implementing provided that an excluded credit fund part of the loan securitization criteria, does not purchase or sell one or more regulations only affect the operations of and banking entities have become banking entities that, as principal, financial instruments principally for the familiar with this definition, as they purpose of short-term resale, benefit directly or indirectly, acquire or retain have implemented and utilized the any ownership interest in or sponsor a from actual or expected short-term price exclusion. 233 movements, realize short-term arbitrage covered fund. Thus, the safety and profits, or hedge one or more of the Requirements for a Sponsor, Investment soundness provision only applies to positions resulting from the purchases Adviser, or Commodity Trading Advisor banking entities that sponsor an or sales of financial instruments. The agencies are adopting the excluded credit fund or that have an The agencies are not expressly proposed requirements for a sponsor, ownership interest in an excluded credit incorporating the permitted activities in investment adviser, or commodity fund and also serve as an investment §§ ll.4, ll.5, and ll.6 of the trading advisor to an excluded credit adviser or commodity trading advisor to implementing regulations into the text fund with one modification. the fund. of the final credit fund exclusion. The Investors in a credit fund that a More generally, to clarify an issue exclusion for credit funds is intended to banking entity sponsors or for which the raised by some commenters, the allow banking entities to share the risks banking entity serves as an investment agencies note that whether a specific of otherwise permissible lending adviser or commodity trading advisor banking entity may use the credit fund activities. Accordingly, the agencies may have expectations related to the exclusion to make or have an otherwise would not expect that a credit fund performance of the credit fund that raise impermissible investment in or would be formed for the purpose of bailout concerns. To ensure that these relationship with a credit fund is engaging, or in the ordinary course investors are adequately informed of the contingent on the permissible activities would be engaged, in the activities banking entity’s role in the credit fund, of the banking entity. That is, the same permitted under §§ ll.4, ll.5, and the final rule requires a banking entity fund may be a covered fund with ll.6 of the implementing regulations. that acts as a sponsor, investment respect to one banking entity and an Nevertheless, to the extent that a credit adviser, or commodity trading advisor excluded credit fund with respect to a fund seeks to engage in any of those different banking entity. A banking activities as an exemption from the exemptions for underwriting and market making- entity continues to be responsible for prohibition on engaging in proprietary related activities in § ll.4 require that a banking ensuring that its particular investment, entity relying on such exemptions, among other trading, as defined in § ll.3(b)(1)(i) of things, be licensed or registered to engage in the sponsorship, or adviser activities the final rule, and does so in applicable activity in accordance with applicable comply with section 13 of the BHC Act compliance with the requirements and law. Moreover, to the extent that a credit fund is and its implementing regulations. This conditions of the applicable exemption, a banking entity with significant trading assets and principle applies to paragraphs (iii), (iv), liabilities (i.e., because it, together with its affiliates then the final rule would not preclude and subsidiaries, has trading assets and liabilities and (v) of the credit fund exclusion. such activities.227 Similarly, with that equal or exceed $20 billion over the four previous calendar quarters), it also would be 231 Final rule § ll.10(c)(15)(iii)(A). These 226 Final rule § ll.10(c)(15)(ii)(B). required to maintain a separate compliance program disclosures include, among other things, that losses 227 The agencies recognize, however, that specific to those exemptions. are borne solely by investors and not the banking compliance with certain requirements and 228 Similarly, trading activity that satisfies the 60- entity, that investors should examine fund conditions in §§ ll.4, ll.5, and ll.6 of the day rebuttable presumption in § ll.3(b)(4) would documents, and that ownership interests are not implementing regulations may be inapt and/or be presumed not to be proprietary trading for these insured by the FDIC or guaranteed. Final rule highly impractical in the context of a credit fund, purposes. § ll.11(a)(8). particularly given the asset and activity restrictions 229 Implementing regulations § ll.10(d)(2). 232 Final rule § ll.10(c)(15)(iii)(B). contained in § ll.10(c)(15). For example, the 230 See 12 CFR 244 (Credit Risk Retention). 233 Implementing regulations § ll.10(a)(1).

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The final rule moves the requirement laws of the jurisdiction applicable to its businesses are covered funds unless that the banking entity must comply activities and operations and should be they can rely on an exclusion other than with § ll.14 of the implementing cognizant of whether a credit fund it section 3(c)(1) or 3(c)(7) to avoid regulations to § ll.10(c)(15)(iii). This sponsors or in which it invests complies registration under the Investment organizational change is in response to with the laws of the jurisdictions in Company Act of 1940 (Investment commenters that requested the agencies which the credit fund operates.238 Company Act) or qualify for an confirm that that the § ll.14 Investment and Relationship Limits exclusion under the implementing limitations do not apply to a banking regulations. entity that merely invests in a credit Finally, the agencies are adopting the fund, as opposed to a banking entity proposed provisions related to a Under the 2020 proposal, the that sponsors or advises the fund. The banking entity’s investment in and exclusion would have been available to agencies believe this change is relationship with a credit fund with one ‘‘qualifying venture capital funds,’’ appropriate because the limitations on revision. Under the final rule, a banking which the 2020 proposal defined as an banking entities’ relationships with a entity’s investment in, and relationship issuer that meets the definition in 17 covered fund in § ll.14 only apply with, the issuer must comply with the CFR 275.203(l)–1 (Rule 203(l)–1), as when a banking entity serves, directly or limitations in § ll.15 of the well as several additional criteria. indirectly, as the investment manager, implementing regulations regarding Specifically, the agencies proposed to investment adviser, commodity trading material conflicts of interest, high-risk exclude from the definition of covered advisor, or sponsor to a covered fund.234 investments, and safety and soundness fund an issuer that: In addition, the agencies appreciate that and financial stability, in each case as • Is a venture capital fund as defined mere investment by a banking entity in though the credit fund were a covered in Rule 203(l)–1; and fund.239 a credit fund does not raise the type of • concerns Super 23A was intended to In addition, a banking entity’s Does not engage in any activity that address, and thus the agencies are investment in, and relationship with, a would constitute proprietary trading, ll applying § ll.14 only when a banking credit fund must be conducted in under § .3(b)(1)(i), as if it were a entity acts as a sponsor, investment compliance with, and subject to, banking entity. adviser, or commodity trading advisor applicable banking laws and With respect to any banking entity to a credit fund, in each case as though regulations, including the safety and that acts as sponsor, investment adviser, the credit fund were a covered fund.235 soundness standards applicable to the or commodity trading advisor to the The limitations in § ll.15 of the banking entity.240 The agencies believe issuer, and that relies on the exclusion implementing regulations regarding it is important to highlight that the to sponsor or acquire an ownership material conflicts of interest, high-risk requirements applicable to the banking interest in the qualifying venture capital investments, and safety and soundness entity also govern the ability of the fund, the banking entity would have and financial stability remain applicable banking entity to invest in a fund that been required to: relies on the credit fund exclusion as to banking entities’ investment in, and • well as the types of transactions that a Provide in writing to any relationship with, excluded credit prospective and actual investor the funds. banking entity may conduct with such funds.241 This means, for example, that disclosures required under Additional Banking Entity Requirements a banking entity that invests in or has § ll.11(a)(8), as if the issuer were a As provided in the 2020 proposal, a a relationship with a credit fund is covered fund; and banking entity may not rely on the subject to capital charges and other • Ensure that the activities of the credit fund exclusion if it guarantees the requirements under applicable banking issuer are consistent with the safety and performance of the fund.236 In a revision law.242 soundness standards that are to the 2020 proposal, under the final 2. Venture Capital Funds substantially similar to those that would rule a banking entity may not rely on apply if the banking entity engaged in the credit fund exclusion if the fund i. Venture Capital Funds the activities directly. holds any debt instruments or equities 2020 Proposal In addition, a banking entity that (or rights to acquire an equity security) relied on the exclusion would not have received on customary terms in The 2020 proposal included an been permitted, directly or indirectly, to connection with loans or debt exclusion for ‘‘qualifying venture capital 243 guarantee, assume, or otherwise insure instruments held by the credit fund that funds.’’ As described in the 2020 the obligations or performance of the the banking entity is not permitted to proposal, venture capital funds that issuer. Finally, the 2020 proposal would acquire and hold directly under provide capital to small and start-up applicable federal banking laws and have required a banking entity’s 238 regulations.237 This change is to clarify, For example, banking entities that are ownership interest in or relationship organized under state or foreign laws may, with a qualifying venture capital fund as suggested by a commenter, that this depending on the nature of the organization, need requirement is specific only to federal to comply with other laws. to: banking laws and regulations. Whether 239 Final rule § ll.10(c)(15)(v)(A). • Comply with the limitations a credit fund’s holdings are permissible 240 Final rule § ll.10(c)(15)(v)(B). imposed in § ll.14 (except the for a banking entity to hold under state 241 The agencies also note that banking entity may acquire and retain § ll.10(c)(15)(v)(B) does not impose any or foreign laws is not relevant to additional burdens and should not generate any ownership interest in the issuer) compliance with section 13 of the BHC confusion. and § ll.15 of the implementing Act. That said, the agencies note that 242 For example, a banking entity’s investment in regulations, as if the issuer were a banking entities must comply with the or relationship with a credit fund could be subject covered fund; and to the regulatory capital adjustments and deductions relating to investments in financial • Be conducted in compliance with 234 ll Final rule § .14(a)(1). subsidiaries or in the capital of unconsolidated and subject to applicable banking laws 235 Final rule § ll.10(c)(15)(iii)(C). financial institutions, if applicable. See 12 CFR 236 Final rule § ll.10(c)(15)(iv). 217.22. and regulations, including applicable 237 Final rule § ll.10(c)(15)(iv)(B). 243 2020 proposal § ll.10(c)(16). safety and soundness standards.

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Comments banking entities.255 Commenters also regulations.265 Another commenter said Several commenters supported an said that the proposed exclusion allows the definition of proprietary trading for exclusion for venture capital funds.244 banking entities to make investments funds should be the same as the indirectly through a fund structure that definition that applies to the banking Some of these commenters argued the 256 Volcker Rule has severely impacted they could make directly and entity and that having two definitions is 266 investment in venture funds and incorporates criteria and activity not reasonable or cost-effective. businesses and that venture capital is a restrictions that address any concerns Commenters also supported changes critical financing source for innovative about safety and soundness or to the requirement that the banking evasion.257 businesses.245 These commenters entity’s investment in and relationship Several commenters supported described their view of the positive with qualifying venture capital funds defining a qualifying venture capital economic impact of venture capital must comply with § ll.14 of the fund by reference to Rule 203(l)–1 as investment.246 For example, these implementing regulations. One proposed.258 These commenters also commenters said companies funded commenter recommended eliminating with venture capital promote research said the rule should not incorporate additional criteria as discussed in the the requirement that would apply and development and job creation.247 § ll.14 to a banking entity’s Similarly, several commenters argued preamble to the 2020 proposal, such as additional limitations on revenues or relationship with a venture capital that venture capital investments by 267 qualifying investments.259 These fund. This commenter said that other banking entities can contribute to proposed conditions adequately address economic growth, innovation, and job commenters said additional criteria are unnecessary to ensure that the fund is bailout and safety and soundness creation.248 At least one commenter said concerns.268 Other commenters said the increased venture capital investment a bona fide venture capital fund and could unnecessarily limit the scope of agencies should clarify that § ll.14 may increase employment by small 260 does not apply to a banking entity that employers.249 qualifying venture capital funds. On the other hand, one commenter said the simply invests in a qualifying venture Several commenters said an exclusion capital fund (as opposed to a banking for venture capital funds would benefit rule should include additional criteria to ensure qualifying venture capital entity that sponsors or advises the underserved regions where venture fund).269 capital funding is not readily available funds serve the public interest and do currently.250 One commenter said not cause the harms at which section 13 Other commenters did not support the venture capital fund sizes are often too of the Bank Holding Company Act was proposed exclusion for qualifying 261 270 small for institutional investors, and directed. One commenter argued venture capital funds. One of these banks have historically served an defining venture capital fund by commenters said if the agencies do important source of investment for reference to Rule 203(l)–1 would be too adopt an exclusion for qualifying small and regional venture capital narrow because it would exclude shares venture capital funds, the exclusion funds.251 This commenter said the loss of emerging growth companies (EGCs) must include additional requirements to of banking entities as limited partners in from being classified as qualifying ensure that excluded venture capital venture capital funds has had a investments and would not reflect funds serve the public interest and do disproportionate impact on cities and certain companies that operate as not cause the harms at which section regions with emerging entrepreneurial venture investors and are exempt from 619 of the Dodd-Frank Act was directed. ecosystems areas outside of Silicon having to register as an investment Specifically, this commenter said the Valley and other traditional technology company but may not meet the rule should: (1) Restrict all fund centers.252 Two commenters noted that technical definition of a venture capital investments to ‘‘qualifying investments’’ fund under Rule 203(l)–1 (e.g., startup or at least very significantly restrict an exclusion for venture capital funds 262 would promote investments in and incubators). investments in non-qualifying financing to small businesses and start- While supporting an exclusion for investments (e.g., limit them to no more ups in a broad range of geographic areas, qualifying venture capital funds than five percent of the fund’s aggregate industries, and sectors.253 generally, a few commenters capital), (2) impose a minimum recommended revisions to the proposed securities holding period and portfolio Commenters said that an exclusion for 263 venture capital funds would promote exclusion. Some commenters company revenue limitation of $35 the safety and soundness of banking proposed changes to the requirement million (or a similarly appropriate and entities.254 One commenter said the that the fund not engage in any activity low figure) to ensure the fund is truly exclusion would allow banks to that would constitute proprietary focused on medium-to-long term ll diversify and to compete with non- trading, under § .3(b)(1)(i), as if it venture (as opposed to growth stage) were a banking entity.264 One of these investments, and (3) quantitatively limit 244 Representatives Gonzalez, Steil, Stivers, Barr, commenters said qualifying venture the use of leverage as a key means for Hill, Riggleman, Zeldin, Davidson, Budd, Gooden, capital funds should be permitted to distinguishing excluded venture capital Rose, Emmer, Timmons, Posey, Kustoff, and engage in permitted proprietary trading funds from statutorily prohibited Loudermilk (Gonzalez et al.); Crapo; FSF; SIFMA; consistent with §§ ll.4, ll.5, and activities involving private equity CCMC; IIB; Goldman Sachs; Credit Suisse; AIC; ll National Venture Capital Association (NVCA); .6 of the implementing funds.271 ABA; and SAF. 245 255 E.g., Gonzalez et al. and NVCA. SIFMA. 265 FSF. 246 256 Gonzalez et al.; NVCA; and CCMC. NVCA. 266 SIFMA. 247 257 Id. FSF and SIFMA. 267 SIFMA. 248 258 E.g., FSF; SIFMA; and Goldman Sachs. SIFMA; NVCA; FSF; and ABA. 268 Id. 249 259 SAF. SIFMA; NVCA; FSF; and ABA. 269 NVCA and ABA. 250 260 FSF; SIFMA; CCMC; and NVCA. Id. 270 Better Markets and Data Boiler. Another 251 NVCA. 261 Better Markets. commenter said an exemption for venture capital 252 Id. 262 CCMC. funds was not supported by the 2020 proposal and 253 FSF and SIFMA. 263 FSF and SIFMA. not permitted under the law. Occupy. 254 FSF; SIFMA; and Goldman Sachs. 264 FSF and SIFMA. 271 Better Markets.

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Final Exclusion of financing to small businesses and section 13.279 That Congress did not The final rule adopts the proposed start-ups. The agencies expect that the intend to prohibit venture capital fund exclusion for qualifying venture capital new exclusion for qualifying venture investments is further supported by the funds with one clarifying change. The capital funds will provide banking legislative history of section 13, in exclusion for qualifying venture capital entities with an additional avenue for which several Members of Congress funds will be available to an issuer that: providing funding to smaller businesses, specifically addressed venture capital • Is a venture capital fund as defined which can help to support job creation funds in the context of the funds 280 in Rule 203(l)–1; and and economic growth. prohibition. • Like the 2020 proposal, the final rule Does not engage in any activity that As described further below, the would constitute proprietary trading, incorporates the definition of venture requirements of the exclusion, including capital fund from Rule 203(l)–1. Most under § ll.3(b)(1)(i), as if it were a the SEC’s definition of venture capital banking entity. 272 commenters accepted or supported the fund in Rule 203(l)–1, address the proposed approach to incorporate the With respect to any banking entity concerns the agencies expressed in the that acts as sponsor, investment adviser, definition of venture capital fund in preamble to the 2013 rule that the 281 or commodity trading advisor to the Rule 203(l)–1. For the reasons activities and risk profiles of venture 282 issuer, and that relies on the exclusion discussed in the 2020 proposal, the capital funds are not readily agencies believe this definition to sponsor or acquire an ownership distinguishable from those of funds that interest in the qualifying venture capital section 13 of the BHC Act was intended 279 fund, the banking entity will be required In the preamble to the 2013 final rule, the to capture. Accordingly, the agencies agencies cited to Congressional reports related to to: determined these requirements will give Title IV that characterized venture capital funds as • Provide in writing to any ‘‘a subset of private investment funds specializing effect to the language and purpose of prospective and actual investor the in long-term equity investment in small or start-up section 13 of the BHC Act without disclosures required under businesses.’’ 79 FR 5704 (quoting S. Rep. No. 111– allowing banking entities to evade the 176 (2010)). However, there is no indication in the § ll.11(a)(8), as if the issuer were a requirements of section 13. statutory text itself that Congress intended to treat covered fund; venture capital funds identically to private equity • Ensure that the activities of the An exclusion for qualifying venture funds. Moreover, the agencies did not address the issuer are consistent with the safety and capital funds is permitted by the difference in terminology that Congress used in section 402 of the Dodd-Frank Act (‘‘private funds’’) soundness standards that are statutory language of section 13 of the and section 619 (‘‘hedge funds’’ and ‘‘private equity substantially similar to those that would BHC Act. As the agencies discussed in funds’’). The difference between these two terms— apply if the banking entity engaged in the preamble to the 2013 final rule, the specifically, the broader term ‘‘private funds’’ used the activities directly; and language, structure, and purpose of in Title IV—may indicate why Congress found it • necessary to exclude venture capital explicitly in Comply with the restrictions section 13 of the BHC Act authorize the section 407 but not in section 619. imposed in § ll.14 (except the agencies to adopt a tailored definition of 280 See 156 Cong. Rec. E1295 (daily ed. July 13, banking entity may acquire and retain ‘‘covered fund’’ that focuses on vehicles 2010) (statement of Rep. Eshoo) (‘‘the purpose of the any ownership interest in the issuer), as Volcker Rule is to eliminate risk-taking activities by used for purposes that were the target of banks and their affiliates while at the same time 273 276 if the issuer were a covered fund. the funds prohibition. The agencies preserving safe, sound investment activities that Like the 2020 proposal, a banking do not believe the fact that Congress serve the public interest . . . Venture capital funds entity that relies on the exclusion may expressly distinguished venture capital do not pose the same risk to the health of the not, directly or indirectly, guarantee, financial system. They promote the public interest funds from other types of private funds by funding growing companies critical to spurring assume, or otherwise insure the in other contexts is dispositive. In this innovation, job creation, and economic obligations or performance of the context, the agencies do not believe that competitiveness. I expect the regulators to use the issuer.274 the differences in how the terms private broad authority in the Volcker Rule wisely and Finally, like the 2020 proposal, the clarify that funds . . . such as venture capital equity fund and venture capital fund are funds, are not captured under the Volcker Rule and final rule requires a banking entity’s used in the Dodd-Frank Act prohibit fall outside the definition of ‘private equity.’ ’’); 156 ownership interest in or relationship this exclusion. Rather, the text of Cong. Rec. S5905 (daily ed. July 15, 2010) with a qualifying venture capital fund (statement of Sen. Dodd) (confirming ‘‘the purpose section 619 and the Dodd-Frank Act as of the Volcker rule is to eliminate excessive risk to: a whole indicate that venture capital • Comply with the limitations taking activities by banks and their affiliates while funds were not the intended target of at the same time preserving safe, sound investment imposed in § ll.15 of the the funds prohibition. The plain activities that serve the public interest’’ and stating implementing regulations, as if the ‘‘properly conducted venture capital investment language of the statutory prohibition issuer were a covered fund; and will not cause the harms at which the Volcker rule • applies to hedge funds and private is directed. In the event that properly conducted Be conducted in compliance with 277 venture capital investment is excessively restricted and subject to applicable banking laws equity funds. This language is silent with respect to venture capital funds. In by the provisions of section 619, I would expect the and regulations, including applicable appropriate Federal regulators to exempt it using safety and soundness standards.275 Title IV of the Dodd-Frank Act, their authority under section 619[d][1](J) . . .’’); The agencies believe the exclusion for Congress mandated specific treatment and 156 Cong. Rec. S6242 (daily ed. July 26, 2010) for venture capital funds for purposes of (statement of Sen. Scott Brown) (‘‘One other area of qualifying venture capital funds will remaining uncertainty that has been left to the support capital formation, job creation, the registration requirements under the regulators is the treatment of bank investments in and economic growth, particularly with Investment Advisers Act of 1940 venture capital funds. Regulators should carefully 278 respect to small businesses and start-up (‘‘Advisers Act’’). This provision consider whether banks that focus overwhelmingly suggests that Congress knew how to on lending to and investing in start-up technology companies. These banking entity companies should be captured by one-size-fits-all investments in qualifying venture accord specific treatment for venture restrictions under the Volcker rule. I believe they capital funds can benefit the broader capital funds. Yet, Congress did not list should not be. Venture capital investments help financial system by improving the flow venture capital funds among the types entrepreneurs get the financing they need to create of funds that were restricted under new jobs. Unfairly restricting this type of capital formation is the last thing we should be doing in 272 Final rule § ll.10(c)(16)(i). this economy.’’). 273 Final rule § ll.10(c)(16)(ii). 276 79 FR 5671. 281 SIFMA; NVCA; FSF; ABA; and Goldman 274 Final rule § ll.10(c)(16)(iii). 277 12 U.S.C. 1851(a)(1)(B). Sachs. 275 Final rule § ll.10(c)(16)(iv). 278 15 U.S.C. 80b–3(l). 282 85 FR 12135–12136.

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accurately identifies venture capital predecessor, and is acquired by the debt obligations, guarantees or other funds and addresses the concerns the private fund in exchange for an equity incurrence of leverage was appropriate agencies identified in declining to adopt security described in (1) or (2).285 to differentiate venture capital funds an exclusion for venture capital funds in ‘‘Qualifying portfolio company,’’ in from other types of private funds that the 2013 rule. turn, is defined in the SEC’s regulation may engage in trading strategies that use The SEC has defined ‘‘venture capital to be a company that: (1) At the time of financial leverage and may contribute to fund’’ as any private fund 283 that: any investment by the private fund, is systemic risk.290 • Represents to investors and not reporting or foreign traded and does This definition of venture capital fund potential investors that it pursues a not control, is not controlled by or helps to distinguish the investment venture capital strategy; under common control with another activities of venture capital funds from • Immediately after the acquisition of company, directly or indirectly, that is those of hedge funds and private equity any asset, other than qualifying reporting or foreign traded; (2) does not funds, which was one of the agencies’ investments or short-term holdings, borrow or issue debt obligations in primary concerns in declining to adopt holds no more than 20 percent of the connection with the private fund’s an exclusion for venture capital funds in amount of the fund’s aggregate capital investment in such company and the 2013 rule. Further, this definition contributions and uncalled committed distribute to the private fund the includes criteria reflecting the capital in assets (other than short-term proceeds of such borrowing or issuance characteristics of venture capital funds holdings) that are not qualifying in exchange for the private fund’s that the agencies believe may pose less investments, valued at cost or fair value, investment; and (3) is not an investment potential risk to a banking entity consistently applied by the fund; company, a private fund, an issuer that • sponsoring or investing in venture Does not borrow, issue debt would be an investment company but capital funds and to the financial obligations, provide guarantees or for the exemption provided by 17 CFR system—specifically, the smaller role of otherwise incur leverage, in excess of 15 270.3a–7, or a commodity pool.286 The leverage financing and a lesser degree of percent of the private fund’s aggregate SEC explained that the definitions of interconnectedness with the public capital contributions and uncalled ‘‘qualifying investment’’ and ‘‘qualifying markets.291 These characteristics help to committed capital, and any such portfolio company’’ reflect the typical address the concern expressed in the borrowing, indebtedness, guarantee or characteristics of investments made by preamble to the 2013 rule that the leverage is for a non-renewable term of venture capital funds and that these activities and risk profiles for banking no longer than 120 calendar days, definitions work together to cabin the entities regarding sponsorship of, and except that any guarantee by the private definition of venture capital fund to investment in, venture capital fund fund of a qualifying portfolio company’s only the funds that Congress understood activities are not readily distinguishable obligations up to the amount of the to be venture capital funds during the from those funds that section 13 of the value of the private fund’s investment in 287 passage of the Dodd-Frank Act. BHC Act was intended to capture. the qualifying portfolio company is not In the preamble to the regulation One commenter said requiring that a subject to the 120 calendar day limit; adopting this definition of venture fund satisfy the requirements of Rule • Only issues securities the terms of capital fund, the SEC explained that the 203(l)–1 would have the effect of which do not provide a holder with any definition’s criteria distinguish venture making the exclusion too narrow. This right, except in extraordinary capital funds from other types of funds, commenter said the exclusion for circumstances, to withdraw, redeem or including private equity funds and qualifying venture capital funds should require the repurchase of such securities hedge funds. For example, the SEC permit investments in EGCs and, more but may entitle holders to receive explained that it understood the criteria generally, should ‘‘reflect the evolving distributions made to all holders pro for ‘‘qualifying portfolio companies’’ to nature of the venture capital industry rata; and be characteristic of issuers of portfolio • Is not registered under section 8 of and not rely solely on the existing SEC securities held by venture capital funds 292 the Investment Company Act, and has definition.’’ The final rule does not and, taken together, would operate to modify the requirement that a qualifying not elected to be treated as a business exclude most private equity funds and development company pursuant to venture capital fund must satisfy the hedge funds from the venture capital requirements of Rule 203(l)–1. These section 54 of that Act.284 fund definition.288 The SEC also ‘‘Qualifying investment’’ is defined in requirements focus the exclusion on the explained that the criteria for types of less mature and start-up the SEC’s regulation to be: (1) An equity ‘‘qualifying investments’’ under the security issued by a qualifying portfolio portfolio companies that characterize SEC’s regulation would help to traditional venture capital activities. At company that has been acquired directly differentiate venture capital funds from by the private fund from the qualifying the same time, the definition of other types of private funds, such as qualifying venture capital fund does not portfolio company; (2) any equity leveraged buyout funds.289 The SEC security issued by a qualifying portfolio preclude investments in EGCs because a further explained that its regulation’s qualifying venture capital fund could company in exchange for an equity restriction on the amount of borrowing, security issued by the qualifying make investments in EGCs within the 20 percent limit for non-qualifying portfolio company described in (1); or 285 17 CFR 275.203(l)–1(c)(3). investments. Because the requirement (3) any equity security issued by a 286 17 CFR 275.203(l)–1(c)(4). company of which a qualifying portfolio 287 See Exemptions for Advisers to Venture that a qualifying venture capital fund company is a majority-owned Capital Funds, Private Fund Advisers With Less subsidiary, as defined in section 2(a)(24) Than $150 Million in Assets Under Management, 290 76 FR 39662. See also 76 FR 39657 (‘‘We and Foreign Private Advisers, 76 FR 39646, 39657 proposed these elements of the qualifying portfolio of the Investment Company Act, or a (Jul. 6, 2011). company definition because of the focus on 288 76 FR 39656. leverage in the Dodd-Frank Act as a potential 283 For purposes of 17 CFR 275.203(l)–1, ‘‘private 289 See, e.g., 76 FR 39653 (explaining that a contributor to systemic risk as discussed by the fund’’ is defined as ‘‘an issuer that would be an limitation on secondary market purchases of a Senate Committee report, and the testimony before investment company, as defined in section 3 of the qualifying portfolio company’s shares would Congress that stressed the lack of leverage in Investment Company Act, but for section 3(c)(1) or recognize ‘‘the critical role this condition played in venture capital investing.’’). 3(c)(7) of that Act.’’ 15 U.S.C. 80b–2(a)(29). differentiating venture capital funds from other 291 76 FR 39662. 284 17 CFR 275.203(l)–1(a). types of private funds’’). 292 CCMC.

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must satisfy the requirements of Rule the exclusions from the definition of The final rule adopts the requirement 203(l)–1 does not preclude investments proprietary trading in § ll.3(d) of the that a banking entity that serves as a in EGCs and helps to distinguish implementing regulations, the agencies sponsor, investment adviser, or qualifying venture capital funds from note that that the trading activities commodity trading advisor to a the type of funds that section 13 of the identified in § ll.3(d) are by qualifying venture capital fund may not BHC Act was intended to restrict, the definition not deemed to be proprietary rely on the exclusion for qualifying agencies have determined to adopt the trading, such that the performance by an venture capital funds unless it provides requirement that a qualifying venture qualifying fund of those activities would the disclosures required under capital fund must be a venture capital not be inconsistent with the final § ll.11(a)(8) to prospective and actual fund as defined in Rule 203(l)–1. qualifying venture capital fund investors in the fund. This requirement The final rule adopts the requirement exclusion.296 promotes one of the purposes of section that a qualifying venture capital fund The final rule does not define 13 of the BHC Act, which is to prevent may not engage in any activity that proprietary trading by reference to the banking entities from bailing out funds would constitute proprietary trading prong of paragraph ll.3(b)(1) that that they sponsor or advise. The final under § ll.3(b)(1)(i), as if the issuer would apply to the banking entity, as rule also adopts the requirement that a were a banking entity.293 As described recommended by some commenters, banking entity that serves as a sponsor, in the 2020 proposal, this requirement because the agencies do not believe this investment adviser, or commodity helps to promote the specific purposes change would be effective or simplify trading advisor to a qualifying venture of section 13 of the BHC Act.294 The the exclusion. Unlike some banking capital fund must ensure the activities agencies are not adopting any changes entities, venture capital funds (that are of the qualifying venture capital fund to this requirement, as recommended by not themselves banking entities) are not are consistent with safety and some commenters. The agencies are not subject to the market risk capital rule, soundness standards that are expressly incorporating the permitted and thus there is generally no need to substantially similar to those that would activities in §§ ll.4, ll.5, and ll.6 evaluate a venture capital fund’s apply if the banking entity engaged in of the implementing regulations into the investments under the market risk the activity directly. Therefore, a text of the qualifying venture capital capital framework. Moreover, applying banking entity may not rely on this fund exclusion. The exclusion for the prong that would apply to the exclusion to sponsor or invest in an qualifying venture capital funds is relevant banking entity could result in investment fund that exposes the intended to allow banking entities to one venture capital fund becoming banking entity to the type of high-risk share the risks of otherwise permissible subject to both prongs. The agencies trading and investment activities that long-term venture capital activities. believe this would complicate the covered fund provisions of section Accordingly, the agencies would not evaluation of a qualifying venture 13 of the BHC Act were intended to expect that a qualifying venture capital capital fund’s eligibility for the restrict. fund would be formed for the purpose exclusion, both for banking entities and In the final rule, the requirement that of engaging, or in the ordinary course the agencies. The agencies do not agree the banking entity must comply with ll would be engaged, in the activities with one commenter’s argument that § .14 of the implementing permitted under §§ ll.4, ll.5, and requiring funds sponsored by banking regulations is moved to ll ll.6 of the implementing regulations. entities that are subject to the market § .10(c)(16)(ii). This change clarifies Moreover, such activities could reflect a risk capital rule test to apply the short- that this requirement applies to a banking entity that acts as sponsor, purpose other than making long-term term intent test for purposes of the investment adviser, or commodity venture capital investments. covered funds provisions would trading adviser to the qualifying venture Nevertheless, to the extent that a introduce unnecessary complexity and capital fund and does not apply to a qualifying venture capital fund seeks to compliance costs for these banking banking entity that merely invests in a engage in any of those activities as an entities. As the agencies described in qualifying venture capital fund. exemption from the prohibition on the preamble to the 2019 final rule, the engaging in proprietary trading, as The final rule does not eliminate the Federal banking agencies’ market risk requirement that a banking entity’s defined in § ll.3(b)(1)(i) of the final capital rule 297 incorporates the same rule, and does so in compliance with investment in or relationship with a short-term intent standard as the short- qualifying venture capital fund must the requirements and conditions of term intent test in § ll.3(b)(1)(i).298 those permitted activities, then the final comply with § ll.14 of the Therefore, market risk capital rule implementing regulations, as rule would not preclude such covered banking entities continue to activities.295 Similarly, with respect to recommended by one commenter. The apply the short-term intent standard as agencies do not agree that applying the part of their compliance with the market 293 requirements of § ll.14 is duplicative Final rule § ll.10(c)(16)(i)(B). risk capital rule. Similar processes may 294 85 FR 12136. of the requirement that the banking 295 As the agencies noted in the discussion of the be employed to apply the short-term entity not directly or indirectly final credit fund exclusion, compliance with certain intent standard to qualifying venture guarantee, assume, or otherwise insure requirements and conditions in ll.4, ll.5, and capital funds. the obligations or performance of the ll.6 of the implementing regulations may be inapt and/or highly impractical in the context of a issuer. In addition to prohibiting qualifying venture capital fund, particularly given that equal or exceeds $20 billion over the four guarantees, § ll.14 also prohibits the activity restrictions contained in previous calendar quarters), it also would be other types of transactions that function required to maintain a separate compliance program § ll.10(c)(16). For example, the exemptions for as extensions of credit or that could underwriting and market making-related activities specific to those exemptions. in ll.4 require that a banking entity relying on 296 Similarly, and consistent with the discussion raise the type of bail-out concerns that such exemptions, among other things, be licensed of the final credit fund exclusion, trading activity section 13 of the BHC Act was intended or registered to engage in the applicable activity in that satisfies the 60-day rebuttable presumption in to address. The agencies also do not accordance with applicable law. Moreover, to the § ll.3(b)(4) would be presumed not to be proprietary trading for these purposes. agree that applying the requirements of extent that a qualifying venture capital fund is a ll banking entity with significant trading assets and 297 See 12 CFR part 3, subpart F; part 217, subpart § .14 is duplicative of the liabilities (i.e., because it, together with its affiliates F; part 324, subpart F. requirement that the banking entity’s and subsidiaries, has trading assets and liabilities 298 84 FR 61986. investment in and relationships with

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the qualifying venture capital fund must applicable banking laws and adopting release, that said providing comply with the backstop provisions in regulations, including applicable safety flexibility for this type of non-qualifying § ll.15. The backstop provisions in and soundness standards, prevent a investment is consistent with the overall § ll.15 address high-risk assets and qualifying venture capital fund from goal of identifying funds engaged in a high-risk trading strategies, and material being used to expose a banking entity to venture capital strategy. In making this conflicts of interest, but do not address the type of high-risk trading and determination, the agencies find it extensions of credit that may not entail investment activities that the covered significant that the SEC considered this a ‘‘substantial financial loss’’ to the fund provisions of section 13 of the BHC issue as part of its 2011 rulemaking and banking entity. The agencies do not Act were intended to restrict. To the concluded that a 20 percent bucket for expect that applying § ll.14 to a extent a fund would expose a banking non-qualifying investments was banking entity that sponsors or advises entity to a high-risk assets or a high-risk appropriate.304 Moreover, all activities a qualifying venture capital fund will trading strategy, the fund would not be of a qualifying venture capital fund, unduly interfere with the effectiveness a qualifying venture capital fund. including any investments that would of the exclusion. The final rule Therefore, prior to making an be non-qualifying investments under incorporates revisions to § ll.14 that investment in a qualifying venture Rule 203(l)–1, will be subject to the will improve banking entities’ ability to capital fund, a banking entity would other requirements in § ll.10(c)(16), enter into certain ordinary course need to ensure that the fund’s including the requirement that the fund transactions with sponsored and investment mandate and strategy would not engage in proprietary trading and advised funds.299 The agencies expect satisfy the requirements of § ll.15. In not result in a material exposure by the these changes will mitigate concerns addition, a banking entity would need banking entity to a high-risk asset or that applying the requirements of to monitor the activities of a qualifying high-risk trading strategy. § ll.14 to qualifying venture capital venture capital fund to ensure it The agencies also decline to impose funds will limit the exclusion’s satisfies these requirements on an additional requirements, such as a utility.300 ongoing basis. minimum securities holding period or a The final rule adopts the requirement The agencies do not believe that any portfolio company revenue limitation. that the banking entity must not additional conditions to the exclusion The agencies believe a minimum guarantee, assume, or otherwise insure for qualifying venture capital funds are securities holding period is unnecessary the obligations or performance of a necessary. One commenter said that the in light of the requirements that the qualifying venture capital fund.301 The exclusion should (1) restrict all fund fund (1) represent to investors and final rule also adopts the requirements investments to ‘‘qualifying investments’’ potential investors that it pursues a that a banking entity’s ownership in or or at least very significantly restrict venture capital strategy 305 and (2) not relationship with a qualifying venture investments in non-qualifying engage in any activity that would capital fund must comply with the investments (e.g., limit them to no more constitute proprietary trading under limitations in § ll.15 of the than five percent of the fund’s aggregate § ll.3(b)(1)(i), as if it were a banking implementing regulations, as if the capital), (2) impose a minimum entity.306 issuer were a covered fund, and be securities holding period and portfolio The agencies also considered whether conducted in compliance with, and company revenue limitation of $35 to include a portfolio company revenue subject to, applicable banking laws and million (or a similarly appropriate and limitation, as discussed in the preamble regulations, including applicable safety low figure) to ensure the fund is truly to the 2020 proposal. Most commenters and soundness standards.302 These focused on medium-to-long term did not support imposing a revenue requirements promote several of the venture (as opposed to growth stage) limitation, while one commenter purposes of section 13 of the BHC Act. investments, and (3) quantitatively limit supported imposing a limitation of $35 The requirement that the banking entity the use of leverage as a key means for million. After considering all comments not guarantee, assume, or otherwise distinguishing excluded venture capital received, the agencies determined that a ensure the obligations or performance of funds from statutorily prohibited revenue limit could unnecessarily a qualifying venture capital fund activities involving private equity disadvantage certain companies because promotes the purpose of preventing funds.303 The agencies have determined the revenues of startups can vary greatly banking entities from bailing out the not to impose any additional criteria for based on industry and geography. The fund. The requirements that a banking the reasons discussed below. agencies determined it would be entity’s ownership in or relationship First, the agencies decline to limit a unnecessarily restrictive to create a with a qualifying venture capital fund qualifying venture capital fund’s non- revenue limit that could limit funding to must comply with the limitations in qualifying investments to five percent or otherwise eligible portfolio companies. § ll.15 of the implementing less of total assets. The agencies agree Again, the agencies found it significant regulations, as if the issuer were a with commenters that it is necessary to that the SEC expressly considered this covered fund, and be conducted in provide some amount of flexibility for a issue as part of the 2011 rulemaking and compliance with, and subject to, venture capital fund to make determined that any ‘‘single factor test investments that deviate from the could ignore the complexities of doing 299 See infra, Section IV.D (Limitations on typical form of venture capital business in different industries or Relationships with a Covered Fund). investment activity. For example, the regions’’ and ‘‘could inadvertently 300 The commenter that recommended agencies understand that certain restrict venture capital funds from eliminating the requirement that the banking common venture capital fund activities, entity’s investment in or relationship with a funding otherwise promising young qualifying venture capital fund said that doing so such as secondary acquisition of small companies.’’ 307 In addition, the would ‘‘limit the utility and related benefits of the portfolio company shares from definition of ‘‘qualifying portfolio qualifying venture capital fund exclusion, founders, are not qualifying investments company’’ in the SEC’s rule regardless of the proposed new exceptions to Super under Rule 203(l)–1. The agencies agree 23A.’’ SIFMA. However, the commenter did not provide any examples or further explain how the with commenters, as well as with the 304 76 FR 39683. utility of the exclusion would be impacted. rationale the SEC provided in the 2011 305 17 CFR 275.203(l)–(1)(a)(1). 301 Final rule § ll.10(c)(16)(iii). 306 Final rule § ll.10(c)(16)(i)(B). 302 Final rule § ll.10(c)(16)(iv). 303 Better Markets. 307 76 FR 39649.

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incorporates appropriate standards that arrangements that make investments commenters said long-term investment distinguish newer ventures from more that they intend to hold for a set vehicles do not engage in short-term established companies. In particular, a minimum time period, such as two proprietary trading or the high-risk ‘‘qualifying portfolio company’’ may not years, (3) whose relevant offering and activities that section 619’s backstop be ‘‘reporting or foreign traded’’ and governing documents reflect a long-term provisions are intended to address.316 may not control, be controlled by or investment strategy, and (4) that meet One commenter said the rule should under common control with another all other requirements of the proposed not establish an exclusion for long-term company that is reporting or foreign qualifying venture capital fund investment vehicles because section 619 traded.308 A ‘‘reporting or foreign exclusion (other than that the issuers of the Dodd-Frank Act was put in place traded’’ company for these purposes would be venture capital funds as to reorient banks away from risky means a company that is subject to the defined in Rule 203(l)–1. speculative activities and toward reporting requirements under section 13 Several commenters supported an responsible lending to businesses and or 15(d) of the Securities Exchange Act exclusion for long-term investment households.317 of 1934 or having a security listed or funds.312 Many of these commenters The final rule does not include an traded on any exchange or organized said an exclusion for qualifying long- exclusion for long-term investment market operating in a foreign term investment funds would help to funds. After reviewing all comments jurisdiction.309 In addition to publicly close gaps in the availability of received, the agencies determined that it offered companies, this definition financing that exist under the remains difficult to distinguish excludes issuers if they have more than implementing regulations while effectively such funds from the type of $10 million in total assets and a class of promoting and protecting the safety and funds that section 13 of the BHC Act equity securities, such as common soundness of the banking entity and the was designed to restrict. A general stock, that is held of record by either financial stability of the U.S.313 These exclusion for long-term investment 2,000 or more persons or 500 or more commenters said the exclusion would funds would be too broad of an persons who are not accredited allow banking entities to diversify their approach for addressing specific types investors.310 In adopting the ‘‘reporting assets and income streams, thereby of issuers, such as inadvertent or foreign traded’’ requirement of Rule reducing the overall risk of their assets investment companies and incubators 203(l)–1, the SEC explained that it and operations and increasing their that do not hold themselves out as found ‘‘a key consideration by resiliency against failure.314 Several of engaging in a venture capital strategy, as Congress’’ was that venture capital these commenters supported an described by some commenters. An funds ‘‘are less connected with the exclusion for long-term investment exclusion based primarily on the length public markets and may involve less funds because they said it would allow of time that an issuer holds its potential systemic risk.’’ 311 This banking entities to do indirectly through investments could be overbroad because condition that qualifying portfolio a fund structure the same activities they it could also permit funds that are companies not be capitalized by the may conduct directly.315 Some engaged in the type of investment public markets serves to limit the type activity that section 13 of the BHC Act of companies in which a qualifying 312 Gonzalez et al.; Crapo; FSF; SIFMA; CCMC; was designed to restrict. Moreover, the CCMR; IIB; Goldman Sachs; AIC; and ABA. One venture capital fund may invest. commenter said the final rule should exclude an agencies believe the exclusions for Finally, the agencies determined it is issuer with the following characteristics: (1) Its credit funds and qualifying venture unnecessary to include an additional investment strategy or business purpose is to invest capital funds will improve banking quantitative limit on the use of leverage in assets in which a financial holding company would be permitted to invest directly; (2) it holds entities’ ability to provide long-term because the exclusion incorporates a itself out to investors as acquiring and holding long- financing through certain fund leverage limit. Specifically, Rule 203(l)– term assets for at least two years; (3) it does not structures in a manner that is consistent 1 provides that a venture capital fund engage in activities that would constitute with the statute. may not borrow or otherwise incur impermissible proprietary trading (as defined in the implementing regulations) if conducted directly by 3. Family Wealth Management Vehicles leverage in excess of 15 percent of the a banking entity; and (4) if it is sponsored by a fund’s aggregate capital contributions banking entity, (A) the sponsoring banking entity The agencies are adopting an and uncalled capital commitments, and and its affiliates cannot, directly or indirectly, exclusion from the definition of guarantee, assume or otherwise insure its ‘‘covered fund’’ under § ll.10(b) of the then only on a short-term basis. Because obligations, (B) it must comply with the disclosure the exclusion already incorporates a obligations under § ll.11(a)(8) of the rule and (C) rule for any entity that acts as a ‘‘family limit on leverage for a qualifying the sponsoring banking entity must comply with wealth management vehicle.’’ This venture capital fund, it is not necessary the limitations imposed by § ll.14 (except that exclusion is available to an entity that the banking entity may acquire and retain any for the final rule to incorporate an ownership interest in the issuer) and § ll.15, as is not, and does not hold itself out as additional limit on leverage. if the vehicle were a covered fund. The commenter being, an entity or arrangement that said these conditions would adequately address raises money from investors primarily ii. Long-Term Investment Funds concerns regarding evasion, promote long-term for the purpose of investing in securities In the preamble to the 2020 proposal, capital formation, and exclude certain entities that are inadvertently captured by the definition of for resale or other disposition or the agencies asked whether the final ‘‘covered fund’’ such as certain incubators. otherwise trading in securities. For rule should include an exclusion for Goldman Sachs. family wealth management vehicles that long-term investment funds. In the 313 SIFMA; AIC; and CCMR. One commenter said are trusts, the grantor(s) must be family preamble, the agencies asked if an an exclusion for long-term investment funds is 318 necessary because the proposed exclusion for customers. For non-trust family exclusion should be provided for issuers qualifying venture capital funds would not address (1) that make long-term investments that incubators and other issuers that do not hold 316 ABA and CCMC. a banking entity could make directly, (2) themselves out as pursuing a venture capital 317 Robert Rutowski. that hold themselves out as entities or strategy. Goldman Sachs. Two commenters said 318 Under § ll.10(c)(17)(iii)(B) of the final rule, excluding long-term investment funds would a ‘‘family customer’’ is a ‘‘family client,’’ as defined provide certainty for banking entities that hold in Rule 202(a)(11)(G)–1(d)(4) of the Advisers Act 308 17 CFR 275.203(l)–1(c)(4). interests in ‘‘inadvertent’’ or ‘‘accidental’’ (17 CFR 275.202(a)(11)(G)–1(d)(4)); or any natural 309 17 CFR 275.203(l)–1(c)(5). investment companies. SIFMA and Goldman Sachs. person who is a father-in-law, mother-in-law, 310 15 U.S.C. 78l(g). 314 Id. brother-in-law, sister-in-law, son-in-law or 311 76 FR 39656. 315 FSF; CCMR; AIC; CCMC; and SIFMA. daughter-in-law of a family client, or a spouse or

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wealth management vehicles, family requirements of 12 CFR 223.15(a), as if oriented financial services, including customers must own a majority of the such banking entity and its affiliates asset management services.327 voting interests (directly or indirectly) were a member bank and the entity were Furthermore, the agencies believe that as well as a majority of interests in the an affiliate thereof.322 the provisions of the exclusion will entity. Ownership of non-trust family In the 2020 proposal, the agencies work together to sufficiently reduce the wealth management vehicles is requested comment on whether to likelihood that these vehicles could be generally limited to family customers exclude family wealth management used to evade the requirements of and up to five closely related persons of vehicles from the definition of ‘‘covered section 13 or the implementing the family customers.319 However, there fund.’’ 323 Several commenters regulations. is a de minimis ownership allowance supported this exclusion stating, One of the commenters that opposed that permits one or more entities, generally, that it would reduce the exclusion expressed concern with including a banking entity, that are not uncertainty for banking entities about the agencies adding an exclusion from family customers or closely related the permissibility of providing the definition of ‘‘covered fund’’ that persons, to acquire or retain, as traditional banking, investment they believed would only benefit a few principal, up to an aggregate 0.5 percent management, and trust and estate wealthy families.328 Banking entities of the family wealth management planning services to family wealth may provide asset management services vehicle’s outstanding ownership management vehicle clients.324 As to families through a trust structure. The interests for the purpose of and to the discussed below, other commenters agencies believe that banking entities extent necessary for establishing opposed the exclusion or recommended should have flexibility to offer such corporate separateness or addressing revisions to it.325 asset management services to families bankruptcy, insolvency, or similar The agencies believe that the through a fund structure subject to concerns.320 exclusion for family wealth appropriate limits. As noted above, the In addition, a banking entity may rely management vehicles will appropriately agencies believe the exclusion for family on the exclusion only if the banking allow banking entities to structure wealth management vehicles will entity: (1) Provides bona fide trust, services or transactions for customers, effectively tailor the definition of fiduciary, investment advisory, or or to otherwise provide traditional covered fund by permitting banking commodity trading advisory services to customer-facing banking and asset entities to continue to provide the entity; (2) does not, directly or management services, through a vehicle, traditional banking and asset indirectly, guarantee, assume, or even though such a vehicle may rely on management services that do not otherwise insure the obligations or section 3(c)(1) or 3(c)(7) of the involve the types of risks section 13 was performance of such entity; (3) complies Investment Company Act or would designed to address. with the disclosure obligations under otherwise be a covered fund under the The agencies continue to believe that § ll.11(a)(8), as if such entity were a implementing regulations.326 The the exclusion for family wealth covered fund, provided that the content agencies believe the exclusion for family management vehicles is consistent with may be modified to prevent the wealth management vehicles will section 13(d)(1)(D), which permits disclosure from being misleading and effectively tailor the definition of banking entities to engage in the manner of disclosure may be covered fund by permitting banking transactions on behalf of customers, modified to accommodate the specific entities to continue to provide when those transactions would circumstances of the entity; (4) does not traditional banking and asset otherwise be prohibited under section acquire or retain, as principal, an management services that do not 13.329 The exclusion will similarly ownership interest in the entity, other involve the types of risks section 13 of allow banking entities to provide than up to an aggregate 0.5 percent of the BHC Act was designed to address. traditional services to customers the family wealth management vehicle’s As the agencies noted in the preamble through vehicles used to manage the outstanding ownership interests for the to the 2013 rule, section 13 and the wealth and other assets of those purpose of and to the extent necessary implementing regulations were customers and their families. for establishing corporate separateness designed in part to permit banking Another commenter suggested that, or addressing bankruptcy, insolvency, entities to continue to provide client- rather than providing an exclusion for or similar concerns; (5) complies with family wealth management vehicles the requirements of §§ ll.14(b) and receiving an order to buy (or sell) a security from through a rulemaking, the agencies ll.15, as if such entity were a covered a customer, purchases (or sells) the security in the should instead provide no-action relief fund; and (6) except for riskless secondary market for its own account to offset a 330 contemporaneous sale to (or purchase from) the on a case-by-case basis. The agencies principal transactions as defined in customer. Final rule § ll.10(d)(11). The allowance do not believe that a case-by case § ll.10(d)(11),321 complies with the for riskless principal transactions in the final rule approach would further the aims of does not affect the independent application of the section 13 or the implementing spousal equivalent of any of the foregoing. All terms Board’s Regulation W (12 CFR part 223). regulations. The agencies believe that a defined in Rule 202(a)(11)(G)–1 of the Advisers Act 322 Final rule § ll.10(c)(17)(ii). (17 CFR 275.202(a)(11)(G)–1) have the same 323 85 FR 12120. case-by-case approach would be meaning in the family wealth management vehicle 324 See, e.g., Goldman Sachs; FSF; CCMR; IAA; exclusion. ABA; BPI; PNC; and SIFMA. 327 See 79 FR 5541 (describing the 2013 rule as 319 Under § ll.10(c)(17)(iii)(A) of the final rule, 325 See, e.g., Better Markets, Data Boiler; SIFMA; ‘‘permitting banking entities to continue to provide, ‘‘closely related person’’ means ‘‘a natural person BPI; ABA. and to manage and limit the risks associated with (including the estate and estate planning vehicles 326 Several commenters supported the exclusion, providing, client-oriented financial services that are of such person) who has longstanding business or with two stating that many family wealth critical to capital generation for businesses of all personal relationships with any family customer.’’ management vehicles do not rely on the exclusions sizes, households and individuals, and that 320 This 0.5 percent ownership interest represents in 3(c)(1) and (c)(7) of the Investment Company Act facilitate liquid markets. These client-oriented the aggregate amount of a family wealth and are not covered funds under the implementing financial services, which include underwriting, management vehicle’s ownership interests that may regulations. See ABA and PNC. Banking entities market making, and asset management services, are be acquired or retained by all entities that are that sponsor or invest in family wealth management important to the U.S. financial markets and the neither a family customer nor a closely related vehicles that are not subject to the covered funds participants in those markets.’’). person. provisions under section 13 of the BHC Act or the 328 See Better Markets. 321 ‘‘Riskless principal transaction’’ means a implementing regulations would not need to rely on 329 12 U.S.C. 1851(d)(1)(D). transaction in which a banking entity, after this exclusion. 330 Data Boiler.

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unnecessarily burdensome and difficult inclusion of this limit in the final rule wealth management vehicles and that to administer. This approach would also is a modification from the 2020 proposal the other conditions imposed by the unnecessarily deviate from the agencies’ which only required family customers proposed rule would keep such vehicles treatment of other excluded entities to own a majority of the voting interests from evading the covered fund under the implementing regulations and (directly or indirectly) in the entity. One provisions of the implementing hinder transparency and consistency. commenter suggested this modification regulations.341 The commenter further The agencies believe that the adopted to ensure that the exclusion is not used noted that a limit of ten closely related exclusion for a family wealth to evade the intent of section 13 and the persons would align the exclusion with management vehicle will appropriately implementing regulations.335 The the numerical limitation of unaffiliated distinguish it from the type of entity agencies believe this modification is an owners provided for in the joint venture that the covered funds provisions of appropriate means of ensuring that the exclusion.342 section 13 of the BHC Act were exclusion is used by banking entities The final rule will allow up to five intended to capture. The exclusion that are providing services to family closely related persons to hold requires that a family wealth wealth management vehicles, rather ownership interests in a family wealth management vehicle not raise money than to hedge funds or private equity management vehicle. Commenters from investors primarily for the purpose funds. indicated that many family wealth of investing in securities for resale or Another commenter suggested management vehicles currently include other disposition or otherwise trading in additional ownership limits for family more than three closely related securities. This aspect of the exclusion wealth management vehicles, including persons.343 The agencies believe that the will help to differentiate family wealth limits on the vehicle’s ability to final rule will more closely align the management vehicles from covered restructure, to prevent evasion of the exclusion with the current composition funds, which raise money from prohibitions of section 13 and the of family wealth management vehicles, investors for this purpose. implementing regulations.336 However, In addition, the family wealth thereby increasing the utility of the as discussed above, the agencies believe exclusion without allowing such a large management vehicle exclusion contains that the requirements of the exclusion, ownership limits designed to ensure number of non-family customer owners along with the conditions a banking to suggest the entity is in reality a hedge that the vehicle is used to manage the entity must meet in order to rely on it, wealth and other assets of customers fund or private equity fund. will help to ensure that banking entities Additionally, the agencies believe that and their families. One such limit is the will not be able to use family wealth definition of ‘‘family customer.’’ As requiring family customers to own a management vehicles as a means to majority of the interests in the family proposed, the definition of ‘‘family evade section 13 and the implementing customer’’ is based on the definition of wealth management vehicle will serve regulations. as an additional safeguard against ‘‘family client’’ in rule 202(a)(11)(G)– Another ownership limit designed to evasion of the provisions of section 13 1(d)(4) under the Advisers Act (the ensure that a family wealth management of the BHC Act. family office rule), and also incorporates vehicle is used to manage the wealth certain in-laws and their spouses and and other assets of customers and their As proposed, the final rule’s spousal equivalents. Several families is the requirement that only up definition of ‘‘closely related person’’ is commenters supported this approach,331 to five closely related persons of family ‘‘a natural person (including the estate however, one commenter suggested that customers may hold ownership interests and estate planning vehicles of such the agencies exclude in-laws, their in the vehicle.337 The agencies proposed person) who has longstanding business spouses and their spousal equivalents to permit three closely related persons or personal relationships with any from the definition of ‘‘family to hold ownership interests. Several family customer.’’ 344 One commenter customer.’’ 332 The agencies believe that commenters supported allowing a finite suggested that the definition of ‘‘closely in-laws, their spouses and spousal number of closely related persons of related person’’ should include only equivalents share the same close family customers to hold ownership persons with personal relationships familial relations as others included in interests.338 However, some commenters with family customers and not also the definition of ‘‘family client.’’ suggested that the proposed limit of business relationships.345 The agencies Furthermore, the agencies believe that three closely related persons did not believe that it is not practical or the final rule’s definition of ‘‘family reflect the typical manner in which worthwhile to exclude business customer’’ reflects the types of family wealth management vehicles are relationships from the definition of relationships typically present in family constituted and would unnecessarily ‘‘closely related person’’ because it wealth management vehicles.333 constrain the availability of the would require banking entities to engage Reflecting those relationships prevents exclusion.339 These commenters in an assessment of relationships that unnecessary constraints on the utility of recommended that the agencies modify are likely to include elements common the exclusion and will allow banking the proposed rule to allow for up to ten in both personal and business entities to provide traditional banking closely related persons to invest in relationships. The agencies also believe services to these clients. family wealth management vehicles.340 that requiring these relationships to be Another ownership limit designed to One of these commenters stated that ‘‘longstanding’’ will help ensure that ensure that a family wealth management increasing the number of closely related they are bona fide established vehicle is used to manage the wealth persons would allow banking entities to relationships and not simply related to and other assets of customers and their provide traditional wealth management the planned investment activities families is the requirement that a and estate planning services to family through the family wealth management majority of the interests in the entity are vehicle. owned by family customers.334 The 335 See ABA. 336 See Data Boiler. 341 See SIFMA. 331 See, e.g., SIFMA; BPI; and ABA. 337 Final rule § ll.10(c)(17)(i)(B)(3). 342 See SIFMA. 332 See Better Markets. 338 See, e.g., BPI; SIFMA; PNC; and ABA. 343 See, e.g., BPI; ABA; and PNC. 333 See, e.g., SIFMA; BPI; and ABA. 339 See, e.g., BPI; SIFMA; ABA; and PNC. 344 Final rule § ll.10(c)(17)(iii)(A). 334 Final rule § ll.10(c)(17)(i)(B)(2). 340 See, e.g., SIFMA; BPI; ABA; and PNC. 345 See, e.g., Better Markets.

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In a change to the 2020 proposal, the provided on arms-length, market terms, 223.15(a)) provides that a member bank final rule permits any entity, or and to prevent evasion of the may not purchase a low-quality asset entities—not only banking entities—to requirements of section 13 of the BHC from an affiliate unless, pursuant to an acquire or retain, as principal, up to an Act and the implementing regulations. independent credit evaluation, the aggregate 0.5 percent of the entity’s In addition, these conditions are based member bank had committed itself to outstanding ownership interests, for the on existing conditions in other purchase the asset before the time the purpose of and to the extent necessary provisions of the implementing asset was acquired by the affiliate.352 for establishing corporate separateness regulations,349 which the agencies Several commenters requested or addressing bankruptcy, insolvency, believe will facilitate banking entities’ clarification that the exclusion permits or similar concerns.346 Some compliance with the exclusion. banking entities to engage in riskless commenters requested that the agencies As proposed, the agencies are not principal transactions to purchase include this modification because often, applying § ll.14(a), which applies assets—including low quality assets for family wealth management vehicles use section 23A of the Federal Reserve Act purposes of section 223.15 of the unaffiliated third parties—such as third- to banking entities’ relationships with Board’s Regulation W—from family party trustees or similar service covered funds, to family wealth wealth management vehicles.353 providers—when structuring family management vehicles because the Commenters stated that the need for wealth management vehicles.347 The agencies understand that the application such asset purchases may arise as a agencies believe that permitting de of § ll.14(a) to family wealth result of a family customer’s preferences minimis ownership by non-banking management vehicles could prohibit and that permitting the banking entities entity third parties is appropriate and in banking entities from providing the full to engage in such purchases may some cases necessary to reflect the range of banking and asset management facilitate the family customer’s sale of typical structure of family wealth services to customers using these the asset.354 Commenters stated that management vehicles. The de minimis vehicles.350 The agencies are, however, allowing these transactions would pose ownership provision recognizes that applying §§ ll.14(b) and ll.15 to minimal market or credit risk to a ownership by an entity other than a family wealth management vehicles, as banking entity because the banking family customer or closely related proposed, because the agencies continue entity would purchase and sell the same person may be necessary under certain to believe that it will help ensure that asset contemporaneously.355 circumstances—such as establishing banking entities and their affiliates’ Furthermore, one commenter stated that corporate separateness or addressing exposure to risk remains appropriately without clarity on the permissiveness of bankruptcy, insolvency, or similar limited. riskless principal transactions, family matters. Whether the entity that owns a The agencies are also adopting a wealth management vehicles would be de minimis amount is a banking entity prohibition, with modifications forced to obtain the services of a third- or some other third party does not raise described below, on banking entity party service provider to sell low quality any concerns that are not sufficiently purchases of low-quality assets from assets, which would increase costs and addressed by the aggregate ownership family wealth management vehicles that operational complexity of the family limit and the narrow circumstances in would be prohibited under Regulation wealth management vehicles without which such entities may take an W concerning transactions with furthering the aims of section 13 of the ownership interest. The agencies affiliates (12 CFR 223.15(a))—as if such BHC Act or the implementing recognize that without this banking entity were a member bank and regulations.356 modification, family wealth the entity were an affiliate thereof—to The agencies believe that permitting a management vehicles may be forced to prevent banking entities from ‘‘bailing banking entity to engage in riskless engage in less effective and/or efficient out’’ family wealth management principal transactions that involve the means of structuring and organization vehicles.351 Regulation W (12 CFR purchase of low-quality assets from a because the exclusion would limit the family wealth management vehicle is vehicle’s access to some customary 349 See implementing regulations §§ ll.11(a)(5) unlikely to pose a substantive risk of service providers that have traditionally (imposing, as a condition of the exemption for evading section 13 of the BHC Act. In taken small ownership interests for organizing and offering a covered fund, that a a riskless principal transaction, the structuring purposes. The agencies are banking entity and its affiliates do not, directly or indirectly, guarantee, assume, or otherwise insure riskless principal (the banking entity) therefore expanding the types of entities the obligations or performance of the covered fund buys and sells the same security that may acquire or retain the de or of any covered fund in which such covered fund contemporaneously, and the asset risk minimis ownership interest to include invests); ll.11(a)(8) (imposing, as a condition of passes promptly from the customer any third party. However, the aggregate the exemption for organizing and offering a covered fund, that the banking entity provide certain (family wealth management vehicle, in de minimis amount and the purpose for disclosures to any prospective and actual investor this context) through the riskless which it may be owned is unchanged in the covered fund); ll.10(c)(2)(ii) (allowing, as principal to a third-party.357 The from the 2020 proposal. a condition of the exclusion from the covered fund agencies are adopting the condition that As stated above, under the final rule, definition for wholly-owned subsidiaries, for the holding of up to 0.5 percent of outstanding banking entities and their affiliates a banking entity may only rely on the ownership interests by a third party for limited comply with the requirements of 12 CFR exclusion with respect to a family purposes); and ll.14(b) (subjecting certain 223.15(a), as if such banking entity and wealth management vehicle if the transactions with covered funds to section 23B of its affiliates were a member bank and the Federal Reserve Act). banking entity meets certain the entity were an affiliate. However, in conditions.348 The agencies believe that, 350 See SIFMA (stating that it agreed with the agencies’ approach of not applying § ll.14 to a change from the 2020 proposal and in collectively, the conditions of the relationships between banking entities and family response to the concerns raised by exclusion will help to ensure that family wealth management vehicles because doing so would prevent banking entities from making wealth management vehicles are used 352 12 CFR 223.15(a). ordinary extensions of credit and entering into a for client-oriented financial services 353 number of other transactions with family wealth See, e.g., BPI and SIFMA. management vehicles that are critical to the banking 354 See, e.g., BPI and SIFMA. 346 Final rule § ll.10(c)(17)(i)(C). entity providing traditional asset management and 355 See, e.g., SIFMA and BPI. 347 See, e.g., SIFMA and BPI. estate planning services). 356 See SIFMA. 348 Final rule § ll.10(c)(17)(ii). 351 Final rule § ll.10(c)(17)(ii)(F). 357 See 67 FR 76597.

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commenters, the condition will explicitly permit banking entities and disclosure delivery obligations in a explicitly exclude from those their affiliates to modify the content of number of ways, such as by including requirements transactions that meet the such disclosures to prevent the them in the family wealth management definition of riskless principal disclosure from being misleading and vehicle’s governing documents, in transactions as defined in also permit banking entities to modify account opening materials or in § ll.10(d)(11). The definition of the manner of disclosure to supplementary materials (e.g., a separate riskless principal transactions adopted accommodate the specific disclosure document provided by the in § ll.10(d)(11) is similar to the circumstances of the entity.361 The banking entity solely for purposes of definition adopted in the Board’s obligations under § ll.11(a)(8) of the complying with this exclusion and Regulation W, as this definition is final rule apply in connection with the providing the required disclosures). appropriately narrow and generally exemption for organizing and offering 4. Customer Facilitation Vehicles familiar to banking entities.358 The covered funds, which would typically agencies expect that, together, the require the preparation and distribution The agencies are adopting an adopted criteria for the family wealth of offering documents. The agencies, exclusion from the definition of management vehicle exclusion will however, understand that many family ‘‘covered fund’’ under § ll.10(b) of the prevent a banking entity from being able wealth management vehicles may not rule for any issuer that acts as a to bail out such entities in periods of have offering documents. The agencies ‘‘customer facilitation vehicle.’’ The financial stress or otherwise expose the have an interest in providing family customer facilitation vehicle exclusion banking entity to the types of risks that wealth management vehicle customers will, as proposed, be available for any the covered fund provisions of section with the substance of the disclosure, issuer that is formed by or at the request 13 were intended to address. rather than a concern with the specific of a customer of the banking entity for Several commenters requested that wording of the disclosure or with the the purpose of providing such customer the agencies remove the condition that document in which the disclosure is (which may include one or more banking entities and their affiliates provided. Accordingly, the agencies affiliates of such customer) with comply with the disclosure obligations have provided that the content of the exposure to a transaction, investment under § ll.11(a)(8) of the final rule, as disclosure may be modified to prevent strategy, or other service provided by if the vehicle were a covered fund, the disclosure from being misleading the banking entity.362 because such disclosures would not and the manner of disclosure may be A banking entity may only rely on the apply to a vehicle that a banking entity modified to accommodate the specific exclusion with respect to an issuer was not organizing and offering circumstances of the family wealth provided that: (1) All of the ownership pursuant to § ll.11(a) of the final rule management vehicle. interests of the issuer are owned by the and therefore would be confusing.359 In For example, § ll.11(a)(8) requires customer (which may include one or particular, these commenters stated that disclosure that an investor ‘‘should read more of its affiliates) for whom the the required disclosure under the fund offering documents before issuer was created; 363 and (2) the § ll.11(a)(8) concerning the banking investing in the covered fund.’’ In order banking entity and its affiliates: (i) entity’s ‘‘ownership interests’’ in the to accurately reflect the specific Maintain documentation outlining how fund and referencing the fund’s circumstances of a family wealth the banking entity intends to facilitate ‘‘offering documents’’ may create management vehicle for which there are the customer’s exposure to such confusion in circumstances where the no offering documents, the modified transaction, investment strategy, or banking entity does not own an interest provision will allow the banking entity service; (ii) do not, directly or in the family wealth management to revise this disclosure to reference the indirectly, guarantee, assume, or vehicle, or where such vehicles do not appropriate disclosure documents, if otherwise insure the obligations or have offering documents. Also, any, provided in connection with the performance of such issuer; (iii) comply commenters requested confirmation vehicle. Similarly, the agencies with the disclosure obligations under from the agencies that banking entities understand the specific wording of the § ll.11(a)(8), as if such issuer were a would be permitted to (i) modify the disclosures in § ll.11(a)(8) of the rule covered fund, provided that the content required disclosures to reflect the may need to be modified to accurately may be modified to prevent the specific circumstances of their reflect the specific circumstances of the disclosure from being misleading and relationship with, and the particular banking entity’s relationship with the the manner of disclosure may be structure of, their family wealth family wealth management vehicle. For modified to accommodate the specific management vehicle clients; and (ii) example, a banking entity that holds no circumstances of the issuer; (iv) do not satisfy the written disclosure ownership interest in the family wealth acquire or retain, as principal, an requirement by means other than management vehicle may modify the ownership interest in the issuer, other including such disclosures in the disclosure required in than up to an aggregate 0.5 percent of governing document(s) of the family § ll.11(a)(8)(i)(A) to reflect its lack of the issuer’s outstanding ownership wealth management vehicle(s).360 ownership. Moreover, § ll.11(a)(8) interests for the purpose of and to the The agencies are adopting the requires that the banking entity provide extent necessary for establishing corporate separateness or addressing condition that banking entities and their these disclosures, ‘‘such as through bankruptcy, insolvency, or similar affiliates comply with the disclosure disclosure in the . . . offering concerns; (v) comply with the obligations under § ll.11(a)(8) of the documents.’’ The agencies expect that a final rule with respect to family wealth banking entity could satisfy these 362 management vehicles. However, in a Final rule § ll.10(c)(18)(i). 363 Notwithstanding this condition, up to an change from the 2020 proposal and in 361 In the 2020 proposal, the agencies had aggregate 0.5 percent of the issuer’s outstanding response to the concerns raised by indicated that for purposes of the proposed ownership interests may be acquired or retained by commenters, the condition will exclusion, a banking entity could satisfy these one or more entities that are not customers if the written disclosure obligations in a number of ways ownership interest is acquired or retained by such and could modify the specific wording of the parties for the purpose of and to the extent 358 12 CFR 223.3(ee). disclosures in § ll.11(a)(8) to accurately reflect necessary for establishing corporate separateness or 359 See, e.g., ABA and PNC. the specific circumstances of the family wealth addressing bankruptcy, insolvency, or similar 360 See, e.g., BPI. management vehicle. concerns. Final rule § ll.10(c)(18)(ii)(B).

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requirements of §§ ll.14(b) and allow banking entities to provide potential benefits of structuring such ll.15, as if such issuer were a covered customer-oriented financial services services through a vehicle.376 fund; and (vi) except for riskless through a vehicle when that vehicle’s As in the 2020 proposal, the agencies principal transactions as defined in purpose is to facilitate a customer’s are not specifying the types of § ll.10(d)(11), comply with the exposure to those services.371 As stated transaction, investment strategy or other requirements of 12 CFR 223.15(a), as if in the 2020 proposal, the agencies do service that a customer facilitation such banking entity and its affiliates not believe that section 13 of the BHC vehicle may be formed to facilitate.377 were a member bank and the entity were Act was intended to interfere One commenter recommended an affiliate thereof.364 unnecessarily with the ability of specifying that the exclusion only allow The agencies continue to believe that banking entities to provide services to vehicles to be formed for extensions of this exclusion will appropriately allow their customers simply because the intraday credit, and payment, clearing, banking entities to structure certain customer may prefer to receive those and settlement services, and only for types of services or transactions for services through a vehicle or through a purposes of operational efficiency.378 customers, or to otherwise provide transaction with a vehicle instead of Another commenter argued that traditional customer-facing banking and directly with the banking entity.372 attempting to specify may prevent asset management services, through a Some commenters agreed, stating that banking entities from being able to vehicle, even though such a vehicle may customer facilitation vehicles would not appropriately respond to a customer’s rely on section 3(c)(1) or 3(c)(7) of the expose banking entities to the types of requests.379 The agencies continue to Investment Company Act or would risks that section 13 was intended to believe that providing flexibility otherwise be a covered fund under the prohibit or limit, particularly given that enhances the utility of this exclusion. final rule. Most commenters that such vehicles will be subject to a Specifically, the agencies note that the addressed this exclusion were number of conditions, as discussed purpose of this exclusion is to allow supportive,365 stating that it would below.373 banking entities to provide customer- provide banking entities with greater The exclusion will, as proposed, oriented financial services through flexibility to meet client needs and require that the vehicle be formed by or vehicles, providing customers with objectives.366 Some commenters found at the request of the customer.374 One exposure to a transaction, investment the exclusion’s conditions to be commenter suggested that the agencies strategy, or other service that the reasonable and sufficient.367 However, remove this requirement, arguing that it banking entity may provide to such two commenters recommended that the would inhibit a banking entity’s ability customers directly. Limiting the type of agencies impose additional limitations to provide customers with services in a transaction, investment strategy, or 375 on the exclusion.368 One of these timely manner. However, the service for which the customer commenters argued that the exclusion agencies continue to believe that this facilitation vehicle may be formed would permit, and possibly encourage, requirement is an important component would interfere with this purpose. banking entities to increase their risk of the exclusion because it helps Accordingly, the agencies are adopting exposures through the use of customer differentiate customer facilitation this requirement as proposed. facilitation vehicles, and the agencies vehicles from covered funds that are Under the final rule, similar to the should minimize such risk exposures organized and offered by the banking 2020 proposal, a banking entity will be and promote risk monitoring and entity. As stated in the 2020 proposal, able to rely on the customer facilitation management.369 the requirement will not preclude a vehicle exclusion only under certain The agencies continue to believe that banking entity from marketing its conditions, as stated above.380 these vehicles do not expose banking customer facilitation vehicle services or Commenters supported most of the entities to the types of risks that section discussing with its customers prior to conditions, stating that the exclusion 13 of the BHC Act was intended to the formation of such vehicles the imposes reasonable conditions that restrict, and that this exclusion is provide safeguards.381 Commenters also amendments § ll.3(d)(11) (excluding from the consistent with section 13(d)(1)(D), definition of ‘‘proprietary trading’’ the entering into suggested modifications to certain 382 which permits banking entities to of customer-driven swaps or customer-driven conditions, as discussed below. The engage in transactions on behalf of security-based swaps and matched swaps or agencies are adopting the conditions, customers, when such transactions security-based swaps under certain conditions). largely as proposed. However, the would otherwise be prohibited under 371 This exclusion does not require that the agencies are modifying the conditions customer relationship be pre-existing. In other section 13. The agencies have elsewhere words, the exclusion will be available for an issuer that relate to de minimis ownership of tailored the 2013 rule to allow banking that is formed for the purpose of facilitating the the vehicle, the requirements of 12 CFR entities to meet their customers’ exposure of a customer of the banking entity where 223.15(a), and the disclosure obligations needs.370 This exclusion will similarly the customer relationship begins only in connection under § ll.11(a)(8), as discussed with the formation of that issuer. The agencies took a similar approach to this question in describing the below. 364 Final rule § ll.10(c)(18)(ii). exemption for activities related to organizing and As proposed, the exclusion would 365 See, e.g., SIFMA; BPI; ABA; Credit Suisse; offering a covered fund under § ll.11(a) of the have permitted banking entities and FSF; Goldman Sachs; and IAA. 2013 rule. See 79 FR 5716. The agencies indicated their affiliates to acquire or retain, as 366 See, e.g., SIFMA; BPI; ABA; and Goldman that section 13(d)(1)(G), under which the exemption Sachs. under § ll.11(a) was adopted, did not explicitly principal, an ownership interest in the 367 See, e.g., SIFMA; FSF; and SAF. require that the customer relationship be pre- issuer up to 0.5 percent of the issuer’s 368 See Better Markets and Data Boiler. existing. Similarly, section 13(d)(1)(D) does not outstanding ownership interests, for the 369 See Better Markets. explicitly require a pre-existing customer purpose of and to the extent necessary relationship. 370 For example, the agencies in 2019 amended 372 85 FR 12120. the exemption for risk-mitigating hedging activities 376 85 FR 12120. 373 See SIFMA and ABA. to allow banking entities to acquire or retain an 377 Final rule § ll.10(c)(18)(i). ownership interest in a covered fund as a risk- 374 Final rule § ll.10(c)(18)(i). 378 See Data Boiler. mitigating hedge when acting as an intermediary on 375 SIFMA (stating that requiring a banking entity 379 behalf of a customer that is not itself a banking to wait for a customer to request formation would See SIFMA. entity to facilitate the exposure by the customer to delay the banking entity’s ability to provide services 380 Final rule § ll.10(c)(18)(ii). the profits and losses of the covered fund. See 2019 to the customer without any corresponding 381 See, e.g., SIFMA; FSF; and SAF. amendments § ll.13(a)(1)(ii). See also 2019 regulatory benefit). 382 See, e.g., SIFMA; BPI; and FSF.

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for establishing corporate separateness same reasons discussed above with appropriate to prevent banking entities or addressing bankruptcy, insolvency, respect to family wealth management from using this exclusion for customer or similar concerns.383 Similar to their vehicles, the agencies have modified the facilitation vehicles to evade the request for family wealth management requirement to exclude from the restrictions of section 13 of the BHC vehicles, commenters suggested that the requirements of 12 CFR 223.15(a) Act. To help track compliance, a agencies specifically allow any party transactions that meet the definition of banking entity and its affiliates will, as that is unaffiliated with the customer, riskless principal transactions as proposed, have to maintain rather than only the banking entities defined in § ll.10(d)(11).390 Similar to documentation outlining how the and their affiliates, to own this de the agencies’ approach with respect to banking entity intends to facilitate the minimis interest.384 For the same family wealth management vehicles, the customer’s exposure to a transaction, reasons as discussed above with respect agencies expect that, together, the investment strategy, or service.395 to family wealth management vehicles, adopted criteria for this exclusion will The agencies are also adopting, as the agencies are modifying the de prevent a banking entity from being able proposed, the condition that the minimis ownership provision such that to bail out customer facilitation vehicles banking entity and its affiliates do not, up to an aggregate 0.5 percent of the in periods of financial stress or directly or indirectly, guarantee, issuer’s outstanding ownership interests otherwise expose the banking entity to assume, or otherwise insure the may be acquired or retained by one or the types of risks that the covered fund obligations or performance of such more entities that are not customers if provisions of section 13 of the BHC Act issuer.396 The agencies continue to the ownership interest is acquired or were intended to address. believe that this condition is retained by such parties for the purpose The agencies are modifying the appropriate and consistent with the goal of and to the extent necessary for condition that the banking entity and its of preventing banking entities from establishing corporate separateness or affiliates comply with the disclosure bailing out their customer facilitation addressing bankruptcy, insolvency, or obligations under § ll.11(a)(8), as if vehicles. Commenters generally agreed, similar concerns.385 such issuer were a covered fund, to supporting the condition as one that is The agencies are adopting, with provide clarification that the content of reasonable and appropriate in modifications, the condition for a the disclosure may be modified to addressing the agencies’ potential banking entity to comply with the prevent the disclosure from being evasion concerns.397 requirements of 12 CFR 223.15(a), as if misleading and the manner of Finally, the agencies are adopting, as such banking entity were a member disclosure may be modified to proposed, the condition that the bank and the issuer were an affiliate accommodate the specific banking entity and its affiliates comply thereof.386 As discussed above, several circumstances of the issuer.391 with the requirements of §§ ll.14(b) commenters recommended that the Commenters requested that the agencies and ll.15, as if such issuer were a agencies clarify that the family wealth provide such clarification in the context covered fund.398 The agencies requested management vehicle exclusion permits of family wealth management comment in the 2020 proposal whether banking entities to engage in riskless vehicles.392 Although the agencies did this exclusion should also require that principal transactions to purchase not receive any comments with respect the banking entity and its affiliates assets—including low quality assets for to this condition in the context of this comply with the requirements of all of purposes of section 223.15 of the exclusion, the agencies are similarly § ll.14. One commenter argued that Board’s Regulation W—from family modifying this condition under this requiring compliance with the 387 wealth management vehicles. One exclusion. The agencies believe that requirements of all of § ll.14 would such commenter also suggested that, for these disclosures will provide important eliminate the utility of this exclusion.399 purposes of consistency, the agencies information to the customers for whom The same commenter supported the should similarly clarify that banking these vehicles will be used to provide condition, as proposed, stating that entities are permitted to engage in such services—whether they are family requiring compliance with only riskless principal transactions with customers under the family wealth § ll.14(b), which would apply the 388 customer facilitation vehicles. management vehicle exclusion or other requirements in section 23B of the The purpose of the proposed customers under this exclusion. The Federal Reserve Act, and the application requirement that a customer facilitation agencies’ treatment of this condition for of the prudential backstops under vehicle must comply with 12 CFR family wealth management vehicles, as § ll.15 would serve as adequate 223.15(a) was the same for both the described above, will similarly apply to safeguards to avoid the risk of bailout or family wealth management vehicle and this condition for customer facilitation other evasion concerns.400 The agencies the customer facilitation vehicle vehicles.393 continue to believe that this condition exclusions—to help ensure that the The agencies are adopting, as will help ensure that banking entities exclusions do not allow banking entities and their affiliates’ exposure to risk 389 proposed, the condition that all of the to ‘‘bail out’’ either vehicle. For the ownership interests of the issuer are remains appropriately limited. owned by the customer (which may The agencies continue to believe that, 383 See 2020 proposed rule collectively, the conditions on the § ll.10(c)(18)(ii)(B)(4). include one or more of the customer’s 384 See SIFMA; BPI; and FSF. affiliates) for whom the issuer was exclusion will help to ensure that 385 Final rule § ll.10(c)(18)(ii)(B). created (other than a de minimis interest 386 Final rule § ll.10(c)(18)(ii)(C)(6). 12 CFR that may be held by others, as discussed 395 Final rule § ll.10(c)(18)(ii)(C)(1). 223.15(a) provides that a member bank may not above).394 The agencies continue to 396 Final rule § ll.10(c)(18)(ii)(C)(2). purchase a low-quality asset from an affiliate believe that this condition is 397 See, e.g., SIFMA; FSF; and Data Boiler. unless, pursuant to an independent credit 398 Final rule § ll.10(c)(18)(ii)(C)(5). evaluation, the member bank had committed itself 399 See FSF (stating that if banking entities were 390 ll to purchase the asset before the time the asset was Final rule § .10(c)(18)(ii)(C)(6). required to comply with all of § ll.14, they would acquired by the affiliate. 12 CFR 223.15(a). 391 Final rule § ll.10(c)(18)(ii)(C)(3). not be able to enter into swaps and other covered 387 See, e.g., BPI and SIFMA. See supra, Section 392 See supra, Section IV.C.3 (Family Wealth transactions with the customer facilitation vehicle IV.C.3 (Family Wealth Management Vehicles). Management Vehicles). for their clients, many of whom seek such 388 See BPI. 393 Id. transactions through the use of such vehicles). 389 See 85 FR 12120. 394 Final rule §§ ll.10(c)(18)(ii)(A)–(B). 400 See FSF.

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customer facilitation vehicles are used the Federal Reserve Act. In addition, the Despite the general prohibition on for customer-oriented financial services 2020 proposal would have allowed a certain covered transactions in section provided on arms-length, market terms, banking entity to enter into short-term 13(f)(1), section 13 also authorizes a and to prevent evasion of the extensions of credit with, and purchase banking entity to own an interest in a requirements of section 13 of the BHC assets from, a related covered fund in related covered fund, which would be a Act and the final rule. The agencies also connection with payment, clearing, and ‘‘covered transaction’’ for purposes of continue to believe that the adopted settlement activities. The agencies section 23A of the Federal Reserve conditions will be consistent with the invited comment on the past Act.409 In addition to this apparent purposes of section 13. interpretation of section 13(f)(1) of the conflict between paragraphs 13(d) and As in the 2020 proposal, the agencies BHC Act,405 and the proposed (f) with respect to covered fund will not apply § ll.14(a) to customer amendments to the regulations ownership, there are other elements of facilitation vehicles because the implementing section 13(f)(1).406 these paragraphs that introduce agencies understand that this would As described in the 2020 proposal, the ambiguity about the interpretation of the prohibit banking entities from providing agencies believe the statutory term ‘‘covered transaction’’ as used in the full range of banking and asset rulemaking authority under paragraph section 13(f) of the BHC Act. For management services to customers using (d)(1)(J) of section 13 of the BHC Act example, despite the general prohibition these vehicles. Commenters generally permits the agencies to determine that on covered funds, another part of supported this approach,401 and one banking entities may enter into covered section 13 permits a bank entity ‘‘to noted that applying § ll.14(a) to these transactions with related covered funds acquire or retain an ownership interest vehicles would undo any practical that would otherwise be prohibited by in a covered fund in accordance with utility of the exclusion.402 section 13(f)(1) of the BHC Act, the requirements of section 13.’’ 410 In D. Limitations on Relationships With a provided that the rulemaking complies the preamble to the 2013 rule, the Covered Fund with applicable statutory agencies specifically interpreted section requirements.407 This interpretation of 13 to allow such investments noting that In the 2020 proposal, the agencies the agencies’ rulemaking authority is a contrary interpretation would make proposed to amend the regulations supported both by the inclusion of other the specific language that permits implementing section 13(f)(1) of the covered transactions within the covered transactions between a banking BHC Act to permit banking entities to permitted activities listed in paragraph entity and a related covered fund ‘‘mere engage in a limited set of covered 411 (d)(1) of section 13 and by the manner surplusage.’’ The statute also transactions with covered funds for in which section 13(f)(1) of the BHC Act prohibits a banking entity that organizes which the banking entity directly or is incorporated in the list of permitted or offers a hedge fund or private equity indirectly serves as investment manager, fund from directly or indirectly investment adviser, or sponsor, or that activities in paragraph (d)(1), as described below. guaranteeing, assuming, or otherwise the banking entity organizes and offers insuring the obligations or performance pursuant to section 13(d)(1)(G) of the Section 23A of the Federal Reserve Act limits the aggregate amount of of the fund (or of any hedge fund or BHC Act (such funds, related covered private equity fund in which such hedge 403 covered transactions between a member funds). fund or private equity fund invests).412 Section 13(f)(1) of the BHC Act bank and its affiliates, while section 13(f)(1) of the BHC Act generally To the extent that section 13(f) prohibits generally prohibits a banking entity all covered transactions between a from entering into a transaction with a prohibits covered transactions between a banking entity and a related covered banking entity and a related covered related covered fund that would be a fund, however, the independent covered transaction as defined in fund, with no minimum amount of 408 prohibition on guarantees in section section 23A of the Federal Reserve Act permissible covered transactions. 13(d)(1)(G)(v) would seem to be as if the banking entity was a member 413 405 unnecessary and redundant. bank and the covered fund was an In the preamble to the 2013 rule, the agencies 404 noted that ‘‘[s]ection 13(f) of the BHC Act does not Although the agencies previously affiliate. The 2020 proposal would incorporate or reference the exemptions contained expressed doubt about their ability to have amended the application of section in section 23A of the FR Act or the Board’s permit banking entities to enter into Regulation W.’’ 79 FR 5746. 13(f)(1) of the BHC Act in limited covered transactions with related circumstances, by allowing a banking 406 85 FR 12145–46. 407 covered funds pursuant to their entity to enter into certain covered 12 U.S.C. 1851(b)(2), (d)(1)(J), (d)(2). 408 authority under section 13(d)(1)(J) of the transactions with a related covered fund 12 U.S.C. 371c, 12 U.S.C. 1851(f)(1). The term ‘‘covered transaction’’ is defined in section 23A of BHC Act,414 the activities permitted that would be permissible without limit the Federal Reserve Act to mean, with respect to an pursuant to paragraph (d) specifically for a state member bank to enter into affiliate of a member bank, (1) a loan or extension contemplate allowing a banking entity with an affiliate under section 23A of of credit to the affiliate, including a purchase of assets subject to an agreement to repurchase; (2) a to enter into certain covered purchase of or an investment in securities issued by 401 See, e.g., SIFMA and BPI. the affiliate; (3) a purchase of assets from the the extent that the transaction causes a member 402 See SIFMA. affiliate, except such purchase of real and personal bank or a subsidiary to have credit exposure to the 403 ll See 2020 proposal § .14(a)(2), (3); 85 FR property as may be specifically exempted by the affiliate. See 12 U.S.C. 371c(b)(7), as amended by 12143–12146. Board by order or regulation; (4) the acceptance of Pub. L. 111.203, section 608 (July 21, 2010). Section 404 12 U.S.C. 1851(f)(1); see also 12 U.S.C. 371c. securities or other debt obligations issued by the 13(f) of the BHC Act does not alter the applicability Section 13(f)(3) of the BHC Act also provides an affiliate as collateral security for a loan or extension of section 23A of the Federal Reserve Act and the exemption for prime brokerage transactions of credit to any person or company; (5) the issuance Board’s Regulation W to covered transactions between a banking entity and a covered fund in of a guarantee, acceptance, or letter of credit, between insured depository institutions and their which a covered fund managed, sponsored, or including an endorsement or standby letter of affiliates. advised by that banking entity has taken an credit, on behalf of an affiliate; (6) a transaction 409 12 U.S.C. 1851(d)(1)(G); (d)(4). ownership interest. 12 U.S.C. 1851(f)(3). In with an affiliate that involves the borrowing or 410 79 FR 5746. addition, section 13(f)(2) subjects any transaction lending of securities, to the extent that the 411 permitted under section 13(f) (including a transaction causes a member bank or a subsidiary Id. permitted prime brokerage transaction) between a to have credit exposure to the affiliate; or (7) a 412 12 U.S.C. 1851(d)(1)(G)(v). banking entity and covered fund to section 23B of derivative transaction, as defined in paragraph (3) 413 See 12 U.S.C. 371c(b)(7)(E); 12 CFR the Federal Reserve Act. 12 U.S.C. 1851(f)(2); see 12 of section 5200(b) of the Revised Statutes of the 223.3(h)(4). U.S.C. 371c–1. United States (12 U.S.C. 84(b)), with an affiliate, to 414 See 76 FR 68912 n.313.

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transactions with related funds.415 The appropriate to permit banking entities to Under the Board’s Regulation W, a exceptions in section 13(f)(1) are also enter into certain covered transactions member bank may enter into certain expressly incorporated into the statutory with related covered funds, in the exempt covered transactions only with list of permitted activities, specifically manner described in the amendments to a securities affiliate. Specifically, under in section 13(d)(1)(G)(iv).416 By virtue of § ll.14 of the implementing these exempt covered transactions, a the conflict between paragraphs (d) and regulations. Consistent with the 2020 member bank may enter into (f) of section 13, and the inclusion of proposal, these amendments do not transactions to purchase marketable specific covered transactions within the modify the definition of ‘‘covered securities, to purchase municipal permitted activities in paragraph (d) of transaction’’ but instead authorize securities, and to enter into riskless section 13, the agencies continue to banking entities to engage in limited principal transactions only with a believe that the authority granted transactions with related covered funds. securities affiliate.425 In permitting such pursuant to paragraph (d)(1)(J) to Any transactions permitted by these transactions under Regulation W, the determine that other activities are not revisions must still meet the eligibility Board previously concluded that the prohibited by the statute authorizes the requirements for the particular condition that such transactions were agencies to exercise rulemaking transaction, and the banking entity must permissible only with a securities authority to determine that banking also comply with certain conflict of affiliate was an important consideration entities may enter into covered interest, high-risk, and safety and that helped justify the exemption, transactions with related covered funds soundness restrictions with respect to noting that securities affiliates generally that would otherwise be prohibited by such transactions. The agencies are also must be registered as broker-dealers, section 13(f)(1) of the BHC Act, expressly providing that a banking and are therefore subject to SEC provided that the rulemaking complies entity may enter into certain riskless supervision and examination, and are with applicable statutory principal transactions with a related required to keep detailed records requirements.417 covered fund, as described below. concerning each securities Several commenters expressed 426 Exempt Transactions Under Section transaction. support for the proposed amendments The exempt transactions specified in to the regulations implementing section 23A and the Board’s Regulation W; Riskless Principal Transactions section 23A of the Federal Reserve Act 13(f)(1) of the BHC Act that would have and Regulation W are structured in a permitted a banking entity to engage in The final rule adopts the amendments manner so as not to present the same a limited set of covered transactions to the regulations implementing section concerns about a depository institution with a related covered fund.418 Some 13(f)(1) of the BHC Act to permit suffering losses or transferring the commenters recommended that the banking entities to enter into exempt subsidy arising from the depository agencies clarify whether a banking transactions permitted under section institution’s access to the Federal safety entity may enter into exempt 23A and the Board’s Regulation W. net. The agencies believe that the same transactions with a related covered fund Specifically, the final rule permits a rationale that supports the exemptions in the circumstance where such banking entity to engage in certain in section 23A of the Federal Reserve transactions would be exempt from covered transactions with a related Act and the Board’s Regulation W also section 23A of the Federal Reserve Act covered fund that would be exempt supports exempting such transactions from the quantitative limits, collateral only if a bank entered into such from the prohibition on covered requirements, and low-quality asset transactions with a securities transactions between a banking entity 419 prohibition under section 23A of the affiliate. A few commenters also and related covered funds under section Federal Reserve Act, including certain recommended that the agencies adopt a 13(f)(1) of the BHC Act, provided that transactions that would be exempt new exclusion allowing a banking entity such transactions are subject to the same pursuant to section 223.42 of the to offer other types of extensions of requirements and conditions specified credit to a related covered fund, Board’s Regulation W.422 Section 23A of the Federal Reserve in Regulation W. In particular, the including extensions of credit in the agencies note that these exemptions 420 Act is designed to protect against a ordinary course of business. Other generally do not present significant risks commenters recommended that the depository institution suffering losses in transactions with affiliates, and to limit of loss and serve important public agencies clarify that section 13(f)(1) 427 the ability of a depository institution to policy objectives. does not apply outside of the United Several commenters recommended 421 transfer to its affiliates the ‘‘subsidy’’ States. The commenters noted that that the agencies clarify whether a such an approach would limit the arising from the depository institution’s access to the Federal safety net.423 banking entity may enter into certain extraterritorial effect of section 13(f)(1), transactions with a related covered fund and would better align section 13(f)(1) Nevertheless, a member bank may enter into certain ‘‘exempt’’ covered that would be permissible under the with the manner in which section 23A Board’s Regulation W if entered into of the Federal Reserve Act applies transactions set forth in section 23A of between a bank and a securities affiliate, outside of the United States. the Federal Reserve Act and the Board’s As discussed below, the final rule Regulation W, without regard to the 425 12 CFR 223.42(f), (g), (m). adopts the proposed amendments from quantitative limits, collateral 426 67 FR 76591 (December 12, 2002); see 67 FR the 2020 proposal with minor requirements, and low-quality asset 76593, 76597. modifications. The agencies believe prohibition of section 23A and the 427 For example, intraday extensions of credit are that, under certain circumstances, it is Board’s Regulation W, provided such exempt covered transactions under section 23A of transactions meet the criteria specified the Federal Reserve Act. The Board previously has 415 12 U.S.C. 1851(d)(1)(G); (d)(4). in Regulation W.424 noted that ‘‘[i]ntraday overdrafts and other forms of intraday credit generally are not used as a means 416 12 U.S.C. 1851(d)(1)(G)(iv). of funding or otherwise providing financial support 417 12 U.S.C. 1851(b)(2), (d)(1)(J), (d)(2). 422 See 12 U.S.C. 371c(d); 12 CFR 223.42. for an affiliate. Rather, these credit extensions 418 See, e.g., ABA; BPI; CBA; Data Boiler; EBF; 423 For a brief background on section 23A of the typically facilitate the settlement of transactions FSF; IIB; PNC; and SIFMA. Federal Reserve Act, see Transactions Between between an affiliate and its customers when there 419 ABA; BPI; FSF; and SIFMA. Member Banks and Their Affiliates, 67 FR 76560– are mismatches between the timing of funds sent 420 BPI and PNC. 765561 (December 12, 2002). and received during the business day.’’ 67 FR 421 CBA; EBF; and IIB. 424 See 12 U.S.C. 371c(d); 12 CFR 223.42. 76596.

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even if the covered fund would not meet previously found that there was no securities, derivatives, or futures the eligibility criteria to be a ‘‘securities regulatory benefit to subjecting riskless clearing; or settlement services. In affiliate’’ under the Board’s Regulation principal transactions to section 23A of addition, each extension of credit must W.428 As noted above, Regulation W the Federal Reserve Act, because such be required to be repaid, sold, or imposes various conditions and transactions closely resemble securities terminated no later than five business requirements on transactions that a bank brokerage transactions, and these days after it was originated. enters into with its affiliates, and transactions do not allow the affiliate to Additionally, the proposed five business permits a bank to enter into transactions transfer risk to the affiliate acting as a day criterion is consistent with the involving the purchase of marketable riskless principal.432 Federal banking agencies’ capital rules securities, the purchase of municipal Although the 2020 proposal would and would generally limit banking securities, and riskless principal have permitted a banking entity to enter entities to transactions with normal transactions only with an affiliate that is into a riskless principal transaction with settlement periods, which have lower a ‘‘securities affiliate’’ as defined in a covered fund provided it met the risk of delayed settlement or failure, Regulation W. With respect to purchases criteria in Regulation W, the final rule when providing short-term extensions of marketable securities and municipal adopts a standalone exception to of credit.435 Each short-term extension securities, the final rule follows the differentiate riskless principal of credit must also meet the same approach adopted in Regulation W, and transactions specifically from other requirements applicable to intraday permits a banking entity to enter into transactions that would be exempt extensions of credit under section such covered transactions with a related transactions under the Board’s 223.42(l)(1)(i) and (ii) of the Board’s covered fund only if those transactions Regulation W.433 In connection with Regulation W (as if the extension of would meet all of the eligibility criteria permitting banking entities to enter into credit was an intraday extension of to qualify as exempt transactions under riskless principal transactions with credit, regardless of the duration of the Regulation W, including the related covered funds in a separate extension of credit). Under these requirement that the related covered exception from Super 23A, the agencies requirements, the banking entity making fund meets the requirements to be a are defining riskless principal a short-term extension would have to securities affiliate.429 As noted above, transactions in § ll.10 of the meet the same requirements as it would the exempt transactions specified in regulations. The definition of riskless to engage in an intraday extension of Regulation W include various limits and principal transactions adopted in the credit under Regulation W (and as conditions that both limit the risks of final rule is similar to the definition incorporated in the implementing such transactions and allow the Federal adopted in the Board’s Regulation W, as regulations). Specifically, the banking banking agencies to monitor this definition is appropriately narrow entity would need to have policies and compliance. Generally, the final rule and generally familiar to banking procedures to manage the credit retains the eligibility criteria for exempt entities.434 exposure and must have no reason to covered transactions defined in In addition, and as discussed in more believe that the related covered fund Regulation W. The agencies believe that detail below, banking entities may will have difficulty repaying the these conditions serve important separately rely on the independent extension of credit in accordance with policies, and appropriately limit the exception for acquisitions of assets in its terms. Finally, each extension of scope of the exempt transactions connection with payment, clearing, and credit or purchase of assets permitted by permissible under the implementing settlement services. The agencies expect these revisions must also comply with regulations. that in many instances, subject to other certain conflict of interest, high-risk, The final rule permits banking entities applicable laws and regulations, a and safety and soundness restrictions, to enter into riskless principal banking entity may be able to engage in and must otherwise be permissible for transactions with a related covered acquisitions of assets in connection with the banking entity to enter into with the fund, including in circumstances where payment, clearing, and settlement fund.436 the covered fund is not a ‘‘securities services, without relying on the affiliate.’’ 430 In a riskless principal exception permitting banking entities to 435 See 78 FR 62110 (October 11, 2013). While the Federal banking agencies require firms to track and transaction, the riskless principal (the enter into covered transactions with their related covered funds that would monitor the credit risk exposure for transactions banking entity) buys and sells the same involving securities, foreign exchange instruments, security contemporaneously, and the be exempt under Regulation W. and commodities that have a risk of delayed asset risk passes promptly from the settlement, this requirement does not apply to other Short-Term Extensions of Credit and types of transactions which may be used in affiliate (the related covered fund) Acquisitions of Assets in Connection providing a short-term extension of credit (e.g., through the riskless principal to a third With Payment, Clearing, and Settlement repo-style transactions). Additionally, banking party.431 In permitting such transactions Services entities typically monitor credit extensions by under Regulation W, the Board counterparty, and not by transaction type. Thus, the The final rule adopts the proposed final rule is consistent with the approach taken in amendments in the 2020 proposal that the Federal banking agencies’ capital rule, without 428 ABA; BPI; FSF; and SIFMA. Under the Board’s would have permitted a banking entity imposing an additional compliance burden without Regulation W, a ‘‘securities affiliate’’ is defined as a corresponding benefit. See, e.g., 12 CFR 3.2; 217.2; ‘‘[a]n affiliate of the member bank that is registered to provide short-term extensions of 324.2 (defining derivative contract to include with the Securities and Exchange Commission as a credit to, and purchase assets from, a unsettled securities with a contractual settlement or broker or dealer; or . . . [a]ny other securities related covered fund, subject to delivery lag that is longer than the lesser of the broker or dealer affiliate of a member bank that is appropriate limits. Under the final rule, market standard for the particular instrument or approved by the Board.’’ 12 CFR 223.3(gg). five business days); 12 CFR 3.38(d); 217.38(d); 429 In addition to requiring that an affiliate be a each short-term extension of credit or 324.38(d) (noting that an institution must hold risk- securities affiliate, the exemptions under Regulation purchase of assets must be made in the based capital against any delivery-versus-payment W permitting a bank to purchase marketable ordinary course of business in or payment-versus-payment transaction with a securities or municipal securities in certain connection with payment transactions; normal settlement period if the counterparty has circumstances require the bank to retain records not made delivery within five business days after about the underlying transaction. See 12 CFR settlement). 223.42(f)(6), (g)(3)(iii)(B). 432 Id. 436 For example, an investment fund with respect 430 Cf. 12 CFR 223.42(m). 433 12 CFR 223.42. to which a member bank or its affiliate is an 431 See 67 FR 76597. 434 See 12 CFR 223.3(ee). Continued

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The agencies do not believe it would banking entity and its affiliates to providers, all of which remain subject to be appropriate to permit banking provide other services, such as trade the Volcker Rule, holding more than 85 entities to enter into other covered settlement services, to the covered fund. percent of custodial assets. Requiring a transactions with a related covered As discussed below, the agencies banking entity that organizes and offers fund, outside of the exceptions noted believe that the exceptions in the final a covered fund to use a third party to above. Although some commenters rule would generally promote and provide these services could increase recommended expanding this exception protect the safety and soundness of the interconnections between these to allow banking entities to enter into banking entities and U.S. financial firms and the risk that distress at one limited amounts of covered transactions stability by allowing banking entities to banking entity would be spread to the with related covered funds, the agencies reduce operational risk. others. The authorized covered believe that permitting banking entities Currently, the restrictions under transactions would permit banking to engage in other covered transactions section 13(f)(1) of the BHC Act entities to provide a more with related covered funds would substantially limit the ability of a comprehensive suite of services to potentially raise the concerns that banking entity to both (1) organize and related covered funds, reducing paragraph 13(f)(1) was intended to offer a covered fund, or act as an interconnectedness by reducing the address. investment adviser to the covered fund, need to rely on third parties to provide The agencies also do not believe that and (2) provide custody or other such services. it would be appropriate to limit the services to the fund. As a result, a third The final rule also retains important application of section 13(f)(1) to the party is required to provide other limits on the transactions that a banking United States as some commenters necessary services for the fund’s entity may enter into with a related recommended, at this time. The operation, including payment, clearing, covered fund, including limitations that agencies note that other amendments in and settlement services that are apply to transactions within the new the final rule (for example, amendments generally provided by the fund’s exceptions in the regulations to the treatment of foreign excluded custodian, even when the banking entity implementing § ll.14(a). As specified funds and foreign public funds) may sponsor of the fund typically provides in the statute, such activities are help address some of the commenters’ those services to other funds it sponsors. permissible only ‘‘to the extent concerns about the extraterritorial This is the case even when the third permitted by any other provision of application of section 13(f)(1). party may not offer the same quality of services available through an affiliate, or Federal or state law, and subject to the Impact of the Amendments on Safety where the third party may charge more limitations under section 13(d)(2) of the and Soundness and U.S. Financial for the same services that could be BHC Act and any restrictions or Stability provided by an affiliate. This increases limitations that the appropriate Federal The agencies expect that the the potential for problems at the third- banking agencies, the Securities and amendments in the final rule described party service provider (e.g., an Exchange Commission, and the above would generally promote and operational failure or a disruption to Commodity Futures Trading 439 protect the safety and soundness of normal functioning) to affect the Commission, may determine . . .’’ banking entities and U.S. financial banking entity or the fund, which were Section 13(d)(2) of the BHC Act also stability. In comments previously required to use the third-party service imposes additional restrictions on any submitted to the agencies, banking provider as a result of the restrictions activities authorized pursuant to section entities that sponsor or serve as the under section 13(f)(1). Those problems (d)(1), including those activities investment adviser to covered funds may then spread among financial authorized by rulemaking pursuant to 440 have argued that the inability to engage institutions or markets and thereby section (d)(1)(J). in any covered transactions with such threaten the stability of the U.S. Sections ll.14(b) and ll.14(c) of funds, particularly those types of financial system. By amending the regulations implementing section 13 transactions that are expressly exempted § ll.14(a), therefore, the final rule of the BHC Act both generally require under section 23A of the Federal allows a banking entity to reduce both that a banking entity may enter into Reserve Act and the Board’s Regulation operational risk and interconnectedness certain transactions specified in section W, has limited the services that they or to other financial institutions by directly 23B of the Federal Reserve Act their affiliates can provide. The providing a broader array of services to (including ‘‘covered transactions’’ as commenters said that amending the a fund it organizes and offers, or defined in section 23A of the Federal regulations to permit limited covered advises. The agencies believe that Reserve Act) with related covered funds transactions with related covered funds reducing these risks will promote and only on terms and under circumstances would not create any new incentives for protect the safety and soundness of that are substantially the same (or at the banking entity to financially support banking entities.438 least as favorable) as to the banking the related covered fund in times of The final rule also would promote entity as those prevailing at the time for stress and would not otherwise permit and protect U.S. financial stability by comparable transactions with or the banking entity to indirectly engage reducing interconnectedness among involving other nonaffiliated in proprietary trading through the firms. The provision of custodial companies, or in the absence of related covered fund.437 For example, services among depository institutions comparable transactions, on terms and when a banking entity sponsors or in the United States is highly under circumstances that the banking advises a covered fund, the prohibition concentrated, with the four largest entity in good faith would offer to, or on covered transactions between the would apply to, nonaffiliated banking entity (and its affiliates) and the 438 The agencies believe that the same rationales companies.441 covered fund may limit the ability of the that supported exempting certain covered transactions in section 23A of the Federal Reserve Act and the Board’s Regulation W also support 439 12 U.S.C. 1851(d)(1). investment adviser may be subject to additional permitting a banking entity to engage in those 440 12 U.S.C. 1851(d)(2); see also 2013 rule restrictions under Section 23A of the Federal exempt covered transactions with a related covered §§ ll.7 and ll.15. Reserve Act. See 12 U.S.C. 371c(b)(1)(D). fund, subject to the same terms and conditions as 441 12 U.S.C. 1851(f)(2); see 12 U.S.C. 371c– 437 See 85 FR 12144. applicable under section 23A and Regulation W. 1(a)(1).

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The agencies therefore have • Any synthetic right to have, receive, event.446 Therefore, these commenters determined that the amendments to or be allocated any of the rights proposed eliminating the ‘‘other similar § ll.14(a) of the final rule, in the above.442 interest’’ clause from the definition manner described above, would This definition focuses on the altogether or, alternatively, replacing the promote and protect both the safety and attributes of the interest and whether it definition of ownership interest with soundness of banking entities, and U.S. provides a banking entity with the definition of ‘‘voting securities’’ financial stability. economic exposure to the profits and from the Board’s Regulation Y. A number of commenters on the 2018 E. Ownership Interest losses of the covered fund, rather than its form. Under the 2013 rule, a debt proposal argued that debt interests 1. Definition of ‘‘Ownership Interest’’ interest in a covered fund can be an issued by covered funds and loans to third-party covered funds not advised or The 2013 rule defines an ‘‘ownership ownership interest if it has the same managed by a banking entity should be interest’’ in a covered fund to mean any characteristics as an equity or other ownership interest (e.g., provides the excluded from the definition of equity, partnership, or other similar 447 holder with certain voting rights; the ownership interest. Other interest. Some banking entities have commenters suggested reducing the expressed concern about the inclusion right or ability to share in the covered fund’s profits or losses; or the ability, scope of the definition of ownership of the term ‘‘other similar interest’’ in interest to apply only to equity and the definition of ‘‘ownership interest,’’ directly or pursuant to a contract or synthetic interest, to earn a return based equity-like interests that are commonly and have indicated that the definition of understood to indicate a bona fide this term could lead to the inclusion of on the performance of the fund’s 448 underlying holdings or investments). ownership interest in a covered fund. debt instruments that have standard One other commenter asked the In the 2018 proposal, the agencies covenants within the definition of agencies to clarify conditions under the ownership interest. Under the 2013 rule, requested comment on all aspects of the ‘‘other similar interest’’ clause.449 ‘‘other similar interest’’ is defined as an 2013 rule’s application to securitization Specifically, the commenter asked the interest that: transactions, including the definition of • agencies to clarify whether the right to Has the right to participate in the ownership interest. Specifically, the receive all or a portion of the spread selection or removal of a general agencies asked whether there were any extends to using the excess spread or partner, managing member, member of modifications that should be made to any debt repaid from collections on the board of directors or trustees, the 2013 rule’s definition of ownership underlying assets of a special purpose 443 investment manager, investment interest. Among other things, the entity to pay principal or interest that is adviser, or commodity trading advisor agencies requested comments on otherwise owed is not an ownership of the covered fund (excluding the whether they should modify interest. Another commenter asked the rights of a creditor to exercise remedies § ll.10(d)(6)(i)(A) to provide that the agencies not to modify the definition of upon the occurrence of an event of ‘‘rights of a creditor to exercise remedies ownership interest as, the commenter default or an acceleration event); upon the occurrence of an event of argued, there is nothing under section • Has the right under the terms of the default or an acceleration event’’ 13 of the BHC Act that limits or restricts interest to receive a share of the income, include the right to participate in the the ability of a banking entity or gains or profits of the covered fund; removal of an investment manager for nonbank financial company to sell or • Has the right to receive the cause, or to nominate or vote on a securitize loans in a manner permitted underlying assets of the covered fund nominated replacement manager upon by law.450 after all other interests have been an investment manager’s resignation or In response to comments received on redeemed and/or paid in full (excluding removal.444 the 2018 proposal and in order to the rights of a creditor to exercise A number of comments received on provide clarity about the types of remedies upon the occurrence of an the 2018 proposal supported the interests that would be considered event of default or an acceleration agencies’ suggestion to modify within the scope of the definition of event); § ll.10(d)(6)(i)(A) and to expressly ownership interest, the 2020 proposal • Has the right to receive all or a permit creditors to participate in the would have amended the parenthetical portion of excess spread (the positive removal of an investment manager for in § ll.10(d)(6)(i)(A) to specify that difference, if any, between the aggregate cause, or to nominate or vote on a creditors’ remedies upon the occurrence interest payments received from the nominated replacement manager upon of an event of default or an acceleration underlying assets of the covered fund an investment manager’s resignation or event, which include, for example, the and the aggregate interest paid to the removal without causing an interest to right to participate in the removal of an holders of other outstanding interests); become an ownership interest.445 investment manager for cause or to • Provides under the terms of the However, a few of these commenters on nominate or vote on a nominated interest that the amounts payable by the the 2018 proposal noted that this replacement manager upon an covered fund with respect to the interest modification would not address all occurrence of an event of default, would could be reduced based on losses arising issues with the condition as banks not be considered an ownership interest from the underlying assets of the sometimes have contractual rights to for this reason alone.451 The 2020 covered fund, such as allocation of participate in the selection or removal of proposal also sought comment on losses, write-downs or charge-offs of the a general partner, managing member or whether it would be appropriate to outstanding principal balance, or member of the board of directors or reductions in the amount of interest due trustees of a borrower that are not 446 See SFIG. and payable on the interest; limited to the exercise of a remedy upon 447 See, e.g., Capital One et al. and BPI. • Receives income on a pass-through an event of default or other default 448 See, e.g., ABA and CAE. basis from the covered fund, or has a 449 See SFIG. 450 See Data Boiler. rate of return that is determined by 442 ll 2013 rule § .10(d)(6)(i). 451 The definition of ‘‘ownership interest’’ in the reference to the performance of the 443 83 FR 33481. implementing regulations is independent from the underlying assets of the covered fund; 444 Id. definition of ‘‘voting securities’’ in the Board’s or 445 See, e.g., SFIG; JBA; LSTA; and IAA. Regulation Y.

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further allow for an interest to confer clarity about the types of creditor rights provided that any senior loan or other the right to participate in any removal that may attach to an interest without senior debt interest that meets all of the of an investment manager for cause, or that interest being deemed an following characteristics would not be to nominate or vote on a nominated ownership interest. The agencies have considered to be an ownership interest: replacement manager upon an modified the scope of the definition of (1) The holders of such interest do not investment manager’s resignation or ownership interest in the final rule to receive any profits of the covered fund removal, whether or not an event of allow for certain additional rights of but may only receive: (i) Interest default or an acceleration event has creditors that are not triggered payments which are not dependent on occurred, without that interest being exclusively by an event of default or the performance of the covered fund; deemed an ownership interest. Such acceleration to attach to a debt interest and (ii) fixed principal payments on or additional ‘‘for cause’’ termination without such interests being deemed before a maturity date (which may events may include the insolvency of ownership interests. In addition to such include prepayment premiums intended the investment manager, the breach by rights arising under events of default or solely to reflect, and compensate the investment manager of certain acceleration, under the final rule, the holders of the interest for, foregone representations or warranties, or the definition of ownership interest does income resulting from an early occurrence of a ‘‘key person’’ event or not include rights of a creditor to prepayment); a change in control with respect to the participate in the removal or (2) The entitlement to payments on investment manager. replacement of an investment manager the interest is absolute and may not be Commenters on the 2020 proposal for cause in connection with: reduced because of the losses arising generally supported the proposed (1) The bankruptcy, insolvency, from the covered fund, such as amendment to the definition of conservatorship or receivership of the allocation of losses, write-downs or ownership interest to specify that investment manager; charge-offs of the outstanding principal creditors’ remedies upon the occurrence (2) the breach by the investment balance, or reductions in the principal of an event of default or an acceleration manager of any material provision of the and interest payable; and event include the right to participate in covered fund’s transaction agreements (3) The holders of the interest are not the removal of an investment manager applicable to the investment manager; entitled to receive the underlying assets for cause or to nominate or vote on a (3) the breach by the investment of the covered fund after all other nominated replacement manager upon manager of material representations or interests have been redeemed and/or an occurrence of an event of default. In warranties; paid in full (excluding the rights of a the view of these commenters, the (4) the occurrence of an act that creditor to exercise remedies upon the proposed clarification would constitutes fraud or criminal activity in occurrence of an event of default or an appropriately recognize that the ability the performance of the investment acceleration event). of a holder to vote on removal or manager’s obligations under the covered Commenters on the 2020 proposal appointment of managers for cause is fund’s transaction agreements; generally supported the proposed safe not a right limited to equity holders. (5) the indictment of the investment harbor from the definition of ownership However, many of these commenters manager for a criminal offense, or the interest for certain senior loans or senior asserted that creditors’ rights are also indictment of any officer, member, debt interests that do not have provided to debt holders in partner or other principal of the equity-like characteristics.454 However, circumstances other than an event of investment manager for a criminal certain commenters also requested that default or acceleration. These offense materially related to his or her the agencies clarify that the safe harbor commenters therefore recommended the investment management activities; is available to senior loans and senior proposed amendments be expanded to (6) a change in control with respect to debt interests where repayment of include additional for cause events that the investment manager; principal may vary as a result of are independent of an event of default (7) the loss, separation or acceleration or amortization or acceleration, such as the insolvency incapacitation of an individual critical provisions.455 Additionally, certain of the investment manager or breach of to the operation of the investment commenters also requested that the the investment management or manager or primarily responsible for the agencies clarify that the reference to collateral management agreement.452 management of the covered fund’s senior loans or senior debt interests in In light of comments received on the assets; or the proposed safe harbor includes all 2020 proposal, the agencies recognize (8) other similar events that constitute exposures that would meet the that it is customary for debt holders to ‘‘cause’’ for removal of an investment definition of ‘‘investment grade’’ found hold certain rights to participate in the manager, provided that such events are in 12 CFR part 1 and implementing removal or replacement of an not solely related to the performance of guidelines, as long as such exposures investment manager for cause that may the covered fund or to the investment comply with the proposed be triggered by events other than default manager’s exercise of investment conditions.456 or acceleration events. The agencies discretion under the covered fund’s The agencies intended for the believe that debt interests that include transaction agreements. proposed conditions of the safe harbor the rights of a creditor to participate in The 2020 proposal also would have to provide clarity and predictability to the for-cause removal or replacement of provided a safe harbor from the banking entities by enabling them to an investment manager under certain definition of ownership interest, as determine more readily whether an circumstances do not necessarily suggested by some commenters to the 453 interest would be an ownership interest constitute the type of interest Section 13 2018 proposal. The safe harbor was under the regulations implementing of the BHC Act is intended to capture intended to address concerns of section 13 of the BHC Act. After as an ownership interest. The agencies commenters to the 2018 proposal that considering comments received, the are therefore finalizing, with certain some ordinary debt interests could be modifications, the amendments to construed as an ownership interest. The 454 See, e.g., SIFMA; BPI; LSTA; Mortgage § ll.10(d)(6)(i)(A) in order to provide 2020 proposal, therefore, would have Bankers Association; and PNC. 455 See SIFMA. 452 See, e.g., SIFMA. 453 See SFIG. 456 See, e.g., LSTA and SFA.

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agencies have included the conditions determined on a fixed or typical index excluded from the definition of from the 2020 proposal for the safe floating rate basis.457 Specifically, the ownership interest, the restricted profit harbor with a modification to commenter suggested a modification to interest must also meet various other § ll.10(d)(6)(ii)(B)(1)(ii). The this condition to clarify that the term conditions, including that any amounts modification requires that the senior ‘‘profit’’ is intended to mean ‘‘net invested in the covered fund—including loan or senior debt interest involves, profits’’ out of concern for the potential amounts paid by the entity, an among other things, repayment of a ambiguity of how the condition would employee of the entity, or former fixed principal amount, on or before a apply to amounts received by employee of the entity—are within the maturity date, in a contractually- securitization noteholders in accordance applicable limits under § ll.12 of the determined manner (which may include with the securitization’s waterfall of 2013 rule.460 prepayment premiums intended solely payment. Another commenter disagreed Under § ll.12 of the 2013 rule, to reflect, and compensate holders of the with any revision to the 2020 proposed different calculation methodologies interest for, forgone income resulting rule that would only cover as an apply for purposes of calculating from an early prepayment). The ownership interest an interest which compliance with the per fund limit, the agencies believe this modification will has the right to receive a share of the aggregate fund limit, and the covered provide additional clarity that the safe ‘‘net’’ income, gains or profits of the fund deduction.461 For purposes of harbor is available to senior loan and covered fund.458 The final rule does not calculating a banking entity’s senior debt interests where contractual modify § ll.10(d)(6)(i)(B) of the compliance with the aggregate fund principal payments vary over the life of implementing regulations or limit and the covered fund deduction, a senior loan or senior debt interest for § ll.10(d)(6)(ii)(B)(1) of the 2020 the banking entity must include any reasons such as amortization and proposal. However, the agencies clarify amounts paid by the banking entity or acceleration provided that the total that a debt interest in a covered fund an employee in connection with amount of principal required to be would not be considered an ownership obtaining a restricted profit interest in 462 repaid over the life of the instrument interest solely because the interest is the covered fund. does not change. The agencies believe entitled to receive an allocation of The agencies did not receive this modification to the safe harbor collections from the covered fund’s comments on the proposed change in under the final rule will ensure that underlying financial assets in the treatment of restricted profit debt interests that do not have equity- accordance with a contractual priority interests. Several commenters like characteristics are not considered of payments. recommended that the agencies ownership interests. Additionally, the eliminate the per fund limit, the agencies believe that the conditions are 2. Fund Limits and Covered Fund aggregate fund limit, and the covered rigorous enough to prevent banking Deduction fund deduction with respect to any entities from evading the prohibition on The 2020 proposal included ownership interest held by a banking acquiring or retaining an ownership amendments to the implementing entity in any covered fund, if that interest in a covered fund. regulations to better align the manner in interest is held pursuant to Further, in response to certain underwriting and market making which a banking entity calculates the 463 commenters’ request that the agencies aggregate fund limit and covered fund activities. With respect to the proposed change clarify that the reference to senior loans deduction with the manner in which it in the treatment of restricted profit or senior debt interests in the proposed calculates the per fund limit, as it interests, the agencies continue to safe harbor includes all exposures that relates to investments by employees of believe that it is appropriate for a would meet the definition of the banking entity. Specifically, banking entity to count amounts ‘‘investment grade’’ found in 12 CFR consistent with how investments by invested by the banking entity (or its part 1 and implementing guidelines, the employees and directors are treated affiliates) to acquire restricted profit agencies have determined that such a generally under the existing rule of interests in a fund organized and offered provision would be inappropriate for construction in § ll.12(b)(1)(iv), the purposes of the safe harbor conditions by the banking entity for purposes of the 2020 proposal would have modified aggregate fund limit and covered fund in the final rule. Unlike the safe harbor §§ ll.12(c) and ll.12(d) to require provisions in the final rule regarding deduction. However, the agencies attribution of amounts paid by an believe attribution of employee and ownership interests, such a provision employee or director to acquire a would not ensure that debt interests that director ownership of restricted profit restricted profit interest only when the have equity-like characteristics are interests to a banking entity may not be banking entity has financed the treated as ownership interests for necessary in the circumstance when a acquisition. purposes of subpart C of the final rule. banking entity does not finance, directly In response to the 2020 proposal, one The 2013 rule excludes from the definition of ownership interest certain compliance with the aggregate fund limit and commenter requested that the agencies 459 modify the condition in restricted profit interests. To be covered fund deduction but would not address in any way the treatment of such profit interests under § ll.10(d)(6)(i)(B) of the implementing 457 See SFA. other laws, including under Federal income tax regulations and § ll.10(d)(6)(ii)(B)(1) 458 See Data Boiler. law. See 79 FR 5706, n.2091. 460 ll of the 2020 proposal, which states that 459 2013 rule § ll.10(d)(6)(ii). Under the 2013 2013 rule § .10(d)(6)(ii)(C). an interest that has the right to receive rule, the exclusion from the definition of ownership 461 2013 rule § ll.12(b)(1)(iv). As noted in the a share of the income, gains or profits interest is limited to restricted profit interests held preamble to the 2013 rule, the attribution to a of the covered fund is considered an by an entity, employee, or former employee in a banking entity of ownership interests acquired by covered fund for which the entity or employee an employee or director using financing provided ownership interest, to clarify that the serves as investment manager, investment adviser, by the banking entity ensures that funding provided condition would not include amounts commodity trading advisor, or other service by the banking entity to acquire ownership interests payable to securitization noteholders in provider. As noted in the preamble to the 2013 rule, in the fund, whether provided directly or indirectly, accordance with a contractual priority the term ‘‘restricted profit interest’’ was used to is counted against the per fund limit and aggregate avoid any confusion from using the term ‘‘carried fund limit. See 79 FR 5733. of payments, commonly referred to as a interest,’’ which is used in other contexts. The 462 2013 rule § ll.10(d)(6)(C); §§ ll.12(c)(1), ‘‘waterfall,’’ so long as such amounts are proposed rule would focus on the treatment of (d). See also 12 U.S.C. 1851(d)(1)(G). limited to fixed principal and interest restricted profit interests for purposes of calculating 463 BPI; FSF; IIB; and SIFMA.

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or indirectly, the employee’s or organizes and offers the fund.’’ 465 While otherwise in parallel with, a covered director’s acquisition of a restricted section 13 of the BHC Act provides the fund.470 The agencies declined to adopt profit interest in a covered fund agencies greater flexibility to adopt this provision in the 2013 rule after organized or offered by the banking changes in the treatment of ownership considering the language of the statute entity. The final rule amends the interests in third-party funds, it as well as commenters’ views on that implementing regulations to limit the prescribes specific requirements that provision.471 attribution of an employee’s or apply to funds that the banking entity The 2013 rule restricts a banking director’s restricted profit interest in a advises, or organizes and offers. entity’s investment in a covered fund covered fund organized or offered by the Specifically, section 13 provides that a organized and offered pursuant to banking entity to only those banking entity must not acquire or § ll.11 to three percent of the total circumstances in which the banking retain an ownership interest in a fund number or value of the outstanding entity has directly or indirectly financed organized and offered by the banking ownership interests of the fund. That the acquisition of the restricted profit entity except for a de minimis regulatory requirement is consistent interest. The agencies expect that this investment subject to and in compliance with section 13(d)(4) of the BHC Act, amendment will simplify a banking with paragraph (d)(4) of section 13 of which limits the size of investments by entity’s compliance with the aggregate the BHC Act.466 Therefore, the final rule a banking entity in a hedge fund or fund limit and covered fund deduction does not adopt the change private equity fund.472 Neither section provisions of the rule, and more fully recommended by commenters to modify 13(d)(4) of the BHC Act nor the text of recognize that employees and directors the treatment of ownership interests in the implementing regulations requires a may use their own resources, not related covered funds that are held by banking entity to treat an otherwise provided by the banking entity, to invest a banking entity in connection with permissible investment the banking in ownership interests or restricted market making and underwriting entity makes alongside a covered fund profit interests in a covered fund they activities. as an investment in the covered fund. advise (for example, to align their F. Parallel Investments The text of the 2013 rule does not personal financial interests with those impose any quantitative limits on any of other investors in the covered fund). The 2020 proposal included a new investments by banking entities made rule of construction in § ll.12(b) The final rule does not adopt the alongside, or otherwise in parallel with, clarifying that banking entities are not 473 recommendation from commenters that covered funds. However, in the required to treat investments alongside the agencies should eliminate the per preamble to the 2013 rule, the agencies covered funds as investments in covered discussed the potential for evasion of fund limit, aggregate fund limit, or funds if certain conditions are met.467 covered fund deduction requirements. the per fund limit and aggregate fund As explained in the 2020 proposal, this limit and stated that ‘‘if a banking entity The 2019 amendments adopted several rule of construction was meant to changes to simplify the covered fund makes investments side by side in provide clarity in light of a discrepancy substantially the same positions as the compliance requirements for banking between the preamble to the 2013 rule entities that engage in market making or covered fund, then the value of such and the text of the implementing investments shall be included for underwriting with respect to a third- regulations. party covered fund. Specifically, the purposes of determining the value of the The implementing regulations require banking entity’s investment in the 2019 amendments eliminated the that a banking entity hold no more than covered fund.’’ 474 The agencies also aggregate fund limit and capital three percent of the total ownership stated that ‘‘a banking entity that deduction requirements for the value of interests of a covered fund that the sponsors the covered fund should not ownership interests in third-party funds banking entity organizes and offers itself make any additional side by side acquired or retained in connection with pursuant to § ll.11.468 Section co-investment with the covered fund in permissible market making or ll.12(b)(1)(i) of the implementing a privately negotiated investment unless underwriting activities (i.e., covered regulations requires that, for purposes of the value of such co-investment is less funds that the banking entity does not this ownership limitation, ‘‘the amount than 3% of the value of the total amount advise or organize and offer pursuant to and value of a banking entity’s co-invested by other investors in such § ll.11(a) or (b) of the implementing permitted investment in any single investment.’’ 475 regulations). In discussing this change covered fund shall include any The 2020 proposal included a new in the preamble to the 2019 ownership interest held under § ll.12 rule of construction to address amendments, the agencies noted that directly by the banking entity, including investments made by banking entities the amendments to the treatment of any affiliate of the banking entity.’’ 469 alongside covered funds. This proposed ownership interests in third-party funds Section ll.12(b) also includes several rule of construction was intended to were intended to better align the other rules of construction that address clarify in the rule text that banking compliance requirements for circumstances under which an underwriting and market making investment in a covered fund would be 470 Prohibitions and Restrictions on Proprietary involving covered funds with the risks attributed to a banking entity. Trading and Certain Interests in, and Relationships 464 that those activities entail. The The 2011 notice of proposed With, Hedge Funds and Private Equity Funds, 76 compliance challenges associated with rulemaking included a proposed FR 68846, 68951–52 (Nov. 7, 2011). underwriting and market making in provision that would have required 471 In declining to adopt this parallel investment ownership interests in covered funds is attribution of certain direct investments provision, the agencies noted that banking entities rely on a number of investment authorities and particularly acute with respect to third- by a banking entity alongside, or structures to make investments and meet the needs party covered funds. As discussed in the of their clients. 79 FR 5734. preamble to the 2019 amendments, ‘‘a 465 Id. 472 12 U.S.C. 1851(d)(4). banking entity can more readily 466 12 U.S.C. 1851(d)(1)(G)(iii). 473 Any investment by the banking entity would determine whether a fund is a covered 467 See 85 FR 12149. need to comply with the proprietary trading 468 See id. at 12148; implementing regulations restrictions in Subpart B of the implementing fund if the banking entity advises or § ll.12. regulations. 469 See implementing regulations 474 79 FR 5734. 464 See 84 FR 62017. § ll.12(b)(1)(i). 475 See id.

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entities are not required to treat a direct would not be permitted to make a direct § ll.12(b)(5), as proposed.486 As investment by a banking entity investment alongside a covered fund described above and in the 2020 alongside a covered fund as an that the banking entity organizes and proposal, this rule of construction is investment in the covered fund if offers for the purpose of artificially consistent with the text of section 13 of certain conditions are met. Specifically, maintaining or increasing the value of the BHC Act, which does not prohibit a proposed § ll.12(b)(5) provided that: the fund’s positions. Likewise, the banking entity from making otherwise (1) A banking entity shall not be banking entity would also need to permissible investments directly when required to include in the calculation of ensure that any direct investment doing so alongside a covered fund. This the investment limits under alongside an organized and offered rule of construction will also reduce § ll.12(a)(2) any investment the covered fund does not cause the compliance burden by clarifying that a banking entity makes alongside a sponsoring banking entity’s permitted banking entity is not required under covered fund as long as the investment organizing and offering activities to § ll.12 of the final rule to attribute to is made in compliance with applicable violate the prudential backstops under the banking entity direct investments laws and regulations, including § ll.15.479 made alongside a covered fund for applicable safety and soundness Most commenters that addressed the purposes of the de minimis investment standards. proposed rule of construction supported limitation. In response to the (2) A banking entity shall not be adopting the proposed revision.480 commenter who opposed the rule of restricted under § ll.12 in the amount Commenters stated that the rule of construction,487 the agencies note that of any investment the banking entity construction was consistent with the rule of construction is consistent makes alongside a covered fund as long section 13 of the BHC Act, would not with section 13 of the BHC Act and each as the investment is made in increase the types of risks that section investment by a banking entity must compliance with applicable laws and 13 of the BHC Act was meant to address, comply with laws and regulations, regulations, including applicable safety and would not raise concerns about including any applicable safety and and soundness standards.476 evading section 13 of the BHC Act.481 soundness standards. In the preamble to the 2020 proposal, Commenters noted that banking entities As discussed in the preamble to the the agencies recognized that banking would need to hold their investments in 2020 proposal, the rule of construction entities rely on a number of investment a manner consistent with relevant will not prohibit a banking entity from authorities and structures to make authorities and the associated risk having investment policies, investments and meet the needs of their management and other prudential and arrangements or agreements to invest clients and shareholders.477 The regulatory limits and controls, including alongside a covered fund in all or agencies indicated that the proposed stringent capital requirements, for these substantially all of the investments rule of construction would provide types of investments.482 Some made by the covered fund or to fund all clarity to banking entities so that they commenters also requested that the or any portion of the investment may make such investments for the agencies permit employees and opportunities made available by the benefit of their clients and shareholders, directors of a banking entity that covered fund to other investors. provided that those investments comply sponsors a covered fund to invest Accordingly, a banking entity could with applicable laws and regulations.478 directly in that covered fund, regardless market a covered fund it organizes and The preamble to the 2020 proposal went of whether the employees or directors offers pursuant to § ll.11 on the basis on to note several restrictions that may provide services to the covered fund on of the banking entity’s expectation that apply to a banking entity’s investment behalf of their banking entity it would invest in parallel with the alongside a covered fund. For example, employer.483 The agencies received one covered fund in some or all of the same a banking entity may not engage in comment opposing the proposed rule of investments, or the expectation that the prohibited proprietary trading alongside construction.484 This commenter banking entity would fund one or more a covered fund. Likewise, a banking characterized the proposed rule of co-investment opportunities made entity must have authority to make any construction as permitting proprietary available by the covered fund. However, investment alongside a covered fund trading at arm’s length but without a as discussed in the preamble to the 2020 under applicable banking and other limit on the ownership interest that a proposal, the agencies would expect laws and regulations and must ensure banking entity may hold and stated that that any such investment policies, that the investment complies with parallel investments should be subject arrangements or agreements would applicable safety and soundness to the limitations that would apply to ensure that the banking entity has the standards. For example, national banks direct investments in covered funds.485 ability to evaluate each investment on a are restricted in their ability to make After carefully considering the case-by-case basis to confirm that the direct equity investments under 12 comments received, the agencies are banking entity does not make any U.S.C. 24 (Seventh) and 12 CFR part 1. adopting the rule of construction in investment unless the investment In addition, a banking entity that invests complies with applicable laws and alongside a covered fund that the 479 See id. In particular, to the extent the banking entity organizes and offers investment would result in a material conflict of 486 Final rule § ll.12(b)(5). These kinds of under the asset management exemption interest between the banking entity and its clients, investments could be, for example, parallel ll for example because the banking entity may exit the investments or co-investments. For these purposes, in § .11 would need to comply with position at a different time or on different terms ‘‘parallel investments’’ generally refers to a series of all the conditions of that exemption, than the covered fund, the banking entity would be investments that are made side-by-side with a which, among other things, prohibits required to provide timely and effective disclosure covered fund, and ‘‘co-investments’’ generally refers in accordance with § ll.15(b) prior to making the to a specific investment opportunity that is made the banking entity from guaranteeing, available to third-parties when the general partner assuming, or otherwise insuring the investments. Id. 480 See FSF; SIFMA; BPI; IIB; Goldman Sachs; or investment manager for the covered fund obligations or performance of the PNC; and ABA. determines that the covered fund does not have sufficient capital available to make the entire covered fund. Thus, a banking entity 481 See FSF; SIFMA; and BPI. investment in the target portfolio company or 482 See FSF; SIFMA; and BPI. determines that it would not be suitable for the 476 See 85 FR 12149. 483 See ABA and PNC. covered fund to take the entire available 477 Id. See also 79 FR 5734. 484 See Data Boiler. investment. 478 85 FR 12149. 485 See id. 487 See Data Boiler.

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regulations, including any applicable investments or a co-investment) by a ‘‘ownership interest of the fund’’ with safety and soundness standards. The director or employee of a banking entity the phrase ‘‘ownership interest in the agencies believe that this would further (or an affiliate thereof) made alongside fund;’’ (4) amend §§ ll.10(c)(3)(i) and ensure that the banking entity is not a covered fund in compliance with ll.10(c)(10)(i) to replace the word exposed to the types of risks that section applicable laws and regulations would ‘‘comprised’’ with the word 13 of the BHC Act was intended to not be treated as an investment by the ‘‘composed;’’ and (5) amend address. director or employee in the covered § ll.10(c)(8)(iv)(A) to replace the word As discussed earlier and in the fund. Accordingly, such a direct ‘‘of’’ in the phrase ‘‘contractual rights of preamble to the 2020 proposal, the investment would not be attributed to other assets’’ with the word ‘‘or.’’ agencies recognize that the 2011 the banking entity as an investment in The agencies did not receive comment proposed rule would have required a the covered fund, regardless of whether on these provisions and are adopting the banking entity to apply the per fund the banking entity arranged the technical amendments as proposed. limit and aggregate fund limit to a direct transaction on behalf of the director or V. Administrative Law Matters investment alongside a covered fund employee or provided financing for the when, among other things, a banking investment.488 Similarly, the A. Use of Plain Language entity is contractually obligated to make requirements under § ll.11(a)(7) Section 722 of the Gramm-Leach- such investment alongside a covered limiting the directors and employees Bliley Act 492 requires the Federal fund. The agencies continue to believe that are eligible to invest in a covered banking agencies to use plain language that such a prohibition is not necessary fund organized and offered by the in all proposed and final rules given the agencies’ expectation that a banking entity to those that are directly published after January 1, 2000. The banking entity would retain the ability engaged in providing specified services Federal banking agencies sought to to evaluate each investment on a case- to the covered fund would not apply to present the proposed rule in a simple by-case basis to confirm that the any such direct investment.489 and straightforward manner and did not banking entity does not make any With respect to investments in a receive any comments on plain investment unless the investment covered fund, the agencies decline to language. complies with applicable laws and permit an employee or director of a regulations, including any applicable banking entity that organizes and offers B. Paperwork Reduction Act safety and soundness standards. a covered fund to make investments in Certain provisions of the final rule The 2013 rule imposes certain that covered fund if the director or contain ‘‘collection of information’’ attribution rules and eligibility employee does not provide services to requirements within the meaning of the requirements for investments by the covered fund on behalf of the Paperwork Reduction Act (PRA) of 1995 directors and employees of a banking banking entity, as requested by some (44 U.S.C. 3501–3521). In accordance entity in covered funds organized and commenters.490 The restriction on these with the requirements of the PRA, the offered by the banking entity. types of director and employee agencies may not conduct or sponsor, ll Specifically, § .12(b)(1)(iv) of the investments is required by the and a respondent is not required to 2013 rule requires attribution of an statute.491 respond to, an information collection investment by a director or employee of unless it displays a currently valid a banking entity who acquires an G. Technical Amendments Office of Management and Budget ownership interest in his or her The agencies proposed five sets of (OMB) control number. The agencies personal capacity in a covered fund clarifying technical edits to the reviewed the final rule and determined sponsored by the banking entity if the implementing regulations. Specifically, that the final rule creates new banking entity, directly or indirectly, the agencies proposed to (1) amend recordkeeping requirements and revises extends financing for the purpose of § ll.12(b)(1)(ii) to add a comma after certain disclosure requirements that enabling the director or employee to the words ‘‘SEC-regulated business have been previously cleared under acquire the ownership interest in the development companies’’ in both places various OMB control numbers. The fund and the financing is used to where that phrase is used; (2) amend agencies did not receive any specific acquire such ownership interest in the § ll.12(b)(4)(i) to replace the phrase comments on the PRA. The agencies are covered fund. Section ll.11(a)(7) ‘‘ownership interest of the master fund’’ extending for three years, with revision, prohibits investments by any director or with the phrase ‘‘ownership interest in these information collections. The employee of the banking entity (or an the master fund’’; (3) amend information collection requirements affiliate thereof) in the covered fund, § ll.12(b)(4)(ii) to replace the phrase contained in this final rule have been other than any director or employee submitted by the OCC and FDIC to OMB who is directly engaged in providing 488 See 2013 rule § ll.12(b)(1)(iv) (requiring for review and approval under section investment advisory, commodity trading attribution of an investment by a director or 3507(d) of the PRA (44 U.S.C. 3507(d)) advisory, or other services to the employee in a covered fund organized and offered and section 1320.11 of the OMB’s covered fund at the time the director or by the banking entity, where the banking entity, directly or indirectly, extends financing for the implementing regulations (5 CFR 1320). employee makes the investment. purpose of enabling the director or employee to The Board reviewed the final rule under As discussed in the preamble to the acquire the ownership interest in the covered fund the authority delegated to the Board by 2020 proposal, the agencies recognize and the financing is used to acquire such ownership OMB. The Board will submit that directors and employees of banking interest in the covered fund) (emphasis added). information collection burden estimates entities may participate in investments 489 See 2013 rule § ll.11(a)(7) (prohibiting investments by any director or employee of the to OMB, and the submission will alongside a covered fund, for example banking entity (or an affiliate thereof) in a covered include burden for Federal Reserve- on an ad hoc basis or as part of a fund organized and offered by the banking entity, supervised institutions, as well as compensation arrangement. Consistent other than any director or employee who is directly burden for OCC-, FDIC-, SEC-, and with the agencies’ rule of construction engaged in providing investment advisory, commodity trading advisory, or other services to the CFTC-supervised institutions under a regarding direct investments by banking covered fund at the time the director or employee holding company. The OCC and the entities alongside a covered fund, the makes the investment) (emphasis added). agencies would expect that any direct 490 See ABA and PNC. 492 Public Law 106–102, section 722, 113 Stat. investments (whether a series of parallel 491 See 12 U.S.C. 1851(d)(1)(G)(vii). 1338, 1471 (1999).

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FDIC will take burden for banking Reporting loan holding companies, foreign entities that are not under a holding Section ll.4(c)(3)(i)—0.25 hours for banking organizations, U.S. State company. an average of 20 times per year. branches or agencies of foreign banks, and other holding companies that Abstract Section ll.12(e)—20 hours (Initial set-up 50 hours) for an average of 10 control an insured depository Section 13 of the BHC Act generally times per year. institution and any subsidiary of the prohibits any banking entity from Section ll.20(d)—41 hours (Initial foregoing other than a subsidiary for engaging in proprietary trading or from set-up 125 hours) quarterly. which the OCC, FDIC, CFTC, or SEC is acquiring or retaining an ownership Section ll.20(i)—20 hours. the primary financial regulatory agency. interest in, sponsoring, or having certain The Board will take burden for all relationships with a covered fund, Recordkeeping institutions under a holding company subject to certain exemptions. The Section ll.3(d)(3)—1 hour (Initial including: exemptions allow certain types of set-up 3 hours). • OCC-supervised institutions, permissible trading and asset Section ll.4(b)(3)(i)(A)—2 hours • FDIC-supervised institutions, • management activities. quarterly. Banking entities for which the Section ll.4(c)(3)(i)—0.25 hours for CFTC is the primary financial regulatory Current Actions an average of 40 times per year. agency, as defined in section 2(12)(C) of The final rule contains requirements Section ll.5(c)—40 hours (Initial the Dodd-Frank Act, and • subject to the PRA, and the changes setup 80 hours). Banking entities for which the SEC relative to the implementing regulations Section ll.10(c)(18)(ii)(C)(1)—10 is the primary financial regulatory are discussed herein. The new hours. agency, as defined in section 2(12)(B) of recordkeeping requirements are found Section ll.11(a)(2)—10 hours. the Dodd-Frank Act. in section ll.10(c)(18)(ii)(C)(1) and Section ll.20(b)—265 hours (Initial Legal authorization and the modified disclosure requirements set-up 795 hours). confidentiality: This information are found in section ll.11(a)(8)(i). The Section ll.20(c)—100 hours (Initial collection is authorized by section 13 of modified information collection set-up 300 hours). the BHC Act (12 U.S.C. 1851(b)(2) and requirements would implement section Section ll.20(d)—10 hours. 12 U.S.C. 1851(e)(1)). The information 13 of the BHC Act. The respondents are Section ll.20(e)—200 hours. collection is required in order for for-profit financial institutions, Section ll.20(f)(1)—8 hours. covered entities to obtain the benefit of including small businesses. A covered Section ll.20(f)(2)—40 hours engaging in certain types of proprietary entity must retain these records for a (Initial set-up 100 hours). trading or investing in, sponsoring, or period that is no less than 5 years in a Disclosure having certain relationships with a form that allows it to promptly produce Section ll.11(a)(8)(i)—0.5 hours for hedge fund or private equity fund, such records to the relevant agency on an average of 26 times per year. under the restrictions set forth in section 13 and the final rule. If a request. OCC respondent considers the information to Recordkeeping Requirements Title of Information Collection: be trade secrets and/or privileged, such Reporting, Recordkeeping, and Section ll.10(c)(18)(ii)(C)(1) information could be withheld from the Disclosure Requirements Associated requires a banking entity relying on the public under the authority of the with Restrictions on Proprietary Trading exclusion from the covered fund Freedom of Information Act (5 U.S.C. and Certain Relationships with Hedge definition for customer facilitation 552(b)(4)). Additionally, to the extent Funds and Private Equity Funds. vehicles to maintain documentation that such information may be contained Frequency: Annual, quarterly, and outlining how the banking entity in an examination report, such event driven. intends to facilitate the customer’s information could also be withheld from Affected Public: Businesses or other the public (5 U.S.C. 552 (b)(8)). exposure to a transaction, investment for-profit. strategy, or service. The agencies Agency form number: FR VV. Respondents: National banks, state OMB control number: 7100–0360. estimate that the new recordkeeping member banks, state nonmember banks, Estimated number of respondents: requirement will be incurred once a and state and federal savings 255. year with an average hour per response associations. Revisions estimated annual burden: of 10 hours. OMB control number: 1557–0309. 7,880 hours. Disclosure Requirements Estimated number of respondents: 39. Estimated annual burden hours: Revisions estimated annual burden: 36,112 hours (4,381 hour for initial set- ll Section .11(a)(8)(i), which 302 hours. up and 31,731 hours for ongoing). requires banking entities that organize Estimated annual burden hours: and offer covered funds to make certain 20,410 hours (3,681 hour for initial set- FDIC disclosures to investors in such funds, up and 16,729 hours for ongoing). Title of Information Collection: is being expanded to also apply to Volcker Rule Restrictions on Proprietary Board banking entities relying on exclusions Trading and Relationships with Hedge for credit funds, venture capital funds, Title of Information Collection: Funds and Private Equity Funds. family wealth management vehicles, or Reporting, Recordkeeping, and Frequency: Annual, quarterly, and customer facilitation vehicles. The Disclosure Requirements Associated event driven. agencies estimate that the current with Regulation VV. Affected Public: Businesses or other average hours per response of 0.1 will Frequency: Annual, quarterly, and for-profit. increase to 0.5. event driven. Respondents: State nonmember Revision, With Extension, of the Affected Public: Businesses or other banks, state savings associations, and Following Information Collections for-profit. certain subsidiaries of those entities. Respondents: State member banks, OMB control number: 3064–0184. Estimated average hours per response: bank holding companies, savings and Estimated number of respondents: 10.

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Revisions estimated annual burden: exclusion. For example, the exclusion a substantial number of small entities. 175 hours. for customer facilitation vehicles The OCC currently supervises Estimated annual burden hours: 3,288 requires a banking entity relying on the approximately 745 small entities.499 hours (1,759 hours for initial set-up and exclusion to maintain documentation Under the EGRRCPA, banking entities 1,529 hours for ongoing). outlining how the banking entity with total consolidated assets of $10 C. Regulatory Flexibility Act Analysis intends to facilitate the customer’s billion or less generally are not exposure to a transaction, investment ‘‘banking entities’’ within the scope of The Regulatory Flexibility Act strategy, or service. The final rule is section 13 of the BHC Act if their (RFA) 493 requires an agency to either expected to reduce regulatory burden on trading assets and trading liabilities do provide a regulatory flexibility analysis banking entities, and the Board does not not exceed five percent of their total with a final rule or certify that the final expect these recordkeeping consolidated assets. In addition, section rule will not have a significant requirements to result in a significant 13 of the BHC Act generally excludes economic impact on a substantial economic impact. certain institutions that function only in number of small entities. The U.S. Small The Board’s rule generally applies to a trust or fiduciary capacity from the Business Administration (SBA) state-chartered banks that are members definition of ‘‘banking entity. As a establishes size standards that define of the Federal Reserve System, bank result, no OCC-supervised small entities which entities are small businesses for holding companies, and foreign banking are subject to section 13 of the BHC Act. purposes of the RFA.494 Except as organizations and nonbank financial Thus, the final rule will not impact any otherwise specified below, the size companies supervised by the Board OCC-supervised small entities. standard to be considered a small (collectively, ‘‘Board-regulated Therefore, the OCC certifies that the business for banking entities subject to entities’’). However, section 203 of the final rule will not have a significant the final rule is $600 million or less in Economic Growth, Regulatory Relief, impact on a substantial number of OCC- consolidated assets.495 and Consumer Protection Act supervised small entities. (EGRRCPA),497 which was enacted on Board FDIC May 24, 2018, amended section 13 of The Board has considered the the BHC Act by narrowing the definition The RFA generally requires that, in potential impact of the final rule on of banking entity to exclude certain connection with a final rulemaking, an small entities in accordance with community banks.498 The Board is not agency prepare and make available for section 603 of the RFA. Based on the aware of any Board-regulated entities public comment a final regulatory Board’s analysis, and for the reasons that meet the SBA’s definition of ‘‘small flexibility analysis describing the stated below, the Board certifies that the entity’’ that are subject to section 13 of impact of the final rule on small final rule will not have a significant the BHC Act and its implementing entities.500 However, a regulatory economic impact on a substantial of regulations following the enactment of flexibility analysis is not required if the number of small entities. EGRRCPA. Furthermore, to the extent agency certifies that the final rule will The Board invited comment on all that any Board-regulated entities that not have a significant economic impact aspects of its analysis related to the meet the definition of ‘‘small entity’’ are on a substantial number of small requirements of the RFA in connection or become subject to section 13 of the entities. The SBA has defined ‘‘small with the 2020 proposal. In particular, BHC Act and its implementing entities’’ to include banking the Board requested that commenters regulations, the Board does not expect organizations with total assets of less describe the nature of any impact on the total number of such entities to be than or equal to $600 million that are small entities and provide empirical substantial. Accordingly, the Board’s independently owned and operated or data to illustrate and support the extent final rule is not expected to have a owned by a holding company with less of the impact. The Board did not receive significant economic impact on a than or equal to $600 million in total any comments related to this issue. 501 substantial number of small entities. assets. Generally, the FDIC considers As discussed in the SUPPLEMENTARY INFORMATION, the agencies are adopting OCC 499 The OCC bases its estimate of the number of revisions to the regulations The Regulatory Flexibility Act (RFA), small entities on the SBA’s size thresholds for commercial banks and savings institutions, and implementing section 13 of the BHC Act 5 U.S.C. 601 et seq., requires an agency, in order to improve and streamline the trust companies, which are $600 million and $41.5 in connection with a final rule, to million, respectively. Consistent with the General regulations by modifying and clarifying prepare a Final Regulatory Flexibility Principles of Affiliation, 13 CFR 121.103(a), the requirements related to the covered Analysis describing the impact of the OCC counts the assets of affiliated financial 496 institutions when determining if the OCC should fund provisions. Certain of the rule on small entities (defined by the exclusions from the covered fund classify an OCC-supervised institution as a small Small Business Administration (SBA) entity. The OCC uses December 31, 2019, to definition included in the final rule for purposes of the RFA to include determine size because a ‘‘financial institution’s contain recordkeeping and disclosure commercial banks and savings assets are determined by averaging the assets reported on its four quarterly financial statements requirements that would apply to institutions with total assets of $600 banking entities relying on the for the preceding year.’’ See footnote 8 of the SBA’s million or less and trust companies with Table of Size Standards. total assets of $41.5 million or less) or 500 5 U.S.C. 601 et seq. 493 5 U.S.C. 601 et seq. to certify that the final rule would not 501 The SBA defines a small banking organization 494 U.S. SBA, Table of Small Business Size have a significant economic impact on as having $600 million or less in assets, where an Standards Matched to North American Industry organization’s ‘‘assets are determined by averaging Classification System Codes, available at https:// the assets reported on its four quarterly financial www.sba.gov/document/support--table-size- 497 Public Law 115–174 (May 24, 2018). statements for the preceding year.’’ See 13 CFR standards. 498 Under EGRRCPA, a community bank and its 121.201 (as amended by 84 FR 34261, effective 495 See id. Pursuant to SBA regulations, the asset affiliates are generally excluded from the definition August 19, 2019). In its determination, the ‘‘SBA size of a concern includes the assets of the concern of banking entity, and thus section 13 of the BHC counts the receipts, employees, or other measure of whose size is at issue and all of its domestic and Act, if the bank and all companies that control the size of the concern whose size is at issue and all foreign affiliates. 13 CFR 121.103(6). bank have total consolidated assets equal to $10 of its domestic and foreign affiliates.’’ See 13 CFR 496 The agencies are explicitly authorized under billion or less and trading assets and liabilities 121.103. Following these regulations, the FDIC uses section 13(b)(2) of the BHC Act to adopt rules equal to five percent or less of total consolidated a covered entity’s affiliated and acquired assets, implementing section 13. 12 U.S.C. 1851(b)(2). assets. averaged over the preceding four quarters, to

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a significant effect to be a quantified financial institution’’ or as additional address. To reduce the extraterritorial effect in excess of five percent of total deductions on Lines 17 or 24 of impact of the implementing regulations, annual salaries and benefits per schedule RC–R otherwise.506 The one the final rule exempts the activities of institution, or 2.5 percent of total affected small, FDIC-supervised certain funds that are organized outside noninterest expenses. The FDIC believes institution did not report any such of the United States and offered to that effects in excess of these thresholds deductions over the past five years.507 foreign investors from certain typically represent significant effects for Based on this supporting information, restrictions of the implementing FDIC-supervised institutions. For the the FDIC certifies that this final rule will regulations. The final rule also revises reasons described below and under not have a significant economic impact several existing exclusions from the section 605(b) of the RFA, the FDIC on a substantial number of small covered fund provisions, to provide certifies that this final rule will not have entities. clarity and simplify compliance with a significant economic impact on a the requirements of the implementing SEC substantial number of small entities. regulations. The final rule adopts As of December 31, 2019, the FDIC In the 2020 proposal, the SEC several new exclusions from the covered supervised 3,344 depository certified that, pursuant to 5 U.S.C. fund definition in order to more closely institutions,502 of which 2,581 were 605(b), the 2020 proposal would not, if align the regulation with the purpose of considered small entities for the adopted, have a significant economic the statute. Last, the final rule adopts purposes of RFA.503 The Economic impact on a substantial number of small revisions to the provisions that govern Growth, Regulatory Relief, and entities. Although the SEC solicited the relationship between a banking Consumer Protection Act excluded written comments regarding this entity and a fund and the definition of entities from the requirements of section certification, no commenters responded ownership interest. 13 of the BHC Act that do not have and to this request. The final rule will generally apply to are not controlled by a company that As discussed in the SUPPLEMENTARY banking entities, including certain has total assets of more than $10 billion INFORMATION, the amendments clarify CFTC-registered entities. These entities or trading assets and liabilities and simplify compliance with the include bank-affiliated CFTC-registered comprising more than five percent of implementing regulations, refine the swap dealers, futures commission total consolidated assets.504 Only one extraterritorial application of the section merchants, commodity trading advisors small, FDIC-supervised institution is 13 of the BHC Act, and permit and commodity pool operators.508 The subject to section 13 of the BHC Act, additional fund activities that do not CFTC has previously determined that because its trading assets and liabilities present the risks that section 13 was swap dealers, futures commission exceed five percent of total consolidated intended to address. merchants and commodity pool assets.505 The amendments will generally apply operators are not small entities for Section 13 of the BHC Act generally to banking entities, including certain purposes of the RFA and, therefore, the prohibits any banking entity from SEC-registered entities. These entities requirements of the RFA do not apply engaging in proprietary trading or from include bank-affiliated SEC-registered to those entities.509 As for commodity acquiring or retaining an ownership investment advisers, broker-dealers, and trading advisors, the CFTC has found it interest in, sponsoring, or having certain security-based swap dealers. Based on appropriate to consider whether such relationships with a covered fund. As information in filings submitted by registrants should be deemed small previously discussed, the final rule these entities, the SEC believes that entities for purposes of the RFA on a modifies existing definitions and there are no banking entity registered case-by-case basis, in the context of the exclusions and introduces new investment advisers or broker-dealers particular regulation at issue.510 exclusions to the implementing that are small entities for purposes of In the context of the final rule, the regulations. The final rule permits the RFA. For this reason, the SEC CFTC believes it is unlikely that a covered entities to engage in additional certifies that the amendments will not substantial number of the commodity activities with respect to covered funds, have a significant economic impact on trading advisors that are potentially including acquiring or retaining an a substantial number of small entities. affected are small entities for purposes ownership interest in, sponsoring, or CFTC of the RFA. In this regard, the CFTC having certain relationships with notes that only commodity trading covered funds, subject to certain Pursuant to 5 U.S.C. 605(b), the CFTC advisors that are registered with the restrictions. hereby certifies that the final rule will CFTC are covered by the implementing This final rule excludes certain types not have a significant economic impact regulations, and generally those that are of investment funds from the definition on a substantial number of small entities registered have larger businesses. of a ‘‘covered fund’’ for the purposes of for which the CFTC is the primary section 13 of the BHC Act. Investments financial regulatory agency. 508 The final rule may also apply to other types in funds that are affected by this final As discussed in this SUPPLEMENTARY of CFTC registrants that are banking entities, such rule could be reported as deductions INFORMATION, the final rule clarifies and as introducing brokers, but the CFTC believes it is simplifies compliance with the unlikely that such other registrants will have from capital on Call Report schedule significant activities that would implicate the final RC–R Part 1 Lines 11 or 13 if the implementing regulations, refines the rule. See 79 FR 5808, 5813 (Jan. 31, 2014) (CFTC investments qualify as ‘‘investments in extraterritorial application of section 13 version of 2013 final rule). the capital of an unconsolidated of the BHC Act, and permits additional 509 See Policy Statement and Establishment of fund activities that do not present the Definitions of ‘‘Small Entities’’ for Purposes of the Regulatory Flexibility Act, 47 FR 18618 (Apr. 30, determine whether the covered entity is ‘‘small’’ for risks that section 13 was intended to 1982) (futures commission merchants and the purposes of RFA. commodity pool operators); Registration of Swap 502 FDIC-supervised institutions are set forth in 12 506 See ‘‘Supervisory Guidance on the Capital Dealers and Major Swap Participants, 77 FR 2613, U.S.C. 1813(q)(2). Treatment of Certain Investments in Covered 2620 (Jan. 19, 2012) (swap dealers and major swap 503 FDIC Call Report data, December 31, 2019. Funds.’’ FDIC FIL–50–2015: November 6, 2015. participants). 504 Public Law 115–174, May 24, 2018. https:// https://www.fdic.gov/news/news/financial/2015/ 510 See Policy Statement and Establishment of www.congress.gov/bill/115th-congress/senate-bill/ fil15050a.pdf. Definitions of ‘‘Small Entities’’ for Purposes of the 2155. 507 FDIC Call Report data, March 2015–December Regulatory Flexibility Act, 47 FR 18618, 18620 505 FDIC Call Report data, December 2019. 2019. (Apr. 30, 1982).

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Similarly, the final rule applies to only 1, 2020, the first day of the calendar more than 5% of total consolidated those commodity trading advisors that quarter.513 assets.516 are affiliated with banks, which the Certain SEC-regulated entities, such E. OCC Unfunded Mandates Reform Act CFTC expects are larger businesses. as broker-dealers, security-based swap The OCC has analyzed the final rule dealers (SBSDs), and registered The CFTC requested that commenters under the factors in the Unfunded address in particular whether any of investment advisers (RIAs) affiliated Mandates Reform Act of 1995 (UMRA). with an insured depository institution, these commodity trading advisors, or Under this analysis, the OCC considered other CFTC registrants covered by the fall under the definition of ‘‘banking whether the final rule includes a entity’’ and are subject to the proposed revisions, are small entities for Federal mandate that may result in the prohibitions of section 13 of the BHC purposes of the RFA. The CFTC did not expenditure by state, local, and tribal Act.517 The SEC’s economic analysis is receive any public comments on this or governments, in the aggregate, or by the limited to areas within the scope of the any other aspect of the RFA as it relates private sector, of $100 million or more SEC’s function as the primary securities to the rule. in any one year (adjusted annually for markets regulator in the United States. Because the CFTC believes that there inflation). The UMRA does not apply to In particular, the SEC’s economic are not a substantial number of regulations that incorporate analysis focuses primarily on the registered, banking entity-affiliated requirements specifically set forth in potential effects of the rule amendments commodity trading advisors that are law. being adopted here (the ‘‘final rule’’) on small entities for purposes of the RFA, The final rule does not impose new (1) SEC registrants, in their capacity as and the other CFTC registrants that may mandates. Therefore, the OCC finds that such, (2) the functioning and efficiency be affected by the proposed revisions the final rule does not trigger the UMRA of the securities markets, (3) investor have been determined not to be small cost threshold. Accordingly, the OCC protection, and (4) capital formation. entities, the CFTC believes that the final has not prepared the written statement SEC registrants that may be affected by rule will not have a significant described in section 202 of the UMRA. the final rule include SEC-registered economic impact on a substantial F. SEC Economic Analysis broker-dealers, SBSDs, and RIAs. Thus, number of small entities for which the the analysis below does not consider the CFTC is the primary financial regulatory 1. Broad Economic Considerations direct effects of the final rule on broker- agency. i. Background dealers, SBSDs, and registered investment advisers that are not banking As discussed above, section 13 of the D. Riegle Community Development and entities, or banking entities that are not Bank Holding Company (BHC) Act Regulatory Improvement Act SEC registrants. In addition, potential generally prohibits banking entities spillover effects on these and other Section 302(a) of the Riegle from acquiring or retaining an entities are reflected in the SEC’s Community Development and ownership interest in, sponsoring, or analysis of effects on efficiency, Regulatory Improvement Act of 1994 having certain relationships with, a 511 hedge fund or private equity fund (RCDRIA) requires that each Federal 516 These and other aspects of the regulatory banking agency, in determining the (covered funds), subject to certain baseline against which the SEC is assessing the effective date and administrative exemptions. Section 13(h)(1) of the BHC economic effects of the final rule being adopted compliance requirements for new Act defines the term ‘‘banking entity’’ to here on SEC-regulated entities are discussed in the include (1) any insured depository economic baseline. On July 22, 2019, the agencies regulations that impose additional adopted a final rule amending the definition of reporting, disclosure, or other institution (as defined by statute), (2) ‘‘insured depository institution’’ in a manner requirements on insured depository any company that controls an insured consistent with EGRRCPA. See Revisions to institutions, consider, consistent with depository institution, (3) any company Prohibitions and Restrictions on Proprietary that is treated as a bank holding Trading and Certain Interests in, and Relationships principles of safety and soundness and with, Hedge Funds and Private Equity Funds, 84 FR the public interest, any administrative company for purposes of section 8 of the 35008 (July 22, 2019). In November 2019, the burdens that such regulations would International Banking Act of 1978, and agencies adopted the 2019 amendments, which place on depository institutions, (4) any affiliate or subsidiary of such an tailored certain proprietary trading and covered entity.514 In addition, the Economic fund restrictions of the 2013 rule. See supra note including small depository institutions, 8. and customers of depository Growth, Regulatory Relief, and 517 Throughout this economic analysis, the terms institutions, as well as the benefits of Consumer Protection Act ‘‘banking entity’’ and ‘‘entity’’ generally refer only 515 such regulations. The agencies have (EGRRCPA), enacted on May 24, to banking entities for which the SEC is the primary 2018, amended section 13 of the BHC financial regulatory agency. While section 13 of the considered comment on these matters in BHC Act and its associated rules apply to a broader other parts of this SUPPLEMENTARY Act to exclude from the definition of set of banking entities, this economic analysis is INFORMATION. ‘‘insured depository institution’’ any limited to those banking entities for which the SEC institution that does not have and is not is the primary financial regulatory agency as In addition, under section 302(b) of controlled by a company that has (1) defined in section 2(12)(B) of the Dodd-Frank Act. the RCDRIA, new regulations that more than $10 billion in total See 12 U.S.C. 1851(b)(2), 5301(12)(B). impose additional reporting, Compliance with SBSD registration requirements consolidated assets; and (2) total trading is not yet required and there are currently no disclosures, or other new requirements assets and trading liabilities, as reported registered SBSDs. However, the SEC has previously on insured depository institutions on the most recent applicable regulatory estimated that as many as 50 entities may generally must take effect on the first filing filed by the institution, that are potentially register as SBSDs and that as many as day of a calendar quarter that begins on 16 of these entities may already be SEC-registered broker-dealers. See Capital, Margin, and Segregation or after the date on which the 513 Additionally, the Administrative Procedure Requirements for Security-Based Swap Dealers and regulations are published in final Act generally requires that the effective date of a Major Security-Based Swap Participants and Capital form.512 Therefore, the effective date for rule be no less than 30 days after publication in the and Segregation Requirements for Broker-Dealers, the Federal banking agencies is October Federal Register. 5 U.S.C. 553(d)(1). The effective 84 FR 43872 (Aug. 22, 2019) (‘‘Capital, Margin, and date, October 1, 2020, will be more than 30 days Segregation Adopting Release’’). after publication in the Federal Register. For the purposes of this economic analysis, the 511 12 U.S.C. 4802(a). 514 See 12 U.S.C. 1851(h)(1). term ‘‘dealer’’ generally refers to SEC-registered 512 12 U.S.C. 4802(b). 515 See supra note 504. broker-dealers and SBSDs.

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competition, investor protection, and activities, such as organizing and certain banking entities and certain capital formation in securities markets. offering covered funds.520 The 2013 rule covered funds (e.g., restrictions on This economic analysis also discusses implemented these exemptions.521 relationships between banking entities the impact of the final rule on private Banking entities engaged in activities and covered funds, definition of funds,518 to the degree that it may flow and investments covered by section 13 ‘‘ownership interest,’’ and treatment of through to SEC registrants, such as of the BHC Act and the implementing loan securitizations). The final rule also RIAs, SEC-registered broker-dealers and regulations are required to establish a reduces the burden on affected banking SBSDs, and securities markets and compliance program reasonably entities by codifying an existing policy investors. designed to ensure and monitor statement by the Federal banking In implementing section 13 of the compliance with the implementing agencies that addresses the potential BHC Act, the agencies sought to regulations.522 issues related to a foreign banking entity increase the safety and soundness of In the 2020 proposal, the SEC controlling a qualifying foreign banking entities, promote financial solicited comment on all aspects of the excluded fund and adopting a rule of stability, and reduce conflicts of interest costs and benefits associated with the construction to provide clarity regarding between banking entities and their proposed amendments for SEC a banking entity’s permissible customers.519 The regulatory regime registrants, including spillover effects investments alongside a covered fund. created by the 2013 rule may have the proposed amendments may have on Broadly, to the extent that the final enhanced regulatory oversight and efficiency, competition, and capital rule directly changes the scope of compliance with the substantive formation in securities markets. The permissible covered fund activities, and prohibitions of section 13 of the BHC SEC has considered these comments, as indirectly reduces costs to banking Act, but could also have impacted discussed in greater detail in the entities and covered funds by reducing capital formation and liquidity, as well sections that follow. uncertainty regarding the scope of as the provision by banking entities of ii. Broad Economic Effects permissible activities, the final rule may a variety of financial services for enhance the beneficial economic effects customers. Certain aspects of the implementing of the implementing regulations.523 The Section 13 of the BHC Act also regulations may have resulted in a provides a number of statutory complex and costly compliance regime SEC’s economic analysis continues to exemptions to the general prohibitions that is unduly restrictive and recognize that the overall risk exposure on proprietary trading and covered burdensome on some affected banking of banking entities generally reflects a funds activities. For example, the statute entities. Distinguishing between combination of activities, including exempts certain covered funds permissible and prohibited activities proprietary trading, market making, may be complex and costly, resulting in traditional banking, asset management, 518 There is significant overlap between the uncertain determinations for some investment activities, and the extent to definitions of ‘‘private fund’’ and ‘‘covered fund.’’ entities. Moreover, the implementing which banking entities engage in For purposes of this economic analysis, ‘‘private regulations may include in their scope hedging and other risk-mitigating fund’’ means an issuer that would be an investment activities. The overall risk exposure is company, as defined in section 3 of the Investment some groups of market participants that Company Act (15 U.S.C. 80a–3(a)), but for section do not necessarily engage in the also a function of the magnitude, 3(c)(1) or section 3(c)(7) of that Act (15 U.S.C. 80– activities or pose the risks that section structure, and manner in which banking 3(c)(1) or (7)). See also 15 U.S.C. 80b–2(a)(29). 13 of the BHC Act intended to address. entities engage in such activities, both Section 13(h)(2) of the BHC Act defines ‘‘hedge within such activities individually and fund’’ and ‘‘private equity fund’’ to mean an issuer For example, definition of the term that would be an investment company, but for ‘‘covered fund’’ may include entities across all of these activities collectively. section 3(c)(1) or 3(c)(7) of the Investment Company that do not engage in the activities As discussed elsewhere,524 the SEC Act, or ‘‘such similar funds’’ as the agencies contemplated by section 13 of the BHC recognizes the complex baseline effects determine by rule (see 12 U.S.C. 1851(h)(2)). In the of section 13 of the BHC Act, as 2013 rule, the agencies combined the definitions of Act or may include entities that do not ‘‘hedge fund’’ and ‘‘private equity fund’’ into a pose the risks that section 13 is amended by sections 203 and 204 of single term ‘‘covered fund’’ and defined this term intended to mitigate. EGRRCPA, and the implementing to include any issuer that would be an investment The final rule includes amendments regulations (including those made with company as defined in the Investment Company Act but for section 3(c)(1) or 3(c)(7) of that Act with that (1) reduce the scope of entities that respect to sections 203 and 204 of a number of express exclusions and additions as may be treated as covered funds (e.g., EGRRCPA) on overall levels and determined by the agencies. Implementing credit funds, venture capital funds, structure of banking entity risk regulations § ll.10(b) and (c). family wealth management vehicles, exposures. 519 See, e.g., 79 FR 5536, 5541, 5574, 5659, 5666. An extensive body of research has examined moral and customer facilitation vehicles), (2) The final rule may promote the ability hazard arising out of federal deposit insurance, modify existing covered fund exclusions of the capital markets to intermediate implicit bailout guarantees, and systemic risk under the implementing regulations between suppliers and users of capital issues. See, e.g., Andrew G. Atkeson et al., (e.g., foreign public funds, public through, for example, increased ability Government Guarantees and the Valuation of American Banks, 33 NBER Macroeconomics Ann. welfare funds, and small business and willingness of banking entities and 81 (2018). See also Javier Bianchi, Efficient investment companies), and (3) affect investors in ‘‘covered funds’’ to Bailouts? 106 Amer. Econ. Rev. 3607 (2016); Bryan the types of permitted activities between facilitate capital formation through Kelly, Hanno Lustig, & Stijn Van Nieuwerburgh, Too-Systematic-to-Fail: What Option Markets Imply sponsorship and participation in certain 520 about Sector-Wide Government Guarantees, 106 See 12 U.S.C. 1851(d)(1)(G). types of funds and to transact with Amer. Econ. Rev. 1278 (2016); Deniz Anginer, Asli 521 See 2013 rule §§ ll.4, ll.5, ll.6, certain groups of counterparties.525 For Demirguc-Kunt, & Min Zhu, How Does Deposit ll.11, and ll.13. Insurance Affect Bank Risk? Evidence from the 522 See 2013 rule § ll.20. See also 2019 523 Recent Crisis, 48 J. Banking & Fin. 312 (2014); amendments, 84 FR 62021–25, which, among other See, e.g., 2019 amendments, 84 FR 62037–92. Andrea Beltratti & Rene M. Stulz, The Credit Crisis things, modified these requirements for banking 524 See id. Around the Globe: Why Did Some Banks Perform entities with limited trading assets and liabilities. 525 See, e.g., U.S. Dep’t of the Treasury, A Better?, 105 J. Fin. Econ. 1 (2012); Pietro Veronesi This SEC Economic Analysis follows earlier Financial System That Creates Economic & Luigi Zingales, Paulson’s Gift, 97 J. Fin. Econ. 339 sections by referring to the regulations Opportunities: Banks and Credit Unions (June (2010). For a literature review, see, e.g., Sylvain implementing section 13 of the BHC Act, as 2017), at 77, available at https://www.treasury.gov/ Benoit et al., Where the Risks Lie: A Survey on amended through June 1, 2020 as the press-center/press-releases/Documents/ Systemic Risk, 21 Rev. Fin. 109 (2017). ‘‘implementing regulations.’’ See supra note 8. A%20Financial%20System.pdf.

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example, exclusions from the ‘‘covered requirements that are applicable to of the securities held by those funds and fund’’ definition of specific types of banking entities and that facilitate the other entities by potentially increasing entities may benefit banking entities by safety and soundness of banking entities demand for those securities. Increased providing clarity and removing certain and the financial stability of the United demand typically results in increased constraints around potentially profitable States. liquidity which can benefit investors business opportunities and by reducing The final rule may also impact because it may enable them to enter or compliance costs, and may benefit competition, allocative efficiency, and exit their positions in fund instruments, excluded funds and their banking entity capital formation. To the extent that the products, and portfolios in a more sponsors and advisers by increasing the implementing regulations have timely manner and at a more attractive spectrum of available counterparties constrained banking entities in their price. and improving the quality or cost of covered fund activities, including Moreover, investors who seek access financial services available to providing traditional banking and asset to public capital markets investments or customers. management services to customers other investments through foreign The final rule, however, may also through a legal entity structure, the public funds may benefit to the extent facilitate risk mitigation as well as risk- exclusions from the definition of the final rule results in banking entities taking activities of banking entities. The ‘‘covered fund’’ made available by the offering more foreign public funds or final rule also may change aspects of the final rule may increase competition offering these funds at a lower cost. relationships among banking entities between banking entities and other Further, investors that prefer to and certain other groups of market entities providing services to and implement a trading or investing participants, including potentially otherwise transacting with those types strategy through a legal entity structure introducing new conflicts of interest, of funds and other entities. Such may benefit from the final rule, which and increasing or reducing the potential competition may reduce costs or allows banking entities to implement or effects of conflicts of interest. To the increase the quality of certain financial facilitate such a trading or investing degree that some banking entities react services provided to such funds and to the final rule by restructuring their counterparties. strategy while providing other banking Finally, the final rule’s costs, benefits, and asset management services to the activities involving covered funds to 526 take advantage of the exclusions and effects on efficiency, competition, investor. At the same time, it is contained in the final rule, there may be and capital formation will be influenced possible that, as a result of banking shifts in the structure and levels of by a variety of factors, including the entities sponsoring or investing in more activities of banking entities that would, prevailing macroeconomic conditions, funds that are excluded from the in turn, decrease or increase risk the financial condition of firms seeking definition of covered fund by the final exposure. Recognizing these various to raise capital and of funds seeking to rule, general market risk could increase potential effects, each of the exclusions transact with banking entities, and that risk could adversely affect includes a number of conditions aimed competition between bank and non- markets generally, including through at facilitating banking entity compliance bank providers of capital, and many the impact on financial stability. while also allowing for customer others. Moreover, these effects are likely However, due to the mitigation effects of oriented financial services provided on to vary widely among banking entities the various conditions of the exclusions arms-length, market terms, and and funds. The SEC recognizes that the from the definition of covered fund preventing evasion of the requirements economic effects of the final rule may be contained in the final rule as well as of section 13. dampened or magnified in different expectations regarding the relative size In evaluating these various potential phases of the macroeconomic cycle, and mix of the investments in the effects, it is important to acknowledge depend on monetary and fiscal policy aggregate, the SEC believes this risk to that the exclusions made available by developments and other government be small. For example, the final rule the final rule, such as for credit funds actions, and may vary across different permits a banking entity to act as a and qualifying venture capital funds, types of banking entities. sponsor, investment adviser, or allow banking entities to engage The SEC also considered the commodity trading advisor to certain indirectly through fund structures in the implications of the final rule for excluded funds (e.g., credit funds and same activities in which they are investors. Broadly, the final rule should qualifying venture capital funds) only to currently permitted to engage directly increase the number of funds and other the extent the banking entity ensures (e.g., extensions of credit or direct entities that will be excluded from the that the activities of the funds are ownership stakes). Thus, the type of covered fund definition. This is likely to consistent with safety and soundness exposure permitted by engaging in those result in an increase in offerings of such standards that are substantially similar activities directly, and indirectly funds or an increase in the number of to those that would apply if the banking through covered funds, is the same and banking entities providing services to entity engaged in the activities directly. customers through entities such as the banking entities may use fund iii. Analytical Approach structures to diversify or otherwise customer facilitation vehicles and mitigate their risk exposure. Other family wealth management vehicles. If The SEC’s economic analysis is exclusions permit banking entities to the final rule increases the ability of informed by research 527 on the effects provide traditional banking and asset investors to access public and private of section 13 of the BHC Act and the management services to customers markets through funds and other 2013 rule, comments received by the through a legal entity structure, with entities, the final rule may result in the agencies from a variety of interested conditions (e.g., limitation on relaxing of constraints on investors’ parties, and experience administering ownership by the banking entity and portfolio optimization and, thus, the implementing regulations. prohibition on ‘‘bail outs’’) intended to enhance the efficiency of portfolio Throughout this economic analysis, the ensure that the risks that section 13 of allocations. The ability of additional SEC discusses how different market the BHC Act was intended to address investors to access these markets are mitigated. Finally, nothing in the through funds and other entities may, in 526 See supra Section IV.B.1. (Foreign Public final rule removes or modifies addition to providing those investors Funds). prudential capital, margin, and liquidity with greater choice, benefit the issuers 527 See 2019 amendments, 84 FR 62044–54.

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participants 528 may respond to various security issuance and secondary market accommodation, and when markets aspects of the final rule. This analysis liquidity that would have been observed have significant liquidity and are less also considers the potential effects of since the financial crisis absent various volatile. Even following an economic the final rule on activities by banking provisions of section 13 of the BHC Act shock, identification of these intended entities that involve risk, their and the implementing regulations. benefits requires a sufficient amount of willingness and ability to engage in Importantly, the existing securities data covering a relevant sample period. client-facilitation activities, and markets—including market participants, Moreover, identifying these benefits competition, market quality, and capital their business models, market structure, following an economic shock could formation. etc.—differ in significant ways from the prove difficult if the effects of past The final rule tailors, removes, or securities markets that existed prior to regulation are confounded by other alters the scope of various covered fund enactment of section 13 of the BHC Act interventions aimed at mitigating the requirements in the implementing and the implementation of the 2013 impact of the shock on financial regulations. Since section 13 of the BHC rule. For example, the role of dealers in markets, including regulation, credit Act and the implementing regulations intermediating trading activity has accommodation, and fiscal stimulus. impose a number of different changed in important ways, including Finally, it is difficult to quantify the net requirements, and, as discussed above, the following: (1) In recent years, on economic effects of any individual the type and level of risk exposure of a both an absolute and relative basis, bank amendment because of overlapping banking entity is the result of a dealers generally committed less capital implementation periods of various post- combination of activities,529 it is to intermediation activities while non- crisis regulations. Further, it is difficult difficult to attribute the observed effects bank dealers generally committed more, to quantify the net economic effects of to a specific provision or subset of although not always in the same manner any individual amendment because of requirements. In addition, analysis of or on the same terms as bank dealers; (2) the fact that many market participants the effects of the implementation of the the volume and profitability of certain changed their behavior in anticipation 2013 rule is confounded by trading activities after the financial of future changes in regulation. macroeconomic factors, other policy crisis may have decreased for bank In some instances, the SEC lacks the interventions, and post-crisis changes to dealers while it may have increased for information or data necessary to provide market participants’ risk aversion and other intermediaries, including non- reasonable estimates for the economic return expectations.530 Because of the bank entities that provide intraday effects of the final rule. For example, the extended timeline of implementation of liquidity, but generally not overnight SEC lacks information and data on how section 13 of the BHC Act and the liquidity, including in some sectors of market participants may choose to overlap of the period during which the the market through the use of electronic restructure their relationships with 2013 rule was in effect with other post- trading algorithms and high speed various types of entities in response to crisis changes affecting the same group access to data and trading venues; and the final rule; the amount of capital or certain sub-groups of SEC registrants, (3) the introduction of alternative credit formation in covered funds that does the SEC cannot rely on quantitative markets, including non-bank direct not occur because of current covered methods that might otherwise provide lending markets, may have contributed fund provisions, including those insight into causal attribution and to liquidity fragmentation across concerning the definition of covered quantification of the effects of section 13 markets while potentially increasing fund, restrictions on relationships with of the BHC Act and the 2013 rule on access to capital.531 covered funds, the definition of measures of capital formation, liquidity, Where possible, the SEC has ownership interest, and the exclusion competition, and informational or attempted to quantify the costs and for loan securitizations; the volume of allocative efficiency. Moreover, benefits it expects to result from the loans, guarantees, securities lending, empirical measures of capital formation final rule. In many cases, however, the and derivatives activity dealers may or liquidity are substantially limited by SEC is unable to quantify these potential wish to engage in with related covered the fact that they do not provide insight economic effects. Some of the primary funds; as well as the extent of risk into security issuance and transaction economic effects, such as the effect on reduction associated with the covered activity that does not occur (or occurs in incentives that may give rise to conflicts fund provision of the 2013 rule. Where a sector of the market for which data is of interest in various regulated entities the SEC cannot quantify the relevant not readily available) as a result of the and the degree to which the economic effects, they are discussed in implementing regulations. Accordingly, implementing regulations may be qualitative terms. it is difficult to quantify the primary impeding activity of banking entities 2. Economic Baseline with respect to certain investment 528 As discussed above, supra Section V.F.1.i. In the context of this economic vehicles, are inherently difficult to (Background), the SEC’s economic analysis is analysis, the economic costs and quantify. Moreover, some of the focused on the potential effects of the final rule on benefits, and the impact of the final rule (1) SEC registrants, (2) the functioning and intended benefits of the implementing on efficiency, competition, and capital efficiency of the securities markets, (3) investor regulations’ definitions and prohibitions protection, and (4) capital formation. Thus, the formation, are considered relative to a that the agencies are amending include below analysis does not consider the direct effects baseline that includes the implementing of the final rule on broker-dealers, SBSDs, or the potential for more resilient markets regulations (including the 2013 rule and investment advisers that are not banking entities, or during a financial crisis or during banking entities that are not SEC registrants, in the 2019 amendments), legislative periods of severe market stress. These either case for purposes of section 13 of the BHC amendments in EGRRCPA, and current intended benefits are less readily Act, beyond the potential spillover effects on these practices aimed at compliance with entities and effects on efficiency, competition, observable under periods of strong these regulations. investor protection, and capital formation in economic conditions, periods of securities markets. See infra Section V.F.2.i. (Affected Participants). significant government credit i. Regulation 529 See, e.g., 2013 rule at 5541. The SEC is assessing the economic 531 530 With respect to the 2019 amendments, supra See U.S. Sec. & Exch. Comm’n, Access to impact of the final rule against a note 8, analysis of the effects is difficult because of Capital and Market Liquidity (Aug. 2017), available the relatively short time that has passed since they at https://www.sec.gov/files/access-to-capital-and- baseline that includes the legal and became effective. market-liquidity-study-dera-2017.pdf. regulatory framework as it exists at the

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time of this release. Thus, the regulatory includes certain commodity pools as cause the banking entity to have credit baseline for the SEC’s economic analysis well as certain foreign funds. Funds that exposure to the affiliated covered fund, includes section 13 of the BHC Act as rely on the exclusions in sections 3(c)(1) including short-term extensions of amended by EGRRCPA, and the 2013 or 3(c)(7) of the Investment Company credit and various other transactions rule. Further, the baseline accounts for Act are covered funds unless an required for a banking entity to provide the fact that since the adoption of the exclusion from the covered fund an affiliated covered fund payment, 2013 rule, the agencies have adopted the definition is available. Funds that rely clearing, and settlement services. 2019 amendments, which, among other on any exclusion or exemption from the Definition of ‘‘Banking Entity’’ things, relate to the ability of banking definition of ‘‘investment company’’ entities to engage in certain activities, under the Investment Company Act, For foreign banking entities,538 certain including underwriting, market-making, other than the exclusion contained in funds organized under foreign law and and risk-mitigating hedging, with section 3(c)(1) or 3(c)(7), such as real offered to foreign investors (‘‘foreign respect to ownership interests in estate and mortgage funds that rely on excluded funds’’) are not ‘‘covered covered funds, as well as amendments the exclusion in section 3(c)(5)(C), are funds’’ under the implementing conforming the 2013 rule to sections not covered funds under the regulations, but may be subject to the 203 and 204 of EGRRCPA. In addition, implementing regulations. The covered implementing regulations as ‘‘banking the agencies’ staffs have provided FAQ fund provisions of the implementing entities’’ under certain circumstances. responses related to the regulatory regulations may reduce the ability and Through the policy statement, the obligations of banking entities, incentives of banking entities to bail out Federal banking agencies (in including SEC-regulated entities that are affiliated funds to mitigate reputational consultation with the staffs of the SEC also banking entities under the 2013 risk, limit conflicts of interest with and the CFTC) have provided temporary rule, which likely influenced these clients, customers, and counterparties, relief, that is currently scheduled to entities’ decisions about how to comply and reduce the ability of banking expire on July 21, 2021, for qualifying with the 2013 rule and may influence entities to engage in proprietary trading foreign excluded funds that may these entities’ decisions about how to indirectly through funds. otherwise be subject to the comply with the 2019 amendments.532 The broad definition of covered funds implementing regulations as banking The Federal banking agencies also encompasses many different types of entities.539 vehicles, and the implementing issued the policy statement in 2017 with Definition of ‘‘Ownership Interest’’ respect to foreign excluded funds, and regulations exclude some of them from 535 has since extended the policy statement the definition of a covered fund. The The implementing regulations to 2021.533 excluded fund types relevant to the prohibit a banking entity, as principal, Although the 2013 rule also included baseline are funds that are regulated by from directly or indirectly acquiring or restrictions on proprietary trading and the SEC under the Investment Company retaining an ‘‘ownership interest’’ in a 540 compliance requirements (as modified Act: Registered investment companies covered fund. The implementing by the 2019 amendments), the most (RICs) and business development regulations define an ‘‘ownership relevant portion of the 2013 rule for companies (BDCs). Seeding vehicles for interest’’ in a covered fund to mean any establishing an economic baseline is these funds are also excluded from the equity, partnership, or other similar that involving covered fund covered fund definition during their interest. Under the implementing seeding period.536 restrictions.534 The features of the regulations, ‘‘other similar interest’’ is regulatory framework under the 2013 Restrictions on Relationships Between defined as an interest that: rule most relevant to the baseline Banking Entities and Covered Funds (A) Has the right to participate in the selection or removal of a general include the definition of the term Under the baseline, banking entities ‘‘covered fund’’; restrictions on a partner, managing member, member of are limited in the types of transactions the board of directors or trustees, banking entity’s relationships with in which they are able to engage with covered funds; and restrictions on covered funds with which they have 538 For purposes of this analysis, ‘‘foreign banking parallel investment, co-investment, and certain relationships. Banking entities entity’’ has the same meaning as used in the policy investments in the fund by banking that serve, directly or indirectly, as the statement, supra note 27, i.e., a banking entity that entity employees. investment manager, adviser, or sponsor is not, and is not controlled directly or indirectly by, a banking entity that is located in or organized Scope of the Covered Fund Definition to a covered fund are prohibited from under the laws of the United States or any state. engaging in a ‘‘covered transaction,’’ as 539 See supra note 26 and 28. For purposes of the The definition of ‘‘covered fund’’ defined in section 23A of the Federal policy statement, a ‘‘qualifying foreign excluded impacts the scope of the substantive Reserve Act, with the covered fund or fund’’ means, with respect to a foreign banking prohibitions on banking entities with any other covered fund that is entity, an entity that (1) is organized or established acquiring or retaining an ownership 537 outside the United States and the ownership controlled by such covered fund. interests of which are offered and sold solely interest in, sponsoring, and having Similarly, a banking entity that outside the United States; (2) would be a covered certain relationships with, covered organizes and offers a covered fund fund were the entity organized or established in the funds. The implementing regulations pursuant to § ll.11 or that continues United States, or is, or holds itself out as being, an define covered funds, in part, as issuers entity or arrangement that raises money from to hold an ownership interest in a investors primarily for the purpose of investing in that would be investment companies covered fund in accordance with financial instruments for resale or other disposition but for section 3(c)(1) or 3(c)(7) of the § ll.11(b) is prohibited from engaging or otherwise trading in financial instruments; (3) Investment Company Act and then in such a ‘‘covered transaction.’’ This would not otherwise be a banking entity except by excludes specific types of entities from virtue of the foreign banking entity’s acquisition or prohibits all ‘‘covered transactions’’ that retention of an ownership interest in, or the definition. The definition also sponsorship of, the entity; (4) is established and 535 The exclusions from the covered fund operated as part of a bona fide asset management 532 See supra note 14. definition are set forth in § ll.10(c) of the business; and (5) is not operated in a manner that 533 See supra Section VI.A. (Qualifying Foreign implementing regulations. enables the foreign banking entity to evade the Excluded Funds) and notes 26 and 28 (discussion 536 See implementing regulations requirements of section 13 or implementing of ‘‘the policy statement’’). §§ ll.10(c)(12)(i) and ll.10(c)(12)(iii). regulations. 534 See 84 FR 61974. 537 See implementing regulations § ll.14(a). 540 Implementing regulations § ll.10(a).

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investment manager, investment permitted by law.543 Accordingly, the investment is less than 3% of the value adviser, or commodity trading advisor implementing regulations exclude from of the total amount co-invested by other of the covered fund (excluding the the covered fund definition entities that investors in such investment.550 The rights of a creditor to exercise remedies issue asset-backed securities if they 2019 amendments eliminated the upon the occurrence of an event of meet specified conditions, including aggregate fund limit and capital default or an acceleration event); that they hold only loans, certain rights deduction requirement under (B) Has the right under the terms of and assets, and a small set of other § ll.12(d) for the value of ownership the interest to receive a share of the financial instruments (permissible interests held by banking entities in income, gains or profits of the covered assets).544 In addition, the baseline third-party covered funds (e.g., covered fund; includes the FAQs issued by agencies’ funds that those banking entities do not (C) Has the right to receive the staff in June 2014 regarding the organize or offer), acquired or retained underlying assets of the covered fund servicing asset provision of the loan as a result of certain underwriting or after all other interests have been securitization exclusion.545 market-making activities. However, the redeemed and/or paid in full (excluding Public Welfare and SBIC Exclusions 2019 amendments did not change or the rights of a creditor to exercise amend the application of the per-fund remedies upon the occurrence of an Under the implementing regulations, limit or aggregate funds limit to co- event of default or an acceleration issuers in the business of making investments alongside a covered fund. event); investments that are designed primarily For purposes of calculating the (D) Has the right to receive all or a to promote the public welfare, of the aggregate fund limit and the capital portion of excess spread (the positive type permitted under paragraph (11) of deduction requirement, the difference, if any, between the aggregate section 5136 of the Revised Statutes of implementing regulations require 546 interest payments received from the the United States (12 U.S.C. 24), are attribution to a banking entity of underlying assets of the covered fund excluded from the covered fund restricted profit interests in a covered and the aggregate interest paid to the definition. Similarly, the implementing fund as ownership interests in the holders of other outstanding interests); regulations exclude from the covered covered fund for which the banking (E) Provides under the terms of the fund definition small business entity serves as investment manager, interest that the amounts payable by the investment companies (SBICs) and investment adviser, commodity trading covered fund with respect to the interest issuers that have received notice from advisor, or other service provider.551 could be reduced based on losses arising the Small Business Administration to Under the implementing regulations, for proceed to qualify for a license as a from the underlying assets of the purposes of calculating a banking SBIC and for which the notice or license covered fund, such as allocation of entity’s compliance with the aggregate has not been revoked.547 losses, write-downs or charge-offs of the fund limit and the capital deduction outstanding principal balance, or Attribution of Certain Investments to a requirement, a banking entity must reductions in the amount of interest due Banking Entity include any amounts paid by the and payable on the interest; As discussed above, the implementing banking entity or an employee in (F) Receives income on a pass-through regulations include a per-fund limit and connection with obtaining a restricted basis from the covered fund, or has a aggregate fund limit on a banking profit interest in the covered fund.552 rate of return that is determined by entity’s ownership of covered funds that ii. Affected Participants reference to the performance of the the banking entity organizes and underlying assets of the covered fund; offers.548 The preamble to the 2013 rule The SEC-regulated entities directly or stated, ‘‘if a banking entity makes affected by the final rule include broker- (G) Any synthetic right to have, investments side by side in substantially dealers, security-based swap dealers, receive, or be allocated any of the rights the same positions as a covered fund, and investment advisers. The above.541 then the value of such investments shall implementing regulations impose a The implementing regulations permit be included for purposes of determining range of restrictions and compliance a banking entity to acquire and retain an the value of the banking entity’s obligations on banking entities with ownership interest in a covered fund investment in the covered fund.’’ 549 respect to their covered fund activities that the banking entity organizes and The agencies also stated that a banking and investments. To the degree that the offers pursuant to § ll.11, but limits entity that sponsors a covered fund final rule reduces or otherwise alters the such ownership interests to three should not make any additional side-by- scope of private funds subject to percent of the total number or value of side co-investment with the covered covered fund restrictions, SEC- the outstanding ownership interests of fund in a privately negotiated registered banking entities, including such fund (the per-fund limit).542 investment unless the value of such co- broker-dealers, security-based swap dealers, and investment advisers may be Loan Securitizations 543 13 U.S.C. 1851(g)(2). See also supra Section affected. As discussed above, section 13 of the IV.B.2 (Loan Securitizations). Broker-Dealers 553 BHC Act provides a rule of construction 544 See implementing regulations § ll.10(c)(8). Loan is further defined as any loan, lease, extension Under the implementing regulations, that explicitly allows the sale and of credit, or secured or unsecured receivable that is securitization of loans as otherwise not a security or derivative. Implementing some of the largest SEC-regulated regulations rule § ll.2(t). 541 Implementing regulations § ll.10(d)(6)(i). 545 See supra Section IV.B.2 (Loan 550 See id. 542 Implementing regulations §§ ll.12(a)(1)(ii) Securitizations, discussion of servicing assets). 551 Implementing regulations §§ ll.10(d)(6)(ii) and ll.12(a)(2)(ii)(A). The implementing 546 See implementing regulations and ll.12(c)(1), (d). See also 12 U.S.C. regulations also require that the aggregate value of § ll.10(c)(11)(ii). 1851(d)(1)(G). all ownership interests of a banking entity and its 547 See implementing regulations 552 Implementing regulations §§ ll.12(c)(1), (d). affiliates in all covered funds acquired or retained § ll.10(c)(11)(i). 553 This analysis is based on data from Reporting under § ll.12 may not exceed three percent of the 548 See implementing regulations § ll.12(a). See Form FR Y–9C for domestic holding companies on tier 1 capital of the banking entity. Implementing also supra Section IV.E.2. (Ownership Interest— a consolidated basis and Report of Condition and regulations § ll.12(a)(2)(iii) (the aggregate funds Fund Limits and Covered Fund Deduction). Income for banks regulated by the Board, FDIC, and limit). 549 79 FR 5734. Continued

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broker-dealers are banking entities. While the 3,487 domestic broker- entity broker-dealers dominate non- Table 1 reports the number, total assets, dealers that are not affiliated with banks banking entity broker-dealers in terms of and holdings of broker-dealers affiliated greatly outnumber the 202 banking total assets (72% of total broker-dealer with banks and broker-dealers that are entity broker-dealers subject to the assets) and aggregate holdings (66% of not. implementing regulations, banking total broker-dealer holdings).

TABLE 1—BROKER-DEALER COUNT, ASSETS, AND HOLDINGS BY AFFILIATION

Holdings Broker-dealer affiliation Number Total assets, Holdings, (alternative), $mln 554 $mln 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 registered as broker-dealers and broker-dealer instead of registering as a The final rule may also affect bank- included in the discussion above, as standalone SBSD if bank or broker- many as 25 other bank-affiliated SBSDs dealer capital and other regulatory affiliated SBSDs. As compliance with 560 SBSD registration requirements is not may be affected by the final rule. requirements are less (or more) costly yet required, there are currently no Similarly, the SEC’s analysis of TIW than those that may be imposed on registered SBSDs. However, the SEC has data suggests that none of the entities SBSDs under Title VII. As a result, the previously estimated that as many as 50 that may register with the SEC as Major above figures may overestimate or entities may potentially register with the Security-Based Swap Participants are underestimate the number of SBSDs that SEC as security-based swap dealers and affected by the final rule. are not broker-dealers and that may that as many as 16 may already be SEC- October 6, 2021 is the compliance become SEC-registered entities affected registered broker-dealers.559 Given the date for the SEC’s registration rules for by the final rule. SBSDs, as well as several rules analysis of DTCC Derivatives Repository Private Funds and Private Fund applicable to those entities, including Limited Trade Information Warehouse Advisers 562 (TIW) transaction and positions data on segregation requirements and non-bank single-name credit-default swaps and capital and margin requirements, This section describes RIAs advising consistent with other recent SEC recordkeeping and reporting private funds that may be affected by rulemakings, the SEC preliminarily requirements, business conduct the final rule. Using Form ADV data, believes that 41 entities that may standards, and risk mitigation Table 2 reports the number of RIAs techniques.561 Accordingly, the SEC advising private funds by fund type as register with the SEC as SBSDs are 563 bank-affiliated firms, including those recognizes that in anticipation of the defined in Form ADV. Private funds that are SEC-registered broker-dealers. compliance date for registration, firms rely on either section 3(c)(1) or 3(c)(7) Therefore, the SEC preliminarily may choose to restructure their security- of the Investment Company Act and so estimates that, in addition to the bank- based swap trading activity into (or out meet the implementing regulations’ affiliated SBSDs that are already of) an affiliated bank or an affiliated definition of ‘‘covered fund.’’ Table 3

OCC for the most recent available four-quarter 557 This category includes all bank-affiliated Form ADV Item 6.A.(7) that it is actively engaged average, as well as data from S&P Market broker-dealers except those exempted by section in business as a bank, or it indicates on Form ADV Intelligence LLC on the estimated amount of global 203 of EGRRCPA. Item 7.A.(8) that it has a ‘‘related person’’ that is trading activity of U.S. and non-U.S. bank holding 558 This category includes both bank affiliated a banking or thrift institution. For purposes of Form companies. Broker-dealer bank affiliations were broker-dealers subject to section 203 of EGRRCPA ADV, a ‘‘related person’’ is any advisory affiliate and broker-dealers that are not affiliated with banks obtained from the Federal Financial Institutions and any person that is under common control with or holding companies. the adviser. The definition of ‘‘control’’ for Examination Council’s National Information Center. 559 See Recordkeeping and Reporting purposes of Form ADV, which is used in Broker-dealer assets and holdings were obtained Requirements for Security-Based Swap Dealers, identifying related persons on the form, differs from from FOCUS Report data for Q4 2019. Major Security-Based Swap Participants, and the definition of ‘‘control’’ under the BHC Act. In 554 Broker-dealer total assets are based on FOCUS Broker-Dealers, 84 FR 68550, 68607 (Dec. 16, 2019). addition, this analysis does not exclude SEC- report data for ‘‘Total Assets.’’ 560 See id. registered investment advisers affiliated with banks 555 Broker-dealer holdings are based on FOCUS 561 See Capital, Margin, and Segregation Adopting that have consolidated total assets less than or equal report data for securities and spot commodities Release, supra note 517, at 43954. See also Rule to $10 billion and trading assets and liabilities less owned at market value, including bankers’ Amendments and Guidance Addressing Cross- than or equal to 5% of total assets. Those banks are no longer subject to the requirements of the 2013 acceptances, certificates of deposit and commercial Border Application of Certain Security-Based Swap Requirements, 85 FR 6270, 6345–49 (Feb. 4, 2020). rule following enactment of the EGRRCPA. Thus, paper, state and municipal government obligations, 562 these figures may overestimate or underestimate the corporate obligations, stocks and warrants, options, These estimates are calculated from Form ADV data as of December 31, 2019. An investment number of banking entity RIAs. arbitrage, other securities, U.S. and Canadian adviser is defined as a ‘‘private fund adviser’’ for 563 RIAs may also advise foreign public funds that government obligations, and spot commodities. the purposes of this economic analysis if it are excluded from the covered fund definition in 556 This alternative measure excludes U.S. and indicates that it is an adviser to any private fund the implementing regulations, are the subject of the Canadian government obligations and spot on Form ADV Item 7.B. An investment adviser is final rule discussed below, and are not reported on commodities. defined as a ‘‘banking entity RIA’’ if it indicates on Form ADV.

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reports the number and gross assets of hedge funds and private equity funds and private equity funds. The SEC private funds advised by RIAs and funds.564 estimates on the basis of this data that separately reports these statistics for Banking entity RIAs advise a total of banking entity RIAs advise 890 hedge banking entity RIAs. As can be seen 4,387 private funds with approximately funds with approximately $606 billion from Table 2, the two largest categories $2.089 trillion in gross assets. From in gross assets and 1,518 private equity of private funds advised by RIAs are Form ADV data, banking entity RIAs’ funds with approximately $466 billion gross private fund assets under in assets. management are concentrated in hedge

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 statistics submitted by certain RIAs of the SEC estimates that, as of December analysis is informed by private fund private funds through Form PF as 2019, there were approximately 15,300 summarized in quarterly ‘‘Private Fund RICs 569 and 101 BDCs. Although RICs 567 564 For purposes of Form ADV, ‘‘private equity Statistics.’’ and BDCs are generally not themselves fund’’ is defined as ‘‘any private fund that is not banking entities subject to the Registered Investment Companies and a hedge fund, liquidity fund, real estate fund, implementing regulations, they may be Business Development Companies securitized asset fund, or venture capital fund and indirectly affected by the implementing does not provide investors with redemption rights The baseline also reflects the potential in the ordinary course.’’ See Form ADV: regulations and the final rule, for Instructions for Part 1A, Instruction 6. For purposes that a RIC or a BDC would be treated as example, if their sponsors or advisers of Form ADV, ‘‘hedge fund’’ is defined as ‘‘any a banking entity where the RIC or BDC’s are banking entities. For instance, bank- private fund (other than a securitized asset fund): sponsor is a banking entity that holds affiliated RIAs or their affiliates may (a) With respect to which one or more investment 25% or more of the RIC or BDC’s voting reduce their level of investment in the advisers (or related persons of investment advisers) 568 may be paid a performance fee or allocation securities after a seeding period. On RICs or BDCs they advise, or potentially calculated by taking into account unrealized gains the basis of SEC filings and public data, close those funds, to eliminate the risk (other than a fee or allocation the calculation of of those funds becoming banking which may take into account unrealized gains defined in Form ADV, and those definitions are the entities themselves. solely for the purpose of reducing such fee or same for purposes of the SEC’s Form PF. allocation to reflect net unrealized losses); (b) that 566 Gross assets include uncalled capital Small Business Investment Companies may borrow an amount in excess of one-half of its commitments on Form ADV. The large decrease in net asset value (including any committed capital) or Gross assets for Liquidity Funds from that reported Small business investment companies may have gross notional exposure in excess of twice in the proposing release is due, in part, to the are generally ‘‘privately owned and its net asset value (including any committed removal of certain Form ADV data from one filer managed investment funds, licensed capital); or (c) that may sell securities or other that contained an erroneous value for gross assets. and regulated by the Small Business assets short or enter into similar transactions (other 567 See U.S. Sec. and Exchange Comm’n, Div. of than for the purpose of hedging currency exposure Inv. Mgmt. Analytics Office, Private Fund Statistics, Administration (SBA), that use their or managing duration). Third Calendar Quarter 2019 (May 14, 2020), own capital plus funds borrowed with 565 This table includes only the advisers that list available at https://www.sec.gov/divisions/ private funds on section 7.B.(1) of Form ADV. The investment/private-funds-statistics/private-funds- 569 This estimate includes open-end companies, number of advisers in the ‘‘Total Private Fund statistics-2019-q3-accessible.pdf. Statistics for exchange-traded funds, closed-end funds, and non- Advisers’’ row is not the sum of the rows that preceding quarters are available at https:// insurance unit investment trusts and does not precede it since an adviser may advise multiple www.sec.gov/divisions/investment/private-funds- include fund of funds. The inclusion of fund of types of private funds. Each listed private fund type statistics.shtml. funds increases this estimate to approximately (e.g., real estate funds and liquidity funds) is 568 See, e.g., 2019 amendments, 84 FR 61979. 16,800.

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an SBA guarantee to make equity and with the Secretary.577 Because SBICs $10.09 billion in equity, and have a debt investments in qualifying small and RBICs share the common purpose of fundraising goal of $31.89 billion.583 businesses.’’ 570 The final rule provides promoting capital formation in their 3. Costs and Benefits relief with respect to banking entity respective sectors, advisers to SBICs and investments in SBICs during the wind- RBICs are treated similarly under the Section 13 of the BHC Act generally down process by excluding from the Advisers Act in that they have the prohibits banking entities from definition of ‘‘covered fund’’ those opportunity to take advantage of acquiring or retaining an ownership SBICs.571 While the SEC does not have expanded exemptions from investment interest in, sponsoring, or having certain relationships with covered funds, data to quantify the number of SBICs adviser registration.578 As of August subject to certain exemptions.584 The undergoing wind-down, trends in the 2019, there were 5 RBICs who were number of SBIC licenses can be SEC’s economic analysis concerns the licensed by the USDA managing potential costs, benefits, and effects on indicative of the turnover in the total approximately $352 million in assets.579 number of SBIC licensees. For example, efficiency, competition, and capital according to SBA data, there were 295 The Tax Cuts and Jobs Act established formation of the final rule for five SBIC licensees as of March 31, 2020 572 the ‘‘opportunity zone’’ program to groups of market participants. First, the and 299 SBIC licensees as of December provide tax incentives for long-term final rule may impact SEC-registered 31, 2019.573 By contrast, as of investing in designated economically investment advisers that are banking September 30, 2017, there were 315 distressed communities.580 The program entities, including those that sponsor or SBICs licensed by the SBA.574 allows taxpayers to defer and reduce advise covered funds and those that do The final rule includes an exclusion taxes on capital gains by reinvesting not, as well as SEC-registered for rural business investment companies gains in ‘‘qualified opportunity funds’’ investment advisers that are not banking (RBICs) from the implementing (QOFs) that are required to have at least entities that sponsor or advise covered regulations similar to that provided to 90 percent of their assets in designated funds and compete with banking entity SBICs.575 As the SEC has discussed low-income zones.581 In this regard, RIAs. Second, the final rule permits elsewhere,576 an RBIC is defined in QOFs are similar to SBICs and public dealers greater flexibility in providing section 384A of the Consolidated Farm welfare companies. The final rule services to more types of funds since dealers can provide a broader array of and Rural Development Act as a provides relief to QOFs from the services to funds that would be company that is approved by the implementing regulations that is similar excluded from the covered fund Secretary of Agriculture and that has to the relief provided to SBICs.582 SEC entered into a participation agreement definition. Third, banking entities that staff is not aware of an official source for are broker-dealers or RIAs may enjoy data regarding QOFs that are available 570 See U.S. Small Bus. Admin., SBIC Program reduced uncertainty and greater Overview, available at https://www.sba.gov/ for investment, but some private firms flexibility in making direct investments content/sbic-program-overview. collect and report such data. One such alongside covered funds. Fourth, the For purposes of the Advisers Act, an SBIC is firm reports that, as of April 2020, there final rule may impact private funds and (other than an entity that has elected to be regulated were 406 QOFs that report raising or is regulated as a business development company other vehicles, including those entities pursuant to section 54 of the Investment Company scoped in or out of the covered fund Act of 1940): (A) A small business investment 577 See the RBIC Advisers Relief Act of 2018, provisions of the implementing company that is licensed under the Small Business Public Law 115–417, 132 Stat. 5438 (2019) (the regulations, as well as private funds Investment Act of 1958, (B) an entity that has ‘‘RBIC Advisers Relief Act’’). To be eligible to received from the Small Business Administration participate as an RBIC, the company must be a competing with such funds. One such notice to proceed to qualify for a license as a small newly formed for-profit entity or a newly formed impact may be seen to the extent that business investment company under the Small for-profit subsidiary of such an entity, have a the final rule permits banking entities to Business Investment Act of 1958, which notice or management team with experience in community provide a full range of traditional license has not been revoked, or (C) an applicant development financing or relevant venture capital that is affiliated with 1 or more licensed small financing, and invest in enterprises that will create customer-facing banking and asset business investment companies described in wealth and job opportunities in rural areas, with an management services to certain entities, subparagraph (A) and that has applied for another emphasis on smaller enterprises. See 7 U.S.C. such as customer facilitation vehicles license under the Small Business Investment Act of 2009cc–3(a). and family wealth management 1958, which application remains pending. 15 U.S.C. 578 Following enactment of the RBIC Advisers vehicles. Fifth, to the extent that the 80b–3(b)(7). Relief Act, supra note 577, advisers to solely RBICs 571 Specifically, the final rule excludes from the and advisers to solely SBICs are exempt from final rule impacts efficiency, definition of ‘‘covered fund’’ any SBIC that has investment adviser registration pursuant to competition, and capital formation in voluntarily surrendered its license to operate as an Advisers Act sections 203(b)(8) and 203(b)(7), covered funds or underlying securities, SBIC in accordance with 13 CFR 107.1900 and does respectively. The venture capital fund adviser investors in, and sponsors of, covered not make any new investments (with some exemption deems RBICs and SBICs to be venture exceptions) after such voluntary surrender. See capital funds for purposes of the registration funds and underlying securities and § ll.10(c)(11)(i). exemption 15 U.S.C. 80b–3(l). Accordingly, the issuers may be affected as well. 572 See U.S. Small Bus. Admin., SBIC Program exclusion for certain venture capital funds As discussed below, the agencies Overview as of March 31, 2020, available at: discussed below (see infra text accompanying notes carefully considered the competing https://www.sba.gov/sites/default/files/2020-05/ 672 and 673) which require that a fund be a venture SBIC%20Quarterly%20Report%20as%20of% capital fund as defined in the SEC regulations effects that could potentially result from 20March_31_2020%20Amended%205.14.2020.pdf. implementing the registration exemption, could the final rule and alternatives. For 573 See U.S. Small Bus. Admin., SBIC Program include RBICs and SBICs to the extent that they example, the final rule could result in Overview as of December 31, 2019, available at satisfy the other elements of the exclusion. enhanced competition among, and https://www.sba.gov/sites/default/files/2020-02/ 579 See RBIC Investment Adviser Adopting capital formation driven by, entities that SBIC%20Quarterly%20Report%20as%20of%20 Release, supra note 576. would be treated as covered funds December_31_2019.pdf. 580 Tax Cuts and Jobs Act of 2017, Public Law 574 See id. 115–97, 131 Stat. 2054 (2017). under the implementing regulations. 575 Under the implementing regulations, an SBIC 581 See U.S. Sec. and Exchange Comm’n & is excluded from the ‘‘covered fund’’ definition. See NASAA, Staff Statement on Opportunity Zones: 583 As reported by Novogradac, a national implementing regulations § ll.10(c)(11)(i). Federal and State Securities Laws Considerations, professional services organization that collects and 576 See Exemptions from Investment Adviser available at https://www.sec.gov/2019_Opportunity- reports information on QOFs. See https:// Registration for Advisers to Certain Rural Business Zones_FINAL_508v2.pdf (‘‘Opportunity Zone www.novoco.com/resource-centers/opportunity- Investment Companies, 85 FR 13734 (Mar. 10, 2020) Statement’’). zone-resource-center/opportunity-funds-listing. (‘‘RBIC Investment Adviser Adopting Release’’). 582 See supra note 575. 584 See 12 U.S.C. 1851.

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The final rule could also potentially of $1,078,650 586 and an ongoing annual regulations, impacting the economic increase (or decrease) financial and burden of $1,078,650.587 In addition, effects of section 13 of the BHC Act and other risks posed by the ability to make under certain circumstances, a banking the implementing regulations.592 investments in covered funds in entity must make certain disclosures Form ADV data is not sufficiently addition to or in lieu of direct with respect to an excluded credit fund, granular to allow the SEC to estimate investments; however, the agencies have venture capital fund, family wealth the number of funds and fund advisers sought to mitigate the potential for vehicle, or customer facilitation vehicle, affected by the exclusions from the increased risk and other concerns by as if the entity were a covered fund. As covered fund definition added or imposing various conditions on the discussed above in Section V.B, these modified by the final rule and other exclusions designed to address such disclosure requirements may impose an relief addressed by the final rule. risks. initial burden of $53,933 588 and an However, Table 2 and Table 3 in the ongoing burden of $1,402,245.589 economic baseline quantify the number In addition, to the extent that the and asset size of private funds advised covered fund provisions of the The sections that follow discuss how each of the amendments in the final rule by banking entity RIAs by the type of implementing regulations limit fund private fund they advise, as those fund formation, the final rule could provide change the implementing regulations, and the anticipated costs and benefits of types are defined in Form ADV.593 a greater ability for banking entities to the amendments, subject to the caveat Using Form ADV data, the SEC organize funds and attract capital from that not all anticipated costs and estimates that approximately 151 third party investors. This could benefits can be meaningfully banking entity RIAs advise hedge funds increase revenues for banking entities quantified.590 and 96 banking entity RIAs advise while reducing long-term compliance private equity funds (as those terms are costs; increase the availability of i. Amendments Related to Specific defined in Form ADV).594 As can be venture, credit, and other financing, Types of Funds seen from Table 2 in the economic including for small businesses and start- As discussed above, the final rule baseline, 44 banking entity RIAs advise ups; and, as a result, increase capital modifies a number of the provisions of securitized asset funds. Table 3 shows formation. The SEC is not currently the implementing regulations related to that banking entity RIAs advise 380 aware of any information or data that the treatment of certain types of funds securitized asset funds with $145 billion would allow a quantification of the (e.g., credit funds, family wealth in gross assets. Another 51 banking extent to which the covered fund management vehicles, small business entity RIAs advise real estate funds, and provisions of the implementing investment companies, qualifying banking entity RIAs advise 320 real regulations are inhibiting capital venture capital funds, customer estate funds with $94 billion in gross formation via funds. Therefore, the bulk facilitation vehicles, foreign excluded assets. Venture capital funds are advised of the analysis below is necessarily funds, foreign public funds, and loan by only 8 banking entity RIAs, and all qualitative. To the extent that the securitizations).591 44 venture capital funds advised by covered fund provisions of the Broadly, such modifications reduce banking entity RIAs have in aggregate implementing regulations limit the number and types of funds that are approximately $3 billion in gross assets. alignment of interests between banking within the scope of the implementing As noted elsewhere, the covered fund entities and their clients, customers, or provisions of the implementing counterparties, and to the extent the 586 In the 2019 amendments, amendments that regulations may limit the ability of final rule alters the alignment of sought, among other things, to provide greater banking entities to use covered funds to interests, the final rule could have a clarity and certainty about what activities were circumvent the proprietary trading positive or negative effect on conflict of prohibited by the 2013 rule—in particular, under prohibition, reduce bank incentives to the prohibition on proprietary trading—and to interest concerns. better tailor the compliance requirements to the risk bail out their covered funds, and The final rule creates new of a banking entity’s activities, banking entity PRA- mitigate conflicts of interest between related burdens were apportioned to SEC-regulated recordkeeping requirements and revise banking entities and their clients, entities on the basis of the average weight of broker- customers, or counterparties. As certain disclosure requirements. dealer assets in holding company assets. See 2019 Specifically, a banking entity may only amendments, 84 FR 62074. The SEC believes that discussed in the 2020 proposal, the rely on the exclusion for customer such an approach would be inappropriate for the implementing regulations may limit the PRA-related burdens associated with the final rule facilitation vehicles if the banking entity ability of banking entities to conduct because we do not have a comparable proxy for an traditional asset management activities and its affiliates maintain investment adviser’s significance within the documentation outlining how the holding company. Since we do not have sufficient and reduce the availability of capital by banking entity intends to facilitate the information to determine the extent to which the imposing significant costs on some costs associated with any of the new recordkeeping customer’s exposure to a transaction, banking entities without providing and disclosure requirements would be borne by commensurate benefits.595 Moreover, investment strategy or service provided SEC registrants specifically, we report the entire by the banking entity. As discussed burden estimated based on information in supra the 2013 rule’s limitations on banking above in Section V.B. (Paperwork Section V.B (Paperwork Reduction Act). entities’ investment in covered funds × Reduction Act) 585 and discussed further Initial recordkeeping burdens: (10 hours) (255 may be more significant for certain entities) × (Attorney at $423 per hour) = $1,078,650. covered funds that are typically small in below, these new recordkeeping 587 × Annual recordkeeping burdens: (10 hours) size such as many venture capital funds, burdens may impose an initial burden (255 entities) × (Attorney at $423 per hour) = $1,078,650. with potentially more negative spillover 588 × 585 For the purposes of the burden estimates in Initial recordkeeping burdens: (0.5 hours) × 592 this release, we are assuming the cost of $423 per (255 entities) (Attorney at $423 per hour) = See, e.g., 2019 amendments, 84 FR 62037–92. hour for an attorney, from SIFMA’s Management $53,933. 593 These fund types include hedge funds, private 589 × and Professional Earnings in the Securities Industry Annual recordkeeping burdens: (0.5 hours) equity funds, real estate funds, securitized asset × × 2013 (available at https://www.sifma.org/resources/ (255 entities) (26 disclosures per year) (Attorney funds, venture capital funds, liquidity, and other research/management-and-professional-earnings- at $423 per hour) = $1,402,245. private funds. See supra note 564. in-the-securities-industry-2013/), modified to 590 See supra Section V.F.1.iii. (SEC Economic 594 As noted in the economic baseline, a single account for an 1800-hour work year and multiplied Analysis—Analytical Approach). RIA may advise multiple types of funds. See supra by 5.35 to account for bonuses, firm size, employee 591 See supra Section IV. (Summary of the Final note 565. benefits, and overhead, and adjusted for inflation. Rule). 595 See 85 FR 12164.

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effects on capital formation in the types certain circumstances.599 As discussed effects on foreign banking entities’ of underlying securities in which these above, the policy statement released by ability to organize and offer certain types of funds invest.596 Federal banking agencies provides that private funds for foreign investments, The final rule could reduce the scope the Federal banking agencies would not disrupting foreign asset management of funds that need to be analyzed for propose to take action (1) against a activities. The SEC recognizes that the covered fund status or could simplify foreign banking entity based on exemption of qualifying foreign this analysis and enable banking entities attribution of the activities and excluded funds from the proprietary to own, sponsor, and have relationships investments of a qualifying foreign trading and covered fund prohibitions with the types of entities that the final excluded fund to the foreign banking that apply to ‘‘banking entities’’ may rule excludes from the covered fund entity 600 or (2) against a qualifying result in increased activity by foreign definition. Accordingly, the final rule foreign excluded fund as a banking banking entities in organizing and may reduce costs of banking entity entity, in each case where the foreign offering such funds, and that such ownership in, sponsorship of, and banking entity’s acquisition or retention activity may involve risk for those transactions with certain funds; may of any ownership interest in, or banking entities. At the same time, the promote greater capital formation in, sponsorship of, the qualifying foreign SEC recognizes a statutory purpose of and competition among such funds; and excluded fund would meet the certain portions of section 13 of the BHC may improve access to capital for requirements for permitted covered Act is to limit the extraterritorial impact issuers of the underlying debt or equity fund activities and investments solely on foreign banking entities.605 that those funds may purchase. outside the United States, as provided Accordingly, the final rule may benefit The final rule may also benefit in section 13(d)(1)(I) of the BHC Act and foreign banking entities and their banking entity dealers through higher § ll.13(b) of the implementing foreign counterparties seeking to profits or greater demand for regulations, as if the qualifying foreign transact with and through such funds. derivatives, margin, payment, clearing, excluded fund were a covered fund.601 The agencies received comments on and settlement services. Reducing As in the 2020 proposal, the final rule the 2020 proposal that expressed restrictions on banking entities by provides a permanent exemption from concern that although qualifying foreign further tailoring the covered fund the proprietary trading and covered excluded funds would be exempted definition may encourage more fund prohibitions for certain foreign from the proprietary trading and launches of funds that are excluded excluded funds that is substantively covered funds restrictions of the from the definition, capital formation similar to the relief currently provided implementing regulations, these funds and, possibly, competition in those to qualifying foreign excluded funds by would still be required to put in place types of funds. If competition increases the policy statement.602 compliance programs.606 However, the quality of funds available to Commenters were generally since these qualifying foreign excluded investors or reduces the fees funds supportive of the proposal to exempt funds are exempted from the proprietary charge, investors in funds may benefit. qualifying foreign excluded funds from trading requirements of § ll.3(a) and Moreover, to the degree that the final certain requirements of the rule.603 Two covered fund restrictions of § ll.10(a), rule may increase the spectrum of funds commenters expressed opposition to the the agencies believe that requiring available to investors, the final rule may proposed exemption.604 compliance programs to be established relax constraints around investor The SEC recognizes that failing to for the qualifying foreign excluded fund portfolio optimization and increase the exclude such funds from the definition itself would be overly burdensome and efficiency of capital allocation. of ‘‘banking entity’’ in the implementing unnecessary. Therefore, under the final The SEC received comments from a regulations imposed proprietary trading rule, in addition to the proposed diverse set of commenters. Comments restrictions, covered fund prohibitions, exemptions from the proprietary trading from banking entities and financial and compliance obligations on and covered fund prohibitions, services industry trade groups were qualifying foreign excluded funds that qualifying foreign excluded funds will generally supportive of the proposal, may be more burdensome than the also not be required to have compliance although many recommended requirements that would apply under programs under § ll.20. However, any additional modifications.597 There were the implementing regulations to covered banking entity that owns or sponsors a also several organizations and funds. qualifying foreign excluded fund will individuals that were generally opposed The SEC believes that, absent the still be required to have in place the to the 2020 proposal.598 The sections qualifying foreign excluded fund appropriate compliance programs as that follow further discuss the economic exemption and upon expiry of the required by § ll.20. costs, benefits, and effects on policy statement, the implementing The exemption is also expected to competition, efficiency, and capital regulations may have significant adverse promote capital formation in the United formation with respect to specific types States. While qualifying foreign of funds and specific amendments in 599 See supra Section IV.A. (Qualifying Foreign excluded funds have a limited nexus to the final rule. Excluded Funds). the United States, such funds are 600 Foreign banking entity was defined for Foreign Excluded Funds purposes of the policy statement to mean a banking permitted to invest in U.S. companies. entity that is not, and is not controlled directly or Therefore, to the extent that these funds Under the baseline, foreign excluded indirectly by, a banking entity that is located in or have any direct impact on capital funds are excluded from the covered organized under the laws of the United States or formation and U.S. financial stability, any State. fund definition, but could be considered the exemption would promote U.S. banking entities if a foreign banking 601 See supra note 26. The policy statement was subsequently extended for a two-year period ending financial stability by providing entity controls the foreign fund in on July 21, 2021. See also supra Section IV.A. additional capital and liquidity to U.S. (Qualifying Foreign Excluded Funds) and note 28. capital markets without a concomitant 596 See id. 602 See final rule §§ ll.6(f) and ll.13(d). increase in risk borne by U.S. banking 597 See supra Section IV. (Summary of the Final 603 SIFMA; BPI; BVI; AIC; ABA; EFAMA; SAF; Rule) for discussion of comments and IIB; JBA; CBA; and Credit Suisse. See also supra entities. recommendations for each of the proposed Section IV.A. (Qualifying Foreign Excluded Funds) amendments. for a discussion of individual comments. 605 See 85 FR 12123–26. 598 See id. 604 See Occupy and Data Boiler. 606 See IIB; JBA; CBA; EBF; and Credit Suisse.

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The final rule may increase the banking entity, the issuer, their exclusion under the implementing incentive for some foreign banking affiliates, directors of such entities, or regulations is impractical, overly entities seeking to organize and offer employees of such entities (the sales narrow, and prescriptive, and results in qualifying foreign excluded funds to limitation). The agencies stated in the competitive disparities between foreign reorganize their activities so that these preamble to the 2013 rule that, public funds and RICs.616 The SEC also funds’ activities qualify for the consistent with the agencies’ view received comment that the home exemptions. The costs and feasibility of concerning whether a foreign public jurisdiction requirement under the such reorganization will depend on the fund has been sold predominantly implementing regulations is narrow and complexity and existing compliance outside of the United States, the fails to recognize the prevalence of non- structures for banking entities, the agencies generally expect that a foreign U.S. retail funds organized in one degree to which there is unmet demand public fund would satisfy this jurisdiction and authorized to sell for investment funds that may be additional condition if 85 percent or interests in other jurisdictions.617 organized as qualifying foreign excluded more of the fund’s interests are sold to As adopted in the final rule, the funds, and the profitability of such persons other than the sponsoring U.S. elimination of the home jurisdiction banking activities. Importantly, the banking entity and the specified persons requirement may benefit such foreign principal risk of foreign banking connected to that banking entity.610 public funds and may facilitate greater entities’ activities related to foreign Third, such public offerings must occur capital formation through such funds, excluded funds generally resides outside the United States, must comply with the potential to create more capital outside the United States. As discussed with applicable jurisdictional allocation choices for investors. To the above,607 because the exemption requirements (the compliance degree that the implementing requires that the foreign banking entity’s obligation), may not restrict availability regulations have disadvantaged foreign acquisition of an ownership interest in to investors having a minimum level of public funds relative to otherwise or sponsorship of the fund meets the net worth or net investment assets, and comparable RICs, the elimination of the requirements in § ll.13(b) of the final must have publicly available offering home jurisdiction requirement may rule, the exemption will help to ensure disclosure documents filed or submitted dampen such competitive disparities. that the risks of the investments made with the relevant jurisdiction. As also discussed in the 2020 by these foreign funds would be booked The final rule makes several changes proposal, the SEC has received to foreign entities in foreign to the foreign public fund exclusion. comment that the requirement that jurisdictions. The agencies believe that First, the final rule removes the home ownership interests be sold exempting the activities of qualifying jurisdiction requirement.611 Second, the ‘‘predominantly’’ through one or more foreign excluded funds promotes and final rule makes the exclusion available public offerings outside of the United protects the safety and soundness of with respect to issuers authorized to States has been burdensome and poses banking entities and U.S. financial offer and sell ownership interests significant compliance burdens.618 For stability,608 and relatedly the SEC through one or more public offerings, example, banking entities may not fully believes the exemption is unlikely to removing the requirement that the observe and predict both historical and impact negatively SEC registrants. issuer sells ownership interests potential future distributions of funds ‘‘predominantly’’ through such public Foreign Public Funds that are sponsored by third parties, offerings.612 Third, the agencies are also listed on exchanges, or sold through The implementing regulations modifying the definition of ‘‘public third-party intermediaries or exclude from the covered fund offering’’ from the implementing distributors.619 In response to the 2020 definition any foreign public fund that regulations to add a new requirement proposal, commenters supported the satisfies three sets of conditions. First, that the distribution is subject to elimination of the home jurisdiction the issuer must be organized or substantive disclosure and retail requirement and the requirement that established outside of the United States, investor protection laws or regulations the fund be sold predominantly through be authorized to offer and sell in one or more jurisdictions where one or more public offerings.620 ownership interests to retail investors in ownership interests are sold.613 Fourth, To the degree that some banking the issuer’s home jurisdiction (the the final rule applies the compliance entities restrict their activities because ‘‘home jurisdiction’’ requirement), and obligation only in instances in which they are unable to quantify the volumes sell ownership interests predominantly the banking entity serves as the of distributions through foreign public through one or more public offerings investment manager, investment offerings relative to, for instance, foreign outside of the United States. The adviser, commodity trading advisor, private placements, the final rule may agencies stated in the preamble to the commodity pool operator, or sponsor.614 enable greater activity by banking 2013 rule that they generally expect that Finally, the final rule narrows the sales entities relating to foreign public funds. an offering is made predominantly limitation to the sponsoring banking Similar to the above discussion, this outside of the United States if 85 entity, the issuer, affiliates, and aspect of the final rule also treats foreign percent or more of the fund’s interests directors and senior executive officers of public funds in a manner more similar are sold to investors that are not such entities, and requires more than 75 to RICs (which are not required to residents of the United States.609 percent of the fund’s interest to be sold 615 Second, for funds that are sponsored by to such entities and persons. 616 See 85 FR 12166. a U.S. banking entity, or by a banking As discussed in the 2020 proposal, 617 Such funds could be organized in a particular entity controlled by a U.S. banking the SEC has received comments jurisdiction for reasons including tax treatment, entity, the ownership interests in the indicating that the foreign public fund investment strategy, or flexibility to distribute into issuer must be sold ‘‘predominantly’’ to multiple markets (for instance, in the ), even though such funds are authorized to persons other than the sponsoring 610 Id. sell interests in other jurisdictions. See also id. 611 See final rule § ll.10(c)(1)(i)(B). 618 See 85 FR 12166. 607 See supra Section IV.A. (Qualifying Foreign 612 See final rule § ll.10(c)(1)(i)(B). 619 See id. Excluded Funds). 613 See final rule § ll.10(c)(1)(iii)(A). 620 IIB; SIFMA; BPI; ABA; EBF; EFAMA; FSF; ICI; 608 See id. 614 See final rule § ll.10(c)(1)(iii)(B). BVI; and CBA. See also supra Section IV.B.1. 609 79 FR 5678. 615 See final rule § ll.10(c)(1)(ii). (Foreign Public Funds).

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monitor or assess distributions), with entity sponsor and associated parties,626 particular, to the degree that some corresponding competitive effects. which the preamble to the 2013 rule banking entities restrict their activities Commenters on the 2020 proposal stated was 85 percent or more (which relating to foreign public funds because also supported the proposed change to would permit the U.S. banking entity they are unable to quantify the the ‘‘public offering’’ definition to sponsor and associated parties to own distributions through public offerings or include a requirement that the the remaining 15 percent). These determine the holdings of their distribution be subject to substantive commenters asserted that the relevant employees, the final rule may enable disclosure and retail investor protection ownership threshold for U.S. registered greater activity by banking entities laws or regulations.621 The final rule investment companies is 25 percent, relating to foreign public funds. The adopts that change, as proposed. and that, for foreign public funds, the final rule also limits the compliance Accordingly, the final rule tailors the threshold should be the same. The obligation to settings in which the scope of disclosure and compliance agencies agree that the permitted banking entity serves as the investment obligations for those jurisdictions where ownership level of a foreign public fund manager, investment adviser, ownership interests are sold in by a U.S. banking entity sponsor and commodity trading advisor, commodity recognition of the prevalence of foreign associated parties should be aligned pool operator, or sponsor—settings that retail fund sales across jurisdictions. with the functionally equivalent may involve greater conflicts of interest Similarly, the final rule limits the threshold for banking entity investments between banking entities and fund compliance obligation to settings in in U.S. registered investment investors than when the banking entity 627 which the banking entity serves as the companies, which is 24.9 percent. is only an investor in the fund. investment manager, investment Accordingly, the agencies have The agencies could have adopted a adviser, commodity trading advisor, amended this provision in the final rule variety of alternatives offering more or commodity pool operator, or sponsor— to require that more than 75 percent of less relief with respect to foreign public funds. For example, the agencies could settings that may involve greater a foreign public fund’s interests must be have eliminated altogether the limit on conflicts of interest between banking sold to persons other than the U.S. sales to affiliated entities, directors and entities and fund investors than when banking entity sponsor and associated 628 employees, which would have provided the banking entity is only an investor in parties. Commenters on the 2020 proposal an even greater alignment of treatment the fund. generally supported the proposed between foreign public funds and The final rule also replaces the changes to the foreign public funds RICs.632 Alternatives providing greater employee sales limitation with a exclusion; 629 however, as discussed in relief with respect to foreign public limitation on sales to senior executive this section and above, the agencies are funds may have facilitated greater officers.622 As discussed in the 2020 making certain targeted adjustments in banking entity activity and proposal, the SEC has received response to comments received.630 One intermediation of such funds on the one comment that banking entities may face commenter stated that the proposed hand, but they may also have significant costs and logistical and changes were less than ideal for strengthened the competitive interpretive challenges monitoring maximum control but acceptable from a positioning of foreign public funds investments by their employees, practical implementation standpoint to relative to U.S. registered funds. including those who transact in fund balance compliance costs and Moreover, providing greater relief with shares through unaffiliated brokers or benefits.631 respect to foreign public funds may through independent exchange As discussed above, the SEC believes have allowed banking entities greater trading.623 The SEC has also received that the foreign public fund provisions flexibility in the formation and comment that the employee sales of the final rule may facilitate greater operation of foreign public funds, but limitation serves no discernible anti- capital formation through such funds, may also have increased the risk that evasion purpose.624 In addition, with the potential to create more capital banking entities would be able to use commenters noted that employee allocation choices for investors. In foreign public funds to engage in ownership interest can be a meaningful activities that the restrictions on mechanism of promoting incentive 626 BPI; FSF; ICI; and CCMC. See also supra covered funds were intended to alignment.625 The final rule replaces the Section IV.B.1. (Foreign Public Funds). prohibit, thereby reducing the employee sales limitation with a 627 Although the implementing regulations do not explicitly prohibit a banking entity from acquiring magnitude of the expected economic corresponding sales limitation with 25 percent or more of a U.S. registered investment benefits of section 13 of the BHC Act respect only to senior executive officers. company, a U.S. registered investment company and the implementing regulations. This change may reduce these reported would become a banking entity if it is affiliated Similarly, relative to the final rule, compliance challenges and burdens with another banking entity (other than as described in § ll.12(b)(1)(ii) of the implementing alternatives providing less relief with while preserving, in part, the original regulations). See 79 FR 5732 (‘‘[F]or purposes of respect to foreign public funds may anti-evasion purpose of the limitations section 13 of the BHC Act and the final rule, a have strengthened the competitive on employee ownership. registered investment company . . . will not be positioning of U.S. RICs relative to considered to be an affiliate of the banking entity The SEC received comments to the if the banking entity owns, controls, or holds with foreign public funds and posed lower 2020 proposal that recommended the the power to vote less than 25 percent of the voting compliance or evasion risks, but may agencies modify their expectation of the shares of the company or fund, and provides also have reduced the benefits of the investment advisory, commodity trading advisory, relief for capital formation in foreign level of ownership of a foreign public administrative, and other services to the company fund that would satisfy the requirement or fund only in a manner that complies with other public funds and their investors. that a fund be ‘‘predominantly’’ sold to limitations under applicable regulation, order, or Loan Securitizations persons other than its U.S. banking other authority.’’). 628 See supra note 69. The 2013 rule excludes from the 629 IIB; SIFMA; BPI; ABA; EBF; EFAMA; FSF; ICI; 621 definition of covered fund any loan IIB; EFAMA; FSF; ICI; and BVI. BVI; CBA; CCMR; Data Boiler; GS; IAA; JBA; SAF; 622 Final rule § ll.10(c)(1)(ii)(D). and CCMC. securitization that issues asset-backed 623 See 85 FR 12166. 630 See supra Section IV.B.1. (Foreign Public securities, holds only loans, certain 624 See id. Funds). 625 See id. 631 See Data Boiler. 632 See 2020 proposal at 12166.

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rights and assets that arise from the percent of the fund’s total assets in any ensuring that a loan securitization holds structure of the loan securitization or non-loan assets. only assets permitted under the from the loans supporting a loan Commenters were generally exclusion. However, permitting securitization, and a small set of other supportive of allowing loan excluded loan securitizations to hold a financial instruments (permissible securitizations to hold a limited amount broader range of non-loan assets could assets), and meets other criteria.633 As of non-loan assets.640 These commenters have increased the risk that the discussed in the 2020 proposal, the SEC indicated that the requirements under character and complexity of excluded received comment that, as a result of the the implementing regulations for the loan securitizations would have 2013 rule, some banking entities may loan securitization exclusion have been changed in a manner that raised the have divested or restructured their too restrictive, excessively limited use type of concerns that section 13 of the of the exclusion, and prevented issuers interests in loan securitizations due to BHC Act was intended to address. the narrowly-drawn conditions of the from responding to investor demand. exclusion, and that a limited holding of Further, commenters suggested that a However, the SEC recognizes that the non-loan assets may enable banking limited bucket of non-loan assets would loan securitization industry may have entities to provide traditional not fundamentally alter the evolved since the issuance of the 2013 securitization products and services characteristics and risks of rule. As a result, the SEC believes that, demanded by customers, clients, and securitizations or otherwise increase even if the scope of non-loan assets counterparties.634 risks in banking entities or the financial permitted to be held were expanded The implementing regulations permit system.641 beyond debt securities, loan loan securitizations to hold rights or In the final rule, the agencies are securitizations may continue to have other assets (servicing assets) that arise revising the loan securitization excluded non-loan assets. Further, from the structure of the loan exclusion to permit a loan securitization permitting loan securitizations to hold a securitization or from the loans to hold a limited amount of debt small amount of debt securities will not supporting a loan securitization.635 In securities.642 To minimize the potential affect the applicable prudential response to questions regarding the for banking entities to use this exclusion requirements aimed at the safety and scope of the provisions permitting to engage in impermissible activities or soundness of banking entities. Banking servicing assets and a separate provision take on excessive risk, the final rule entities currently take on a variety of limiting the types of permitted permits a loan securitization to hold risks arising out of a broad range of securities, the staffs of the agencies debt securities (excluding asset-backed permissible activities, including the released the Loan Securitization securities and convertible securities), as core traditional banking activity related Servicing FAQ.636 The final rule opposed to any non-loan asset, as the to the extension of credit and direct and codifies the staff-level approach to the 2020 proposal would have allowed.643 loan securitization exclusion in the The SEC believes that non-loan assets indirect extension of credit by banking Loan Securitization Servicing FAQ.637 with materially different risk entities flows through to the real To the degree that market participants characteristics from loans could change economy in the form of greater access to may have restructured their activities the character and complexity of an capital. consistent with the Loan Securitization issuer and raise the type of concerns In the 2020 proposal, the agencies Servicing FAQ, an effect of the final rule that section 13 of the BHC Act was also requested comment on the may be to reduce uncertainty. However, intended to address. Moreover, as methodology for calculating the limit on the economic effects of the codification described further below, limiting the non-loan assets. Several commenters of the Loan Securitization Servicing assets to those with risk characteristics suggested using as a method for FAQ with respect to enabling greater that are similar to loans may allow for calculating the limit on non-loan assets: capital formation through loan a simpler and more transparent The par value of assets on the day they securitizations on the one hand, and calculation of the five percent limit than are acquired.644 These commenters increasing potential risks related to such would have been necessary if loan suggested that relying on par value is activities on the other, may be limited. securitizations could invest in any non- accepted practice in the loan In the preamble to the 2013 rule, the loan asset, which will facilitate banking securitization industry and would agencies declined to permit loan entities’ compliance with the exclusion. obviate concerns related to tracking securitizations to hold a certain amount Alternatively, the agencies could have amortization or prepayment of loans in of non-loan assets.638 Several expanded the range of permissible a securitization portfolio.645 Another commenters on the 2018 proposal assets in an excluded loan securitization commenter indicated that the limit disagreed with the agencies’ views and to include any non-loan asset with or should be calculated as the lower of the supported expanding the range of without limitations (e.g., the holding of permissible assets in an excluded loan purchase price and par value of the non- asset-backed securities could have been qualifying assets over the issuer’s securitization.639 The 2020 proposal permitted). Permitting loan would have allowed a loan aggregate capital commitments plus its securitizations to hold small amounts of subscription based credit facility.646 securitization vehicle to hold up to five non-loan assets may have enabled loan securitizations to respond to investor In response to these comments, the 633 See 2013 rule § ll.10(c)(8). Loan is further demand and may have reduced agencies are clarifying the methodology defined as any loan, lease, extension of credit, or compliance costs associated with for calculating the five percent limit on secured or unsecured receivable that is not a 647 security or derivative. See also 2013 rule § ll.2(t). non-loan assets. As suggested by 634 See 85 FR 12173. 640 See, e.g., SIFMA; CCMC; ABA; Credit Suisse; several commenters, the final rule 635 Implementing regulations §§ ll.2(s); MFA; Goldman Sachs; LSTA; BPI; and SFA. specifies that the limit on debt securities ll.10(c)(8)(i)(D), (v). 641 See, e.g., LSTA and Goldman Sachs. must be calculated at the most recent 636 See supra note 14 (links to the staff-level 642 Final rule § ll.10(c)(8)(i)(E). FAQs) and 78 and referencing paragraph 643 The implementing regulations also allow an 644 (discussion of Loan Securitization Servicing FAQ). excluded loan securitization to hold certain interest SIFMA; BPI; ABA; and LSTA. 637 § ll.10(c)(8)(i)(B). rate and foreign exchange derivatives for risk 645 SIFMA and BPI. 638 2013 rule at 5687–88. management purposes. The final rule makes no 646 Goldman Sachs. 639 See 85 FR 12129. change to this provision. 647 Final rule § ll.10(c)(8)(i)(E).

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time of acquisition of such assets.648 securitization’s investment activities. commenters stated that to the degree Specifically, the aggregate value of debt This straightforward calculation that credit funds require pre- securities may not exceed five percent methodology will ensure that the loan commitments of capital, they may of the aggregate value of loans, cash and securitization exclusion remains easy to dampen cyclical fluctuations in loan cash equivalents, and debt securities, use and will facilitate banking entities’ originations and may facilitate ongoing where the value of the loans, cash and compliance with the exclusion. extensions of credit during times of cash equivalents, and debt securities is The agencies recognize that a loan market stress.652 calculated using par value at the most securitization’s transaction agreements The agencies included in the 2020 recent time any such debt security is may require that some categories of proposal a specific exclusion for credit purchased.649 loans, cash equivalents, or debt funds. Under the 2020 proposal, a credit The agencies have determined a securities be valued at fair market value fund would have been an issuer whose calculation methodology that is for certain purposes. To accommodate assets consist solely of: Loans, debt intended to reduce compliance costs such situations, the exclusion provides instruments, related rights and other while ensuring that the investment pool that the value of any loan, cash assets that are related or incidental to of a loan securitization is composed of equivalent, or permissible debt security acquiring, holding, servicing, or selling loans. The agencies have chosen the may be based on its fair market value if loans, or debt instruments; and certain most recent time any such debt security (1) the issuing entity is required to use interest rate or foreign exchange is acquired as the moment of calculation the fair market value of such loan or derivatives.653 The proposed exclusion to simplify the manner in which the five debt security for purposes of calculating would have been subject to certain percent limit applies. This would compliance with concentration additional requirements to reduce permit an issuer that, at some point in limitations or other similar calculations evasion concerns and ensure that its life, held debt securities in excess of under its transaction agreements and (2) banking entities invest in, sponsor, or five percent of its assets to continue to the issuing entity’s valuation advise credit funds in a safe and sound qualify for the exclusion if it came into methodology values similarly situated manner. For example, the proposed compliance with the five percent limit assets, for example non-performing exclusion would have imposed (1) prior to the next acquisition of a debt loans, consistently. This provision is certain activity requirements on the security that is subject to the five intended to provide issuers with the credit fund, including a prohibition on percent limit. The SEC believes that this flexibility to leverage existing proprietary trading; 654 (2) disclosure approach balances the cost of calculation methodologies while and safety and soundness requirements calculation with the benefits of preventing issuers from using on banking entities that sponsor or serve addressing the potential for evasion. inconsistent methodologies in a manner as an advisor for a credit fund; 655 (3) The SEC believes that the alternative of to evade the requirements of the safety and soundness requirements on a continuous monitoring obligation (i.e., exclusion. all banking entities that invest in or requiring an excluded loan Credit Funds have certain relationships with a credit securitization to ensure that it held debt fund; 656 and (4) restrictions on the securities below or at the five percent Under the baseline, funds that raise banking entity’s investment in, and limit at all times, regardless of any capital to engage in loan originations or relationship with, a credit fund.657 The change in value of the securitization’s extensions of credit or purchase and proposed exclusion also would have hold debt instruments that a banking assets) would have imposed significant permitted a credit fund to receive and entity would be permitted to acquire burdens on banking entities and could hold a limited amount of equity directly may be ‘‘covered funds’’ under have caused an issuer to be disqualified securities (or rights to acquire equity the implementing regulations. As a from the loan securitization exclusion securities) that were received on result, prior to the final rule, banking based on market events not under its customary terms in connection with the entities faced limitations on sponsoring control. credit fund’s loans or debt or investing in credit funds that engage In the final rule, this calculation is instruments.658 based only on the value of the loans and in traditional banking activities— Commenters on the 2020 proposal debt securities held under activities that banking entities are able were generally supportive of adopting §§ ll.10(c)(8)(i)(A) and (E) and the to engage in directly outside of the fund an exclusion for credit funds.659 After cash and cash equivalents held under structure. The SEC received several consideration of the comments, the § ll.10(c)(8)(iii)(A) rather than the comments to the 2018 proposal agencies are adopting the credit fund aggregate value of all of the issuing supporting an exclusion for credit exclusion largely as proposed. The final entity’s assets. The purpose of the five funds. For example, some commenters rule creates a separate exclusion from percent limit is to ensure the investment suggested that a fund or partnership the covered fund definition for credit pool of a loan securitization is structure enables banking entities to funds that meet certain conditions, engage in permissible activities more composed of loans. Therefore, the 650 including several conditions that are calculation takes into account the assets efficiently. Specifically, one similar to certain conditions of the loan that should make up the issuing entity’s commenter indicated that credit funds securitization exclusion, but that reflect investment pool and excludes the value facilitate investments by third parties, of other rights or incidental assets, as leading to the creation of a broader and 652 See id. well as derivatives held for risk deeper pool of capital, which may allow 653 2020 proposal § ll.10(c)(15)(i). management. This further simplifies the for more diversification in banking 654 2020 proposal § ll.10(c)(15)(ii). calculation methodology by excluding entities’ lending portfolios, the pooling 655 2020 proposal § ll.10(c)(15)(iii). 656 ll assets that may be more complex to of expertise of groups of market 2020 proposal § .10(c)(15)(iv). 657 2020 proposal § ll.10(c)(15)(v). value and that are ancillary to the loan participants, and otherwise reduce the risk for banking entities and the 658 2020 proposal § ll.10(c)(15)(i)(C)(1)(iii). financial system.651 In addition, some 659 See, e.g., CCMC; AIC; SIFMA; FSF; ABA; 648 This limit applies to the debt securities that Arnold & Porter; and Goldman Sachs. See also a loan securitization may hold pursuant to final rule supra Section IV.C.1.ii. (Credit Funds—Comments) § ll.10(c)(8)(i)(E). 650 See 85 FR 12167. for a more detailed discussion of comments 649 Id. 651 See id. received.

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the structure and operation of credit compete more effectively with non- securitization exclusion to ease funds. banking entities that are not subject to compliance burdens. For example, any The final rule permits banking entities the same prudential regulation or derivatives held by the credit fund must to extend credit through a fund supervision as banking entities subject relate to loans, permissible debt structure but also contains provisions to to section 13 of the BHC Act and instruments, or other rights or assets prevent a banking entity from taking the thereby likely result in an increase in held and reduce the interest rate and/or types of risks that the covered fund lending activity in banking entity- foreign exchange risks related to these provisions of section 13 were meant to sponsored credit funds without holdings.662 In addition, any related address. First, the credit fund exclusion negatively affecting capital formation or rights or other assets held that are specifies the types of activities in which the availability of financing. In this securities must be cash equivalents, these funds may engage. Excluded respect, the final rule could result in securities received in lieu of debts credit funds can transact in or hold only greater competition between bank and previously contracted with respect to loans, debt instruments that would be non-bank provision of credit with both loans or debt instruments held or, permissible for the banking entity expected lower costs that typically unique to the credit fund exclusion, relying on the exception to hold result from increased competition and a equity securities (or rights to acquire directly, certain rights or assets that are larger volume of permissible banking equity securities) received on customary related or incidental to the loans or debt and financial activities to occur in the terms in connection with the credit instruments, and certain interest rate regulated banking system. In addition, fund’s loans or debt instruments.663 and foreign exchange derivatives. The since cost reductions and increased Establishing an exclusion for credit final rule requires that the credit fund efficiencies are commonly passed along funds based on the framework provided not engage in activities that would to customers, the exclusion may also by the loan securitization exclusion will constitute proprietary trading. Finally, benefit banking entities’ borrowers and allow banking entities to provide the restrictions on guarantees and other facilitate the extension of credit in the traditional extensions of credit limitations should eliminate the ability real economy. regardless of the specific form, whether and incentive for either the banking The SEC continues to recognize that directly via a loan made by a banking entity sponsoring a credit fund or any banking entities already engage in a entity, or indirectly through an affiliate to provide additional support variety of permissible activities investment in or relationship with a beyond the ownership interest retained involving risk, including extensions of credit fund that transacts primarily in by the sponsor. credit, underwriting, and market- loans and certain debt instruments. Credit funds are likely to carry similar making. To the degree that credit funds In the 2020 proposal, the agencies returns and risks as direct extensions of may enable greater formation of capital requested comment on whether to credit and loan origination outside of by banking entities through various debt impose a limit on the amount of equity the fund structure, including the instruments, this may influence the securities (or rights to acquire equity possibility of losses or gains related to risks and returns of banking entities securities) that may be held by an changes in interest rates, borrower individually and of banking entities as excluded credit fund.664 After a review default or delinquent payments, a whole. However, the SEC recognizes of the comments and further fluctuations in foreign currencies, and that the activities of credit funds largely deliberation, the agencies are not overall market conditions. While the replicate permissible and traditional adopting a quantitative limit on the presence of a fund structure may activities of banking entities and amount of equity securities (or rights to introduce certain common risks undertaking similar activities largely acquire equity securities) that may be associated with pooled investments, results in the same risk exposures. held by an excluded credit fund. Any e.g., those related to governance of the Moreover, banking entities subject to the such equity securities or rights are fund and those related to relying on implementing regulations may also be limited by the requirements that they be third-party investors providing capital subject to multiple prudential, capital, (1) received on customary terms in to the fund, the SEC believes those risks margin, and liquidity requirements that connection with the fund’s loans or debt to banking entities to be limited. facilitate the safety and soundness of instruments and (2) related or incidental Moreover, fund structures also entail banking entities and promote the to acquiring, holding, servicing, or certain common risk mitigating features financial stability of the United States. selling those loans or debt instruments. (such as diversification across a larger These requirements would necessarily The agencies generally expect that the number of borrowers) as well as limit the risk that banks could take on equity securities or rights satisfying significant cost efficiencies for banking by lending through a credit fund those criteria in connection with an entities. structure in a similar manner that would investment in loans or debt instruments The SEC believes that the credit fund apply if the banking entity were to of a borrower (or affiliated borrowers) exclusion may allow banking entities to undertake similar lending activities would not exceed five percent of the engage, indirectly, in more loan directly. In addition, the final rule value of the fund’s total investment in origination and traditional extension of includes a set of conditions on the the borrower (or affiliated borrowers) at credit relative to the current baseline. credit fund exclusion, including the time the investment is made. To the degree that banking entities are limitations on banking entities’ The agencies could have imposed a currently constrained in their ability to guarantees, assumption or other quantitative limit on the amount of engage in extensions of credit through insurance of the obligations or equity securities (or rights to acquire credit funds because of the performance of the fund,660 and equity securities) held by the fund. implementing regulations, the exclusion compliance with applicable safety and However, the value of those equity may increase the volume of soundness standards.661 securities or other rights may change intermediation of credit by banking Several provisions of the exclusion over time for a variety of reasons, entities and make intermediation more are similar to and modeled on including as a result of market efficient and less costly. In addition, conditions in the existing loan permitting banking entities to extend 662 Final rule § ll.10(c)(15)(i)(D). financing to businesses through credit 660 Final rule § ll.10(c)(15)(iv)(A). 663 Final rule § ll.10(c)(15)(i)(C). funds could allow banking entities to 661 Final rule § ll.10(c)(15)(v)(B). 664 85 FR 12133.

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conditions and business performance, as held, and reduce the interest rate and/ entity engaged in the activities well as more fundamental changes in or foreign exchange risks related to directly.671 the business and the credit fund’s these holdings.’’ 668 The agencies As an alternative, the agencies could corresponding management of the suggested then and currently believe have adopted a credit fund exclusion investment (e.g., exchanges of debt that allowing a credit fund to hold that restricted permissible assets to only instruments for equity in connection derivatives not related to interest rate or loans or debt instruments and not with mergers and restructurings or a foreign exchange hedging would not be equity. The SEC recognizes that many disposition of all portion of the credit necessary to facilitate the indirect banking entities are permitted to take as investment without a corresponding extensions of credit by banking entities consideration for a loan to a borrower a disposition of the equity securities or that are the goal of the exclusion and warrant or option issued by the rights due to differences in market may pose the very risks that section 13 borrower that may result in an equity conditions or other factors). of the BHC Act was intended to reach. holding. The SEC recognizes that if Accordingly, the agencies can foresee To help ensure that the credit fund banking entities are to be allowed to various circumstances where the exclusion does not inadvertently allow provide credit through a fund structure relative value of such equity securities the holding of certain derivatives that they would otherwise be allowed to or rights in a borrower (or affiliated unrelated to hedging interest rate and/ provide outside of a fund structure, an borrowers) would over the life of the or foreign exchange risks, the final rule allowance for equity holdings is investment exceed five percent on a explicitly excludes derivatives from necessary. However, allowing a credit basis consistent with the requirements. permissible related rights and other fund to hold an unlimited amount of Therefore, a quantitative limit on the assets.669 equity in connection with an extension amount of equity securities held by the Importantly, extensions of credit and of credit could turn the exclusion for fund could have imposed compliance, credit funds into an exclusion for the opportunity, and performance costs on loan origination by banking entities, type of funds that section 13 of the BHC a fund without a substantial reduction whether directly or indirectly, are Act was intended to address. in risk to the fund. Nonetheless, the influenced by a wide variety of factors, Accordingly, the agencies indicate agencies expect that the fund’s exposure including the prevailing macroeconomic above that they generally expect that the to equity securities (or other rights), conditions, the creditworthiness of equity securities or other rights acquired individually and collectively and when borrowers and potential borrowers, by a credit fund would not exceed five viewed over time, would be managed on competition between bank and non- percent of the value of the fund’s total a basis consistent with the fund’s bank credit providers, and many others. investment in a borrower at the time the overall purpose. Moreover, the efficiencies of credit The credit fund exclusion prevents a funds relative to direct extensions of investment is made. banking entity from relying on the credit described above are likely to vary Venture Capital Funds exclusion unless any debt instruments considerably among banking entities and equity securities (or rights to and funds. The SEC recognizes that the As discussed above, the agencies are acquire an equity security) held by the potential effects described above of the adopting amendments in the final rule credit fund and received on customary credit fund exclusion may be dampened to exclude certain venture capital funds terms in connection with the credit or magnified in different phases of the from the definition of ‘‘covered fund,’’ fund’s loans or debt instruments are macroeconomic cycle and across which allow banking entities to acquire permissible for the banking entity to various types of banking entities. or retain an ownership interest in, or acquire and hold directly. A banking sponsor, those venture capital funds to Investors in a credit fund that a entity that acts as sponsor, investment the extent the banking entity is banking entity sponsors or for which the adviser or commodity trading advisor of otherwise permitted to engage in such a credit fund must ensure that the banking entity serves as an investment activities under applicable law.672 The activities of the credit fund are adviser or commodity trading advisor exclusion is available with respect to consistent with certain safety and may have expectations related to the qualifying venture capital funds, which soundness standards.665 In addition, a performance of the credit fund that raise includes an issuer that meets the banking entity’s investment in, and bailout concerns. To ensure that these definition of ‘‘venture capital fund’’ in relationship with, a credit fund must be investors are adequately informed of the 17 CFR 275.203(l)–1 and that meets conducted in compliance with, and banking entity’s role in the credit fund, several additional criteria.673 subject to, applicable banking laws and the final rule requires a banking entity A qualifying venture capital fund is regulations, including applicable safety that acts as a sponsor, investment an issuer that, among other criteria, is a and soundness standards.666 Combined adviser, or commodity trading advisor venture capital fund as defined in 17 with the prohibition on proprietary to an excluded credit fund to provide CFR 275.203(l)–1.674 In the preamble to trading by a credit fund,667 these prospective and actual investors the the regulations adopting this definition ll limitations are expected to prevent disclosures specified in § .11(a)(8) of venture capital fund, the SEC evasion of section 13 of the BHC Act. of the implementing regulations as if the explained that the definition’s criteria 670 The final rule does not separately credit fund were a covered fund. In distinguish venture capital funds from permit credit funds to hold derivatives addition, a banking entity that acts as a other types of funds, including private under the provision allowing related sponsor, investment adviser, or commodity trading advisor must ensure rights and other assets. The preamble to 671 Final rule § ll.10(c)(15)(iii)(B). the 2020 proposal made clear that ‘‘any that the activities of the credit fund are 672 Final rule § ll.10(c)(16). derivatives held by the credit fund must consistent with safety and soundness 673 See supra Section IV.C.2. (Venture Capital relate to loans, permissible debt standards that are substantially similar Funds). instruments, or other rights or assets to those that would apply if the banking 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 665 Final rule §§ ll.10(c)(15)(iv)(B), (iii)(B). 668 See 85 FR 12132. Act, supra note 577, the SEC’s definition of 666 Final rule §§ ll.10(c)(15)(v)(B). 669 Final rule § ll.10(c)(15)(i)(C)(2). ‘‘venture capital fund’’ includes any RBIC and any 667 Final rule § ll.10(c)(15)(ii)(A). 670 Final rule § ll.10(c)(15)(iii)(A). SBIC. See 15 U.S.C. 80b–3(l).

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equity funds and hedge funds.675 investment horizon, and intermediation must be conducted in compliance with Moreover, the SEC explained that these between companies in need of capital and subject to, applicable banking laws criteria reflect the Congressional and institutional investors seeking to and regulations, including applicable understanding that venture capital deploy capital in efficient ways, venture safety and soundness standards.687 funds are less connected with the public capital funds may play a significant role The qualifying venture capital fund markets and therefore may have less in capital formation, economic growth, exclusion being adopted may provide potential for systemic risk.676 The SEC and efficient market function.680 banking entities with greater flexibility further explained that the restriction on In response to the 2020 proposal, the in their investments in private firms the amount of borrowing, debt agencies received comments supporting generally and in private firms with a obligations, guarantees or other the proposed definition of ‘‘qualifying broader range of financing sources, in incurrence of leverage are appropriate to venture capital fund.’’ 681 At the same each case to the extent that those differentiate venture capital funds from time, two commenters expressed investments are made through a fund other types of private funds that may opposition to the 2020 proposal.682 structure. In addition, it is widely noted engage in trading strategies that use The final rule largely adopts the that the availability of venture capital financial leverage and may contribute to exclusion as proposed.683 As adopted, and other financing from funds is not systemic risk.677 The SEC believes that the exclusion for qualifying venture uniform throughout the United States its definition includes criteria reflecting capital funds is available to an issuer and is generally available on a the characteristics of venture capital that is a venture capital fund as defined competitive basis for companies with a funds that may pose less potential risk in 17 CFR 275.203(l)–1 and does not significant presence in certain to a banking entity sponsoring or engage in any activity that would geographic regions (e.g., the New York investing in venture capital funds and to constitute proprietary trading, under metropolitan area, the Boston the financial system—specifically, the § ll.3(b)(1)(i), as if it were a banking metropolitan area, and ‘‘Silicon Valley’’ smaller role of leverage financing and a entity.684 With respect to any banking and surrounding areas).688 This view lesser degree of interconnectedness with entity that acts as sponsor, investment was shared by several commenters on public markets. adviser, or commodity trading advisor the 2020 proposal, who indicated that As discussed in the 2020 proposal, to the issuer, the banking entity is an exclusion for venture capital funds the SEC has received comments required (1) to provide in writing to any would benefit underserved regions supporting an exclusion for venture prospective and actual investor the where venture capital funding is not capital funds and stating that venture disclosures required under readily available currently.689 In this capital funds do not commonly engage § ll.11(a)(8), as if the issuer were a respect, the qualifying venture capital in short-term, high-risk activities, and covered fund, (2) to ensure that the fund exclusion could allow banking that, by their nature, venture capital activities of the issuer are consistent entities with a presence in and funds make long-term investments in with the safety and soundness standards knowledge of the areas where venture private firms.678 Moreover, the SEC that are substantially similar to those capital and other types of financing are received comment that venture capital that would apply if the banking entity less readily available to businesses to funds promote economic growth and engaged in the activities directly, and provide this type of financing in those competitiveness of the United States (3) to comply with the restrictions in areas, further promoting capital more effectively than investments in § ll.14 (except the banking entity may formation. expressly permissible vehicles, such as acquire and retain any ownership The SEC remains cognizant of the fact small business investment interest in the issuer), as if the issuer that the overall level and structure of companies.679 The SEC has also were a covered fund.685 activities of banking entities that received comment that, by virtue of As in the 2020 proposal, a banking involve risk stems from a variety of their investment strategy, long-term entity that relies on the exclusion may permissible sources, including not, directly or indirectly, guarantee, traditional capital provision, 675 See, e.g., Exemptions for Advisers to Venture assume, or otherwise insure the underwriting, and market-making. To Capital Funds, Private Fund Advisers With Less obligations or performance of the the degree that qualifying venture Than $150 Million in Assets Under Management, issuer.686 Finally, the banking entity’s capital funds may enable greater and Foreign Private Advisers, 76 FR 39645, 39652 formation of capital by banking entities, (July 6, 2011). ownership interest in or relationship 676 See id. at 39648 (‘‘[T]he proposed definition with a qualifying venture capital fund this may influence the risks and returns of venture capital fund was designed to . . . must comply with the limitations of such funds individually and of address concerns expressed by Congress regarding imposed in § ll.15 of the banking entities as a whole. However, the potential for systemic risk.’’); and at 39656 implementing regulations (regarding, the exclusion has a number of (‘‘Congressional testimony asserted that these funds may be less connected with the public markets and among other subjects, material conflicts conditions, including a prohibition on may involve less potential for systemic risk. This of interest and high-risk investments), as direct or indirect guarantees by the appears to be a key consideration by Congress that if the issuer were a covered fund; and banking entity, disclosures to investors, led to the enactment of the venture capital and compliance with applicable safety exemption. As we discussed in the Proposing 680 Release, the rule we proposed sought to incorporate See id. and soundness standards. this Congressional understanding of the nature of 681 See supra note 244. The SEC recognizes that venture investments of a venture capital fund, and these 682 See supra note 270. capital funds commonly invest in principles guided our consideration of the proposed 683 The one change from the proposal is moving venture capital fund definition.’’). the requirement that the banking entity must 687 Final rule § ll.10(c)(16)(iv). 677 ll ll See id. at 39661–62. See also id. at 39657 (‘‘We comply with §§ .14 to .10(c)(16)(ii). This 688 See, e.g., Richard Florida, Venture Capital proposed these elements of the qualifying portfolio change clarifies that this requirement applies to a Remains Highly Concentrated in Just a Few Cities, company definition because of the focus on banking entity that acts as sponsor, investment CITYLAB (Oct. 3, 2017), available at https:// leverage in the Dodd-Frank Act as a potential adviser, or commodity trading advisor to the www.citylab.com/life/2017/10/venture-capital- contributor to systemic risk as discussed by the qualifying venture capital fund and does not apply concentration/539775/; Senate Committee report, and the testimony before to a banking entity that merely invests in a PRICEWATERHOUSECOOPERS & CB INSIGHTS, Congress that stressed the lack of leverage in qualifying venture capital fund. MoneyTree Report (Q3 2019), available at https:// venture capital investing.’’). 684 Final rule § ll.10(c)(16)(i). www.pwc.com/us/en/moneytree-report/assets/ 678 See 85 FR 12168. 685 Final rule § ll.10(c)(16)(ii). moneytree-report-q3-2019.pdf. 679 See id. 686 Final rule § ll.10(c)(16)(iii). 689 See FSF; SIFMA; CCMC; and NVCA.

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illiquid private firms with few sources venture capital fund exclusion to make commensurate with the risk of the of market price information, with investments in third-party funds, which underlying activities.692 Another corresponding risks and returns. To the may not have been willing to restrict— commenter indicated that, in the degree that the exclusion for qualifying and could have been prohibited from ordinary course of business, SBIC fund venture capital funds facilitates banking restricting under other applicable managers often relinquish or voluntarily entity activities related to venture laws—the fund’s investments in surrender a license during the wind- capital funds, this exclusion could companies that met any such revenue or down of the fund while liquidating increase the volume and alter the other similar test. As a result, such an assets in the dissolution process (since structure of banking entities’ activities, additional condition could have the license is no longer necessary or an affecting the risks associated with those diminished the benefits discussed efficient use of partnership funds).693 activities. At the same time, as above, both by limiting the utility of the The agencies proposed revising the discussed elsewhere,690 many other exclusion for banking entities to make exclusion for SBICs to clarify how the traditional and permissible activities of permissible investments and potentially exclusion would apply to SBICs that banking entities involve risk, and the reducing the availability of financing for voluntarily surrender their licenses provision of capital to private firms is businesses, including small businesses during wind-down phases.694 an important function of banking and start-ups in areas outside of certain Specifically, the agencies proposed entities within the financial system and major metropolitan areas. revising the exclusion for SBICs to securities markets that benefits the real apply explicitly to an issuer that has Small Business Investment Companies economy. voluntarily surrendered its license to As an alternative, the agencies The implementing regulations operate as an SBIC and does not make considered an additional restriction for exclude from the covered fund new investments (other than which they are requested specific definition small business investment investments in cash equivalents) after comment as part of the 2020 proposal. companies. The implementing such voluntary surrender.695 Under this additional restriction, and regulations include within the scope of Most commenters that directly notwithstanding 17 CFR 275.203(1)– the exclusion SBICs and issuers that addressed the 2020 proposal’s revisions 1(a)(2), the venture capital fund have received notice to proceed to concerning SBICs supported the exclusion would be limited to funds qualify for a license as an SBIC and proposed revisions, stating that the that do not invest in companies that, at which have not received a revocation of proposed revisions would provide the time of the investment, have more the notice or license. The final rule greater certainty to banking entities than a limited dollar amount of total expands the exclusion to incorporate wishing to invest in SBICs and would annual revenue. The agencies SBICs that have voluntarily surrendered increase investment in small considered several alternative their licenses to operate and do not businesses.696 The final rule adopts the thresholds that could have been make new investments (other than 2020 proposal’s revisions concerning appropriate in this regard to further investments in cash equivalents) after SBICs without modification. differentiate qualifying venture capital such voluntary surrender.691 SBICs are an important mechanism funds from other types of private funds. Clarifying that SBICs that have for capital allocation by banking entities The potential benefit of including a voluntarily surrendered their licenses and one important channel of capital revenue or other similar test is that it and are winding-down remain excluded raising for issuers. The final rule could have been more difficult for from the covered fund definition clarifies that banking entities are able to banking entities to use the exclusion to reduces regulatory uncertainty for continue to participate in SBIC-related make investments through the fund that banking entities. Under the activities during the dissolution of such the agencies may not have intended to implementing regulations, because it is funds, as long as certain conditions are be permissible. However, any such anti- unclear whether an SBIC that has met. To the degree that banking entities evasion benefits of this alternative could voluntarily surrendered its license is have been reluctant to invest in SBICs have been offset by the extent to which still excluded from the definition of to avoid the risk of an SBIC being anti-evasion concerns are already ‘‘covered fund,’’ banking entities must treated as a covered fund during SBIC addressed by the other conditions of the make a determination whether or not dissolution, the final rule may increase exclusion. In addition, such a revenue the SBIC that is winding-down is a the willingness of some banking entities test or other similar test could have covered fund. If the banking entity to participate in SBICs. The final rule facilitated the indirect investment by determines that when the SBIC that is requires that SBICs that have voluntarily banking entities in smaller companies winding-down and has voluntarily surrendered their license may not make that may have been particularly risky or surrendered its license no longer new investments during the wind-down would have required qualifying venture qualifies for the exclusion from the process. This aspect of the final rule capital funds to pass up investment covered fund definition, then the seeks to address the possibility of opportunities that would otherwise be implementing regulations apply and the banking entities becoming exposed to considered typical venture capital-type banking entity’s existing investment in, greater risk as part of their participation investments. and relationship with, the SBIC is in SBICs during their wind-down Such an additional restriction as prohibited. This potential result may process, even though such exposure contemplated in the alternative would discourage banking entities from making may not be common in an SBIC’s have made it more difficult for banking investments in SBICs. ordinary course of business. In any case, entities to sponsor and invest in The 2020 proposal discussed both the risks and the returns arising out qualifying venture capital funds by comments the SEC had received of a banking entity’s investment in a limiting the pool of possible indicating that the 2013 rule had limited SBIC at all stages of its lifecycle are investments in which those funds could banking entity activities in SBICs that invest. This difficulty may have been may spur economic growth, and that 692 See 85 FR 12169. particularly pronounced for banking banking entities faced significant 693 See id. entities that would use the qualifying regulatory burdens that are not 694 See 85 FR 12131. 695 See id. 690 See 2019 amendments, 84 FR 62037–92. 691 Final rule § ll.10(c)(11)(i). 696 See SIFMA; BPI; ABA; PNC; and SBIA.

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likely to flow through to the banking implementing regulations to incorporate banking entities in growth stage entity’s shareholders. Moreover, issuers explicitly, the business of which businesses. banking entities participating in SBICs is to make investments that qualify for The SEC understands that RBICs may remain subject to applicable safety and consideration under the regulations already have been excluded from the soundness regulations and implementing the CRA.702 definition of covered fund under the requirements. To the degree that some banking implementing regulations.709 For entities have faced uncertainty about example, RBICs may qualify for the Public Welfare Funds their ability to make CRA-qualified public welfare exclusion under the The implementing regulations investments and qualify for the implementing regulations or may not be exclude from the definition of ‘‘covered exclusion, the explicit exclusion for a covered fund by virtue of relying on fund’’ issuers that make investments such funds may increase the willingness an exclusion from the definition of that are designed primarily to promote of banking entities to intermediate such ‘‘investment company’’ under the the public welfare, of the type permitted community development investments. Investment Company Act other than under paragraph 11 of section 5136 of At the same time, to the degree that section 3(c)(1) or 3(c)(7). An express the Revised Statutes of the United States banking entities have financed exclusion for RBICs nevertheless should (12 U.S.C. 24), including the welfare of community development projects reduce compliance costs for banking low- and moderate-income communities eligible for the CRA through other fund entities, which may otherwise have or families (such as providing housing, structures and have relied on been required to conduct a case-by-case services, or jobs) (public welfare corresponding exemptions, the analysis of each RBIC to determine investment exclusion).697 economic effects of the explicit whether it qualifies for an exclusion or As discussed in the 2020 proposal, exclusion for CRA-qualified investments exemption under the implementing the SEC has received comment that the may be limited to the difference in regulations. implementing regulations’ exclusion for compliance burdens between the new In response to a request for comment public welfare funds may not capture explicit exclusion and any existing in the 2020 proposal, commenters community development investments covered fund exclusions. generally favored explicitly excluding made through investment vehicles and Commenters on the 2020 proposal QOFs from the definition of ‘‘covered comment supporting an exclusion of generally favored explicitly excluding fund.’’ 710 The final rule provides a investments that qualify for Community RBICs from the definition of ‘‘covered specific exclusion for QOFs similar to Reinvestment Act (CRA) credit, fund,’’ either by adopting a new that provided to RBICs.711 As discussed including direct and indirect exclusion, or by further clarifying the above, the QOF program allows investments in a community scope of the public welfare investment taxpayers to defer and reduce taxes on development fund, SBIC, or similar exclusion.703 The final rule provides a capital gains by reinvesting gains in fund.698 separate specific exclusion for RBICs, QOFs that are required to have at least The 2020 proposal posed a number of similar to the separate, specific 90 percent of their assets in designated questions related to the scope of the exclusion for SBICs.704 As discussed low-income zones. In this regard, QOFs public welfare investment exclusion. elsewhere,705 RBICs are intended to are similar to SBICs and public welfare For example, the 2020 proposal asked promote economic development and the companies. The QOF exclusion should whether investments that would receive creation of wealth and job opportunities expand the economic effects of the SBIC consideration as qualified investments in rural areas and among individuals exclusion and public welfare exclusion under the regulations implementing the living in such areas,706 and their discussed above, and may facilitate CRA should be excluded from the purpose is similar to the purpose of capital formation by banking entities. definition of covered fund, either by SBICs and public welfare companies.707 QOFs already may have been incorporating these investments into the Because SBICs and RBICs share the excluded from the definition of covered public welfare investment exclusion or common purpose of promoting capital fund under the implementing by establishing a new exclusion for regulations. For example, QOFs may 699 formation in their respective sectors, CRA-qualifying investments. In advisers to SBICs and RBICs are treated qualify for the public welfare exclusion addition, the 2020 proposal requested similarly under the Advisers Act (in that under the implementing regulations or comment on whether RBICs are they have the opportunity to take may not be covered funds by virtue of typically excluded from the definition advantage of exemptions from relying on an exclusion from the of ‘‘covered fund’’ because of the public investment adviser registration).708 The definition of ‘‘investment company’’ welfare investment exclusion or another final rule’s specific exclusion for RBICs under the Investment Company Act exclusion and on whether the agencies should expand the economic effects of other than section 3(c)(1) or 3(c)(7), such should expressly exclude RBICs from 712 the SBIC exclusion discussed above and as section 3(c)(5)(C). In addition, the definition of covered fund.700 may facilitate capital formation by depending on the facts and Finally, the 2020 proposal requested circumstances, an issuer that holds comment on whether many or all QOFs 702 See Final rule § ll.10(c)(11)(ii)(A). securities issued by a QOF may not would meet the terms of the public 703 See SIFMA; FSF; and SBIA. meet the definition of ‘‘investment welfare investment exclusion and on 704 See supra note 575. company’’ under section 3(a)(1) of the whether the agencies should expressly 705 See supra note 576. Investment Company Act, may be exclude QOFs from the definition of 706 See U.S. Dep’t of Agriculture, Rural Business excluded under Rule 3a–1 thereunder, covered fund.701 Investment Program Overview, available at http:// or may qualify for the exclusion under The final rule revises the public www.rd.usda.gov/programs-services/rural-business- investment-program. welfare investment exclusion of the 709 707 SBICs are intended to increase access to In addition, RBICs may be excluded from the capital for growth stage businesses. See U.S. Small definition of ‘‘covered fund’’ under the qualifying 697 Implementing regulations Bus. Admin., SBIC Program Overview, available at venture capital fund exclusion in the final rule. See § ll.10(c)(11)(ii)(A). https://www.sba.gov/partners/sbics. supra note 578. 698 See 85 FR 12169. 708 See supra note 578. The private fund adviser 710 See SIFMA; FSF; and ABA. 699 See id. exemption excludes the assets of RBICs and SBICs 711 Final rule § ll.10(c)(11)(iv). 700 See id. from counting towards the $150 million threshold. 712 See Opportunity Zone Statement, supra note 701 See id. 15 U.S.C. 80b–3(m). 581.

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section 3(c)(6) of the Investment traditional client-oriented financial and similar concerns.722 In addition, Company Act.713 The express exclusion asset management services. Thus, the banking entities may rely on this for QOFs, similar to the express final rule may enhance competition exclusion only if they: (1) Provide bona exclusion for RBICs, should reduce among banking and non-banking fide trust, fiduciary, investment compliance costs for banking entities, entities providing financial services to advisory, or commodity trading which may otherwise be required to family wealth management vehicles and advisory services to the entity; 723 (2) do conduct a case-by-case analysis of each may lead to more efficient capital not, directly or indirectly, guarantee, QOF to determine whether it qualifies allocation of family wealth management assume, or otherwise insure the for an exclusion or exemption under the vehicles’ funds. To the degree banking obligations or performance of such implementing regulations. entities pass compliance costs on to entity; 724 (3) comply with the disclosure obligations under Family Wealth Management Vehicles customers, family wealth vehicles may experience costs savings from the final § ll.11(a)(8), as if such entity were a As discussed in the 2020 proposal, rule as well. covered fund, provided that the content family wealth management vehicles may be modified to prevent the commonly engage in asset management Some commenters on the 2020 proposal opposed the exclusion for disclosure from being misleading and activities, as well as estate planning and the manner of disclosure may be other related activities.714 The SEC family wealth management vehicles. One commenter stated that rather than modified to accommodate the specific understands that some banking entities circumstances of the entity; 725 (4) may have been constrained in providing providing an exclusion for family wealth management vehicles through an comply with the requirements of traditional banking and asset ll ll agency rulemaking, the agencies should §§ .14(b) and .15, as if such management services, including, for entity were a covered fund; 726 and (5) example, investment advice, brokerage instead provide no-action relief to such vehicles on a case-by-case basis.719 The except for riskless principal transactions execution, financing, clearing, and ll SEC believes that such an approach as defined in § .10(d)(11), comply settlement services, to family wealth with the requirements of 12 CFR management vehicles due to the would be unnecessarily burdensome and difficult to administer. The 223.15(a), as if such banking entity and implementing regulations.715 In its affiliates were a member bank and addition, the SEC understands that compliance costs of such an approach 727 could impact the willingness of banking the entity were an affiliate thereof. certain family wealth management The definition of ‘‘family customer’’ entities to provide traditional client- vehicles that are structured as trusts includes any ‘‘family client’’ as defined oriented financial and asset may prefer to appoint banking entities in Rule 202(a)(11)(G)–1(d)(4) of the management services to their family as trustees acting in a fiduciary Investment Advisers Act of 1940, and 716 customers. This approach would also capacity. any natural person who is a father-in- unnecessarily deviate from the agencies’ In the 2020 proposal, the agencies law, mother-in-law, brother-in-law, treatment of other excluded entities requested comment on whether to sister-in-law, son-in-law or daughter-in- under the implementing regulations and exclude family wealth management law of a family client, or a spouse or a hinder transparency and consistency. vehicles from the definition of ‘‘covered spousal equivalent of any of the 717 fund.’’ Several commenters The SEC recognizes that some foregoing.728 The SEC believes that the supported this exclusion, stating banking entities may respond to the conditions for the exclusion and the generally that it would reduce exclusion by seeking to structure other definition of ‘‘family customer’’ will uncertainty for banking entities about entities as family wealth management result in family wealth management the permissibility of providing vehicles. However, as discussed in vehicles being used as vehicles for traditional banking, investment detail above, the exclusion is only providing customer-oriented financial management, and trust and estate available under a number of services on arms-length, market terms, planning services to family wealth conditions.720 Specifically, if the entity 718 which the SEC believes will reduce the management vehicle clients. is a trust, the grantor(s) of the entity risk that banking entities’ involvement As discussed above, the agencies are must all be family customers; if the in these vehicles will give rise to the adopting an exclusion from the entity is not a trust, a majority of the types of risks that the covered funds definition of ‘‘covered fund’’ for any voting interests in the entity must be provisions are meant to mitigate. entity that acts as a ‘‘family wealth owned (directly or indirectly) by family In the 2020 proposal, the agencies management vehicle.’’ By specifically customers, a majority of the interests in proposed to permit up to three closely excluding family wealth management the entity must be owned by family related persons to hold ownership vehicles, the final rule may benefit such customers, and the entity must be interests in a family wealth management banking entities and their family owned only by family customers and up vehicle. Several commenters supported customers by permitting the banking to five closely related persons of the allowing a finite number of closely entities to offer services to and engage family customers.721 Moreover, up to an related persons to hold ownership in transactions with family wealth aggregate 0.5 percent of the family interests, but suggested that the management vehicle customers. wealth management vehicle’s Importantly, the final rule may benefit proposed limit of three did not reflect outstanding ownership interests may be family wealth management vehicles and the typical manner in which family acquired or retained by one or more their investment advisers by increasing entities that are not family customers or 722 ll the number of banking entity See final rule § .10(c)(17)(i)(C). closely related persons for the purpose 723 See final rule § ll.10(c)(17)(ii)(A). counterparties willing to provide of and to the extent necessary for 724 See final rule § ll.10(c)(17)(ii)(B). establishing corporate separateness or 725 The disclosure content may be modified to 713 See id. prevent the disclosure from being misleading, and 714 See 85 FR 12170. addressing bankruptcy, insolvency, or the manner of disclosure may be modified to 715 See id. accommodate the specific circumstances of the 716 See id. 719 See Data Boiler. entity. See final rule § ll.10(c)(17)(ii)(C). 717 See 85 FR 12170. 720 See supra Section IV.C.3. (Family Wealth 726 See final rule § ll.10(c)(17)(ii)(E). 718 See, e.g., Goldman Sachs; FSF; CCMR; IAA; Management Vehicles). 727 See final rule § ll.10(c)(17)(ii)(F). ABA; BPI; PNC; and SIFMA. 721 See final rule § ll.10(c)(17)(i). 728 See final rule § ll.10(c)(17)(iii)(B).

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wealth management vehicles are family wealth management vehicle. how to structure a family wealth constituted and would unnecessarily Whether the de minimis amount is held management vehicle, they may assist constrain the availability of the by a banking entity or some other third family customers in deciding how best exclusion.729 party is not likely to raise any concerns to receive services from or otherwise The final rule allows for five closely that are not sufficiently addressed by interact with banking entities. The SEC related persons to hold ownership the aggregate ownership limit and the expects that these benefits will justify interests in a family wealth management narrow circumstances in which such de any costs incurred by banking entities in vehicle. The agencies understand that minimis ownership interest may be tailoring the disclosures of many family wealth management held. At the same time, when § ll.11(a)(8) or in providing them to vehicles currently include more than circumstances require that a de minimis customers (either by including them in three closely related persons.730 The ownership interest be held (e.g., for existing documents or preparing a new agencies believe that the final rule will establishing corporate separateness), if disclosure document). more closely align the exclusion with the de minimis ownership interest is The agencies are adopting, with the current composition of family held by a third party and not a banking modifications, the condition requiring a wealth management vehicles, thereby entity, then no banking entity will be banking entity relying on the exclusion increasing the utility of the exclusion exposed to any risk associated with for family wealth management vehicles without allowing such a large number of holding the interest, however minimal to comply with the requirements of 12 non-family customer owners to suggest that risk may be. CFR 223.15(a), as if such banking entity the entity is in reality a hedge fund or In the 2020 proposal, banking entities were a member bank and the vehicle private equity fund. could rely on the family wealth were an affiliate thereof.733 This In the 2020 proposal, a banking entity management vehicle exclusion only if condition prohibits banking entity could rely on the family wealth the banking entity complied with the purchases of low-quality assets from management vehicle exclusion only if disclosure obligations under these vehicles and is intended to the banking entity and its affiliates did § ll.11(a)(8), as if such vehicle were a prevent banking entities from ‘‘bailing not acquire or retain, as principal, an covered fund. Commenters on the 2020 out’’ family wealth management ownership interest in the entity, other proposal requested that the agencies vehicles. Several commenters on the than up to 0.5 percent of the entity’s clarify that the disclosures could be 2020 proposal stated that the agencies outstanding ownership interests. In modified (1) to reflect the specific should clarify that the exclusion permits addition, such de minimis interest could circumstances of the banking entity’s banking entities to engage in riskless be held only for the purpose of and to relationship with, and the particular principal transactions to purchase the extent necessary for establishing structure of, its family wealth assets—including low quality assets for corporate separateness or addressing management vehicle clients; and (2) to purposes of section 223.15 of Regulation bankruptcy, insolvency, or similar allow the banking entity to satisfy the W—from family wealth management concerns.731 Some commenters written disclosure requirement by vehicles.734 According to these requested that unaffiliated third means other than including such commenters, allowing a banking entity parties—such as third-party trustees or disclosures in the governing to engage in such riskless principal similar service providers—be permitted document(s) of the family wealth transactions would facilitate the family to hold the de minimis interest.732 management vehicle(s). customer’s sale of assets,735 while As adopted, the final rule allows up The final rule provides such clarity posing minimal market or credit risk to and change the disclosure requirement to an aggregate 0.5 percent of the the banking entity because the banking to permit banking entities and their vehicle’s outstanding ownership entity would purchase and sell the same affiliates (1) to modify the content of interests to be acquired or retained by asset contemporaneously.736 such disclosures to prevent them from third parties (that is, entities other than Furthermore, commenters stated that being misleading and (2) to modify the family customers or closely related absent clarity on the permissiveness of manner of disclosure to accommodate persons). The SEC believes that riskless principal transactions, a family the specific circumstances of the permitting de minimis ownership by wealth management vehicle would be vehicle. The SEC believes that these these third parties reflects a common forced to obtain the services of a third disclosures will provide important structure of family wealth management party service provider to sell low quality information to the customers for whom vehicles. The SEC recognizes that assets, which in turn would increase the without this modification, family wealth these vehicles will be established. Because the final rule permits vehicle’s costs and operational management vehicles may be forced to complexity without providing a engage in less effective and/or efficient modification of the disclosures for certain reasons, the SEC expects that the meaningful benefit to furthering the means of structuring and organization aims of section 13 of the BHC or the because the exclusion could limit the disclosures provided to any particular 737 family customer will be more accurate implementing regulations. vehicle’s access to some customary The SEC believes that permitting a and better tailored to the particular service providers that have traditionally banking entity to engage in riskless taken small ownership interests for circumstances of the family wealth management vehicle than the principal transactions that involve the structuring purposes. To the extent that purchase of low-quality assets from a a family customer prefers a particular disclosures might have been under the 2020 proposal. These disclosures may person or entity to act as a service 733 See final rule § ll.10(c)(17)(ii)(F). 12 CFR provider, allowing third-party service result in the family customers being 223.15(a) provides that a member bank may not providers to acquire the de minimis better able to understand the purchase a low-quality asset from an affiliate ownership interest may enable the information included in these unless, pursuant to an independent credit disclosures and being better able to evaluation, the member bank had committed itself family customer to choose to establish a to purchase the asset before the time the asset was weigh that information in determining acquired by the affiliate. 12 CFR 223.15(a). 729 See, e.g., BPI; SIFMA; ABA; and PNC. whether to establish a family wealth 734 See, e.g., BPI and SIFMA. 730 See, e.g., BPI; ABA; and PNC. management vehicle. To the extent that 735 See, e.g., SIFMA. 731 See 85 FR 12139. these tailored disclosures assist family 736 See, e.g., SIFMA and BPI. 732 See, e.g., SIFMA and BPI. customers in determining whether or 737 See, e.g., SIFMA.

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family wealth management vehicle is the SEC believes that traditional customer (which may include one or unlikely to pose a substantive risk of banking and asset management services more of its affiliates) for whom the evading section 13 of the BHC Act. involving family wealth management issuer was created; 743 and (2) the Accordingly, in a change from the 2020 vehicles in general do not involve the banking entity and its affiliates: (i) proposal and in response to the types of risks that section 13 of the BHC Maintain documentation outlining how concerns raised by commenters, the Act was designed to address.738 the banking entity intends to facilitate condition will explicitly exclude from Accordingly, any narrower relief than the customer’s exposure to such the requirements of 12 CFR 223.15(a) that provided by the final rule with transaction, investment strategy, or transactions that meet the definition of respect to family wealth management service; (ii) do not, directly or riskless principal transactions as vehicles may have constrained the indirectly, guarantee, assume, or defined in § ll.10(d)(11). The SEC economic benefits of the final rule otherwise insure the obligations or expects that, together, the adopted (including with respect to capital performance of such issuer; (iii) comply criteria for the family wealth formation and allocative efficiency) with the disclosure obligations under management vehicle exclusion will unnecessarily. § ll.11(a)(8), as if such issuer were a prevent a banking entity from being able covered fund, provided that the content to bail out such vehicles in periods of Customer Facilitation Vehicles may be modified to prevent the financial stress or otherwise expose the As discussed in the 2020 proposal, disclosure from being misleading and banking entity to the types of risks that the SEC has received comments that, the manner of disclosure may be the covered fund provisions of section because of the implementing modified to accommodate the specific 13 were intended to address. regulations’ covered fund restrictions, circumstances of the issuer; (iv) do not Alternative forms of relief with some banking entities have been unable acquire or retain, as principal, an respect to family wealth management to engage in traditional banking and ownership interest in the issuer, other vehicles—for example, alternatives that asset management services with respect than up to an aggregate 0.5 percent of define ‘‘family customers’’ more broadly to vehicles provided for customers, even the issuer’s outstanding ownership or narrowly, or that remove some of the though banking entities are otherwise interests for the purpose of and to the conditions for the exclusion—would able to provide such exposures and extent necessary for establishing have increased or reduced the services to customers directly (outside corporate separateness or addressing availability of the exclusion relative to of the fund structure).739 The SEC has bankruptcy, insolvency, or similar the final rule. Alternatively, the also received comment that some concerns; (v) comply with the agencies could have amended the clients, particularly clients in markets requirements of §§ ll.14(b) and limitations on relationships with a such as Brazil, Germany, Hong Kong, ll.15, as if such issuer were a covered covered fund to permit banking entity and Japan, prefer to transact with or fund; and (vi) except for riskless transactions with family wealth through such vehicles rather than principal transactions as defined in management vehicles that would banking entities directly because of a § ll.10(d)(11), comply with the otherwise be considered covered variety of legal, counterparty risk requirements of 12 CFR 223.15(a), as if transactions (e.g., ordinary extensions of management, and accounting factors.740 such banking entity and its affiliates credit) without subjecting them to 12 Moreover, the SEC is aware that were a member bank and the entity were CFR 223.15(a) or section 23B of the limitations of the implementing an affiliate thereof. Federal Reserve Act, as if such banking regulations on the activities of such The exclusion in the final rule should entity were a member bank and such vehicles may have disrupted client reduce or eliminate the costs imposed family wealth management vehicle were relationships, reducing the efficiency of by the implementing regulations that an affiliate thereof. customer-facing financial services, and limit the services that banking entities Broader (narrower) alternative forms raising compliance costs of banking can provide to customer facilitation of relief may have increased (decreased) entities.741 vehicles, which in turn may limit the the magnitude of the economic benefits The final rule establishes an exclusion activities of these vehicles. These costs for capital formation, allocative from the definition of ‘‘covered fund’’ include those associated with the efficiency, and the ability of banking for any issuer that acts as a ‘‘customer disruption of client relationships and entities to provide traditional customer facilitation vehicle.’’ The customer the reduction in the efficiency of oriented services to family wealth facilitation vehicle exclusion will, as customer-facing financial services. The management vehicles. At the same time, proposed, be available for any issuer final rule should reduce these baseline such broader relief may have increased that is formed by or at the request of a costs and inefficiencies by allowing the risk that some banking entities banking entities to provide customer- would have responded to such relief by customer of the banking entity for the oriented financial services through attempting to evade the intent of the purpose of providing such customer vehicles, the purpose of which is to rule, increasing the volume of their (which may include one or more provide such customers with exposure activities with family wealth affiliates of such customer) with to a transaction, investment strategy, or management vehicles. Such risks of the exposure to a transaction, investment alternatives, as compared to the strategy, or other service provided by other service. As a result, banking 742 exclusion contained in the final rule, the banking entity. entities may become better able to may have been mitigated by the fact that A banking entity may only rely on the engage in the full range of customer banking entities would have remained exclusion with respect to an issuer facilitation activities through special subject to the full scope of broker-dealer provided that: (1) All of the ownership interests of the issuer are owned by the 743 Notwithstanding this condition, up to an and prudential capital, margin, and aggregate 0.5 percent of the issuer’s outstanding other rules aimed at facilitating safety ownership interests may be acquired or retained by 738 See supra Section IV.C.3. (Customer one or more entities that are not customers if the and soundness. Nonetheless, by Facilitation Vehicles). ownership interest is acquired or retained by such providing relief that is narrower than 739 See 85 FR 12171. parties for the purpose of and to the extent the broader alternative, the final rule 740 See id. necessary for establishing corporate separateness or should reduce those possible risks even 741 See id. addressing bankruptcy, insolvency, or similar further. Moreover, as discussed above, 742 See final rule § ll.10(c)(18)(i). concerns. See § ll.10(c)(18)(ii)(B).

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purpose vehicles and fund structures, any costs from tailoring and providing and otherwise transact with, such which could benefit banking entities, the disclosures. vehicles. The SEC believes that such their customers, and securities markets In the 2020 proposal, as with family risks may be mitigated by at least two more broadly. wealth management vehicles, a banking of the conditions of the exclusion. First, Most commenters on the 2020 entity could rely on the customer similar to the family wealth proposal that addressed this exclusion facilitation vehicle exclusion only if the management vehicle discussed above, were supportive,744 stating that it would banking entity and its affiliates did not other than the de minimis ownership provide banking entities with greater acquire or retain, as principal, an interest, a banking entity and its flexibility to meet client needs and ownership interest in the entity, other affiliates may not acquire or retain, as objectives.745 Some commenters found than up to 0.5 percent of the entity’s principal, any ownership in interest in the exclusion’s conditions to be outstanding ownership interests. In the issuer.753 Second, a banking entity reasonable and sufficient.746 However, addition, such de minimis interest could and its affiliates may not directly or two commenters recommended that the be held only for the purpose of and to indirectly guarantee, assume, or agencies impose additional limitations the extent necessary for establishing otherwise insure the obligations or on the exclusion.747 One of these corporate separateness or addressing performance of the vehicle.754 These commenters argued that the exclusion bankruptcy, insolvency, or similar conditions, among the other conditions would permit, and possibly encourage, concerns.750 As with family wealth of the exclusion, may mitigate risks that banking entities to increase their risk management vehicles, commenters may be borne by individual banking exposures through the use of customer suggested that the agencies specifically entities and by banking entities as a facilitation vehicles, and the agencies allow any party that is unaffiliated with whole as a result of the exclusion, and should minimize such risk exposures the customer, rather than only the may facilitate banking entities’ ongoing and promote risk monitoring and banking entity and its affiliates, to own compliance with section 13 of the BHC management.748 this de minimis interest.751 Act and the final rule. Moreover, the In the 2020 proposal, banking entities As adopted, the final rule allows up SEC continues to believe that the could rely on the customer facilitation to an aggregate 0.5 percent of the provision of customer-oriented financial vehicle exclusion only if the banking vehicle’s outstanding ownership services by banking entities may benefit entity complied with the disclosure interests to be acquired or retained by customers, counterparties, and obligations under § ll.11(a)(8), as if third parties (that is, entities other than securities markets. such vehicle were a covered fund. the customer) if the ownership interest The final rule creates new Commenters on the 2020 proposal is acquired or retained by such parties recordkeeping requirements for a requested that the agencies provide for the purpose of and to the extent banking entity that relies on the clarification in the context of family necessary for establishing corporate exclusion for customer facilitation separateness or addressing bankruptcy, 755 wealth management vehicles that the vehicles. Specifically, the banking insolvency, or similar concerns.752 The content of the disclosure may be entity and its affiliates must maintain SEC recognize that without this modified to prevent the disclosure from documentation outlining how the modification, customer facilitation being misleading and the manner of banking entity intends to facilitate the vehicles may be forced to engage in less disclosure may be modified to customer’s exposure to a transaction, effective and/or efficient means of accommodate the specific investment strategy or service offered by structuring and organization because the circumstances of the issuer. the banking entity. As discussed in exclusion could limit the vehicle’s Section V.B 756 and above, these As with family wealth management access to some customary service recordkeeping burdens may impose a vehicles, the final rule includes a providers that have traditionally taken total initial burden of $1,078,650 757 and modification to the proposed exclusion or may otherwise take small ownership a total ongoing annual burden of clarifying that the content of the interests for structuring purposes. To 1,0798,650.758 disclosure may be modified to the extent that a customer prefers a The agencies are adopting, with accommodate the specific particular person or entity to act as a modifications, the condition requiring a circumstances of the issuer.749 The SEC service provider, allowing third-party banking entity relying on the exclusion believes that these disclosures will service providers to acquire the de for customer facilitation vehicles to provide important information to the minimis ownership interest may make comply with the requirements of 12 CFR customers for whom these vehicles will the customer more willing to establish 223.15(a), as if such banking entity were be used to provide services—whether a customer facilitation vehicle. Whether a member bank and the vehicle were an they are family customers under the the de minimis amount is held by a affiliate thereof.759 The purpose of the family wealth management vehicle banking entity or some other third party proposed requirement that a customer exclusion or other customers under this is not likely to raise any concerns that facilitation vehicle must comply with 12 exclusion. As discussed above with are not sufficiently addressed by the CFR 223.15(a) was the same for both the respect to family wealth management aggregate ownership limit and the family wealth management vehicle and vehicles, the SEC believes that the narrow circumstances in which the de the customer facilitation vehicle clarification in the final rule regarding minimis ownership interest may be permissible modifications of the 753 held. Final rule § ll.10(c)(18)(ii)(B)(4). ll 754 disclosures required by § .11(a)(8) The SEC recognizes that the provision Final rule § ll.10(c)(18)(ii)(B)(2). 755 ll will provide benefits that will justify of financial services related to customer Final rule § .10(c)(18)(ii)(B)(1). 756 See supra note 585. facilitation vehicles may involve market 757 744 See, e.g., SIFMA; BPI; ABA; Credit Suisse; See supra note 586. risk, and the exclusion in the final rule 758 FSF; Goldman Sachs; and IAA. See supra note 587. 759 745 See, e.g., SIFMA; BPI; ABA; and Goldman may enable banking entities to provide See final rule § ll.10(c)(18)(ii)(C)(6). 12 CFR Sachs. a greater array of financial services to, 223.15(a) provides that a member bank may not purchase a low-quality asset from an affiliate 746 See, e.g., SIFMA; FSF; and SAF. unless, pursuant to an independent credit 747 750 See Better Markets and Data Boiler. See 85 FR 12139. evaluation, the member bank had committed itself 748 See Better Markets. 751 See SIFMA; BPI; and FSF. to purchase the asset before the time the asset was 749 See final rule § ll.10(c)(18)(ii)(C)(3). 752 See final rule § ll.10(c)(18)(ii)(B). acquired by the affiliate. 12 CFR 223.15(a).

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exclusions—to help ensure that the ii. Limitations on Relationships for banking entities and covered funds. exclusions do not allow banking entities Between Banking Entities and Covered The final rule provides banking entities to ‘‘bail out’’ either vehicle.760 For the Funds greater flexibility to provide these and same reasons discussed above with As discussed above, under the other services directly to covered funds. respect to family wealth management implementing regulations, banking If being able to provide custody, vehicles, the agencies have modified the entities that either: (1) Serve, directly or clearing, and other services to related requirement to exclude from the indirectly, as a sponsor, investment covered funds reduces the costs of these requirements of 12 CFR 223.15(a) any adviser, commodity trading advisor, or services and risks of operational failure transactions that meet the definition of investment manager to a covered fund; of fund custodians, then fund advisers riskless principal transactions as (2) organize and offer a covered fund and, indirectly, fund investors, may defined in § ll.10(d)(11). under § ll.11; or (3) hold an benefit from the final rule. Many direct benefits are likely to accrue to banking As with the discussion of family ownership interest under § ll.11(b) have been unable to engage in any entity advisers to covered funds that wealth management vehicles above, the have been relying on third-party service SEC believes that the ability of a covered transactions with such funds.761 This prohibition may have providers as a result of the requirements banking entity to engage in riskless of the implementing regulations. principal transactions with a customer limited the services that such banking entities and their affiliates have been The final rule includes a standalone facilitation vehicle will lower costs for provision that permits banking entities the vehicle by allowing it to avoid able to provide to certain entities that are covered funds under the to enter into riskless principal finding a third party to intermediate transactions with a related covered trades for low quality assets. At the implementing regulations. For example, as noted above, banking entities have fund, including in circumstances where same time, allowing these riskless the covered fund is not a ‘‘securities principal transactions should not pose been significantly limited in their ability to both organize and offer a covered affiliate.’’ The 2020 proposal would the type of risk to the banking entity have permitted a banking entity to enter that section 13 of the BHC Act was fund, as well as to provide custody or other services to the fund. into a riskless principal transaction with intended to prevent. The SEC expects The final rule permits a banking a covered fund provided it met the that the conditions for the customer entity to engage in certain covered criteria in Regulation W. The SEC facilitation vehicle exclusion will transactions with a related covered fund believes that providing a standalone prevent a banking entity from being able that would be exempt from the exception will provide clarity and to bail out such vehicles in periods of quantitative limits, collateral certainty to banking entities about the financial stress or otherwise expose the requirements, and low-quality asset extent to which they are able to enter banking entity to the types of risks that prohibition under section 23A of the into riskless principal transactions with the covered fund provisions of section Federal Reserve Act, including certain related covered funds. In addition, by 13 were intended to address. transactions that would be exempt permitting more riskless principal The agencies considered alternative pursuant to section 223.42 of the transactions than would have been the forms of relief with respect to customer Board’s Regulation W.762 In addition, case under the 2020 proposal (i.e., those facilitation vehicles. For example, the the final rule authorizes banking entities that do not or may not meet the criteria agencies could have adopted a higher to engage in certain transactions, such of Regulation W), the final rule may third party ownership limit (of, for as extensions of intraday credit for facilitate banking entities entering into example, 5% or 10%). Alternatively, the purchases of assets from covered funds more of these transactions than they agencies could have adopted a 0.5% in connection with payment, clearing, would have, reducing the likelihood ownership interest limit, but without and settlement services.763 Finally, in a that the covered fund would incur specifying a list of purposes for which modification from the 2020 proposal, additional costs in buying or selling 766 such interest may be held, leading to the final rule expressly permits banking securities. As described above, in a banking entities accumulating greater entities to enter into certain riskless riskless principal transaction, the ownership interests in such vehicles. As principal transactions with a related riskless principal (the banking entity) another example, the agencies could covered fund, including in buys and sells the same security have adopted an exclusion for customer circumstances where the covered fund contemporaneously, and the asset risk 764 facilitation vehicles without subjecting is not a ‘‘securities affiliate.’’ passes promptly from the affiliate (the the banking entity relying on the As discussed in the 2020 proposal, related covered fund) through the exclusion to 12 CFR 223.15(a) or section the SEC received comment suggesting riskless principal to a third party. 23B of the Federal Reserve Act, as if that section 13(f)(1) of the BHC Act Accordingly, the SEC does not believe such banking entity were a member should be interpreted to include the that an increase in riskless principal bank and such customer facilitation exemptions provided under section 23A transactions overall will increase the vehicles were an affiliate thereof. Such of the Federal Reserve Act, and that risks borne by any particular banking alternatives would have removed or banking entities should be permitted to entity or banking entities in general. loosened the conditions of the engage in a limited amount of covered The final rule increases banking transactions with related covered entities’ ability to engage in custody, exclusion, which may have increased 765 the risk that customer facilitation funds. The SEC recognizes that clearing, and other transactions with vehicles could be used for evasion outsourcing such activities to third related covered funds and will benefit purposes or could have exposed parties may have adversely affected banking entities that have been unable banking entities to additional risk, but customer relationships, increasing costs and decreasing operational efficiency 766 As discussed above, the final rule includes a could also have further reduced definition of riskless principal transaction that is compliance burdens and provided similar to the definition adopted in Regulation W. 761 See 12 U.S.C. 1851(f)(1). greater flexibility to banking entities and To the extent these definitions are sufficiently 762 See final rule § ll.14(a)(2)(iii). their customers. similar, the SEC expects that compliance costs will 763 See final rule § ll.14(a)(2)(v). be low for banking entities seeking to enter into 764 See final rule § ll.14(a)(2)(iv). riskless principal transactions with related covered 760 See 85 FR 12140. 765 See 85 FR 12144. funds.

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to engage in otherwise profitable or credit.770 In addition, the agencies could restrictions.774 In addition, the SEC efficient activities with related covered have imposed quantitative limits on the received comment that the ownership funds. Moreover, this may enhance newly permitted covered transactions interest definition in the implementing operational efficiency and reduce tied to bank capital or fund size. regulations may have required an operational risks and costs incurred by Relative to the final rule, alternatives extensive legal analysis and covered funds, which have been unable providing greater relief with respect to documentation review and that, as a to rely on banking entities with which covered transactions with covered funds result, some banking entities may have they have certain relationships for could have magnified the cost savings defaulted to treating interests without custody, clearing, and other and operational risk benefits described controlling positions or equity-like transactions. As discussed above, above, but may also have increased risk features as ownership interests.775 reducing operational risk as well as the to banking entities or the incentives for The final rule modifies the definition interconnectedness between financial banking entities to bail out related of ownership interest in several ways. firms that would result from such covered funds. Similarly, narrower First, the final rule moves the existing services being provided by the banking alternative forms of relief may have exclusion from the definition of ‘‘other entities and their affiliates, would dampened the economic effects of the similar interest’’ in § ll.10(d)(6)(A) promote the financial stability of the final rule discussed above. (‘‘for the rights of a creditor to exercise U.S. financial system.767 iii. Definition of Ownership Interest remedies upon the occurrence of an In the 2020 proposal, the SEC event of default or an acceleration discussed a prior comment that opposed As discussed above, the implementing event’’) from the parenthetical to its incorporating the Federal Reserve Act regulations define ‘‘ownership interest’’ own provision.776 The final rule also section 23A exemptions or quantitative in a covered fund to mean any equity, creates a new exclusion, for ‘‘the right limits.768 To the extent that the final partnership, or ‘‘other similar interest.’’ to participate in the removal of an rule may increase transactions between This definition focuses on the attributes investment manager for ’’cause’’ or banking entities and related covered of the interest and whether it provides participate in the selection of a funds, banking entities could incur risks a banking entity with voting rights or replacement manager upon an associated with these transactions. economic exposure to the profits and investment manager’s resignation or However, as discussed above, the final losses of the covered fund, rather than removal.’’ 777 rule imposes a number of conditions its form. ‘‘Other similar interest’’ is Commenters on the 2020 proposal aimed at reducing overall risks to defined, in part, as an interest that: asserted that creditors’ rights are also banking entities, the ability of banking ‘‘Has the right to participate in the provided to debt holders in entities to lever up related covered selection or removal of a general partner, circumstances other than an event of funds, and the incentive of banking managing member, member of the board of default or acceleration. These entities to bail out related covered directors or trustees, investment manager, commenters therefore recommended the funds, while enhancing their ability to investment adviser, or commodity trading advisor of the covered fund (excluding the proposed exclusion be expanded to provide ordinary-course banking, rights of a creditor to exercise remedies upon include additional for cause events that custody, and asset management the occurrence of an event of default or an are independent of an event of default services, and to facilitate capital acceleration event).’’ 771 or acceleration, such as the insolvency formation in covered funds. As discussed in the 2020 proposal, of the investment manager or breach of The agencies could have adopted the SEC has received comment that the the investment management or broader or narrower forms of relief. For 778 implementing regulations’ definition of collateral management agreement. example, in addition to the relief under ownership interest has captured The final rule reflects those comments the final rule, the agencies could have instruments that do not have equity-like and provide clarity about the types of permitted banking entities to engage in features and constrained banking entity creditor rights that may attach to an additional covered transactions in investments in debt securitizations and interest without that interest being connection with payment, clearing, and client facilitation services.772 For deemed an ownership interest. In settlement services beyond extensions example, one commenter indicated that particular, under § ll.10(d)(6)(A)(2), of credit and purchases of assets. analyzing the ownership interest the definition of ownership interest Further, under the final rule, each definition in the context of does not include rights of an interest extension of credit must be repaid, sold, securitizations had resulted in added that allows a creditor to participate in or terminated by the end of five the removal of an investment manager 769 time and costs of executing transactions, business days. As another alternative, as well as impeded securitization for ‘‘cause.’’ The final rule defines the agencies could have allowed transactions.773 Moreover, the ‘‘cause’’ for removal to mean one or extensions of credit in connection with commenter indicated that the ‘‘other more of the following events: payment transactions, clearing, or similar interest’’ prong of the definition (1) The bankruptcy, insolvency, settlement services for periods that are precluded some banking entities from conservatorship or receivership of the longer than five business days. investing in collateralized loan investment manager; However, the five business day criteria obligation (CLO) senior debt (2) The breach by the investment is consistent with the federal banking instruments, which affects lending to manager of any material provision of the agencies’ capital rule and generally CLOs, and that banking entities with covered fund’s transaction agreements requires banking entities to rely on pre-existing CLO exposures have had to applicable to the investment manager; transactions with normal settlement waive credit-enhancing remedies to (3) The breach by the investment periods, which have lower risk of avoid triggering the ownership interest manager of material representations or delayed settlement or failure, when warranties; providing short-term extensions of 770 See supra note 435. 771 See implementing regulations 774 See id. 767 See supra Section IV.D. (Limitations on § ll.10(d)(6)(i)(A). See also supra Section IV.E.1. 775 See id. Relationships with a Covered Fund). (Ownership Interest). 776 See final rule § ll.10(d)(6)(i)(A)(1). 768 See 85 FR 12172. 772 See 85 FR 12173. 777 See final rule § ll.10(d)(6)(i)(A)(2). 769 See final rule § ll.14(a)(2)(iv)(B). 773 See id. 778 See SIFMA.

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(4) The occurrence of an act that Moreover, to the degree that banking their underlying assets, while reducing constitutes fraud or criminal activity in entities may have responded to the compliance uncertainty and increasing the performance of the investment ownership interest definition in the the willingness of banking entities to manager’s obligations under the covered implementing regulations by reducing participate in covered funds. fund’s transaction agreements; their investments in certain debt iv. Parallel Investments (5) The indictment of the investment instruments, the final rule may result in manager for a criminal offense, or the greater banking entity investments in As discussed above, the preamble to indictment of any officer, member, covered funds and a greater ability of the 2013 rule stated that if a banking partner or other principal of the covered funds to allocate capital to the entity makes investments side by side in investment manager for a criminal underlying assets. substantially the same positions as a offense materially related to his or her The SEC recognizes that such debt covered fund, then the value of such 781 investment management activities; instrument investments carry risk, investments would be included for the (6) A change in control with respect and that the risks and returns of such purposes of determining the value of the to the investment manager; investments flow through to banking banking entity’s investment in the (7) The loss, separation or entities’ shareholders. While the final covered fund.782 The agencies also incapacitation of an individual critical rule’s ownership interest definition may stated that a banking entity that to the operation of the investment permit banking entities to increase sponsors a covered fund should not manager or primarily responsible for the exposures to certain debt instruments, make any additional side-by-side co- management of the covered fund’s three key considerations may mitigate investment with the covered fund in a assets; or the risks associated with such activities. privately negotiated investment unless (8) Other similar events that First, the final rule does not change any the value of such co-investment is less constitute ‘‘cause’’ for removal of an of the applicable prudential capital, than three percent of the value of the investment manager, provided that such margin, or liquidity requirements total amount co-invested by other events are not solely related to the intended to ensure safety and soundness investors in such investment.783 performance of the covered fund or to of banking entities. Second, to the the investment manager’s exercise of degree that the ownership interest As discussed in the 2020 proposal, investment discretion under the covered definition has actually discouraged the SEC has received comment that fund’s transaction agreements. banking entities from obtaining credit argued the implementing regulations The final rule also modifies the enhancements to avoid triggering the should not impose a limit on parallel definition of ownership interest to add ownership interest restrictions, the final investments and noted that such a to the list of interests that are excluded rule may result in banking entities restriction is not reflected in the text of from the definition of ownership receiving credit enhancements that the 2013 rule.784 The final rule includes interest. Specifically, the final rule reduce the risk of the debt instrument or a rule of construction that (1) a banking provides a safe harbor excluding any loan and are therefore stronger than entity will not be required to include in senior loan or senior debt interest that what banking entities may have the calculation of the investment limits has specific characteristics.779 Those received in the absence of the final rule. under § ll.12(a)(2) any investment the characteristics are: (1) Under the terms Finally, the final rule includes a number banking entity makes alongside a of the interest, the holders do not have of conditions and restrictions aimed at covered fund, as long as the investment the right to receive a share of the reducing the risk to banking entities is made in compliance with applicable income, gains, or profits of the covered while facilitating traditional lending laws and regulations, and (2) a banking fund, but are entitled to receive only activity. entity shall not be restricted in the certain interest and fees, and repayment The agencies could have adopted amount of any investment the banking of a fixed principal amount on or before broader relief by limiting the particular entity makes alongside a covered fund a maturity date in a contractually- forms of a banking entity’s interest (e.g., as long as the investment is made in determined manner (which may include equity or partnership shares) that would compliance with applicable laws and prepayment premiums intended solely qualify as an ownership interest or by regulations, including applicable safety to reflect, and compensate holders of the limiting the definition of ownership and soundness standards.785 interest for, forgone income resulting interest to ‘‘voting securities’’ as defined The SEC recognizes that this rule of from an early prepayment); (2) the by the Board’s Regulation Y. By construction may increase the incentive entitlement to payments is absolute and providing broader relief relative to the for banking entities to make parallel cannot be reduced because of the losses final rule, such an alternative may have investments alongside a covered fund arising from the covered fund’s produced greater reductions in that is organized and offered by the underlying assets; and (3) the holders of uncertainty and compliance burdens, banking entity for the purposes of the interest are not entitled to receive and a greater willingness of banking artificially maintaining or increasing the the underlying assets of the covered entities to become involved in certain value of the fund’s positions. fund after all other interests have been debt transactions. However, such greater Supporting a fund with a direct redeemed or paid in full (excluding the involvement in certain debt transactions investment in such a manner would rights of a creditor to exercise remedies may also have given rise to greater risks increase these banking entities’ upon the occurrence of an event of being borne by banking entities. The exposures to the covered fund’s assets default or an acceleration event).780 final rule is intended to provide and, as discussed above, could be The final rule should simplify the sufficient safeguards and limitations to inconsistent with the final rule’s analysis banking entities must perform prevent banking entities from acquiring restriction on a banking entity to determine whether they have an interests in covered funds that run guaranteeing, assuming, or otherwise ownership interest under section 13 of counter to the intentions of the implementing regulations and limit a the BHC Act and the final rule. 782 See supra Section IV.F. (Parallel Investments) banking entity’s exposure to the and references therein. 779 See final rule § ll.10(d)(6)(ii)(B). economic risks of covered funds and 783 See id. 780 See id. See also, supra Section IV.E.1. 784 See 85 FR 12174. (Ownership Interest). 781 See Occupy. 785 See final rule § ll.12(b)(5)(i).

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insuring the obligations or performance impact competition, capital formation, The possible effects of the final rule of such covered fund.786 and allocative efficiency. on allocative efficiency are related to the Further, as stated above, the agencies The final rule may have three groups final rule’s likely impact on capital would expect that any investments of competitive effects. First, the final formation. Specifically, as discussed made alongside a covered fund by a rule may make it easier for bank above, the SEC believes that the final director or employee of a banking entity affiliated broker-dealers, SBSDs, and rule may result in a greater number and or its affiliate, if made in compliance RIAs to compete with bank unaffiliated variety of private funds launched by with applicable laws and regulations, broker-dealers, SBSDs, and RIAs in their banking entities. To the degree that would not be treated as an investment activities with certain groups of private banking entities may be able to provide by the director or employee in the funds and other entities. Second, the superior private funds due to their covered fund. Accordingly, such an final rule may reduce competitive expertise or economies of scale or scope, investment would not be attributed to disparities between banking entities and to the degree that fund structures the banking entity as an investment in subject to the final rule and affected by may be more efficient than direct the covered fund, regardless of whether the final rule, and banking entities that investments (due to, e.g., superior risk the banking entity arranged the are not. Third, certain aspects of the sharing and pooling of expertise across transaction on behalf of the director or final rule (such as those related to fund investors), the final rule may employee or provided financing for the foreign excluded funds and foreign enhance the ability of market investment. public funds) may reduce competitive participants, investors, and issuers to disparities between U.S. banking The SEC recognizes that the rule of allocate their capital efficiently. entities and foreign banking entities in construction may remove a restriction their covered fund activities. Because The SEC recognizes that the final rule on investments made alongside a competition may reduce costs or may increase the ability of banking covered fund that may have interfered increase quality, and because some entities to engage in certain types of with banking entities’ ability to make affected banking entities may face activities involving risk, and that otherwise permissible investments increases in risk exposures of large 787 economies of scale or scope in the directly on their balance sheets. In provision of services to certain private groups of banking entities may particular, the rule of construction may funds, these competitive effects may negatively impact capital formation, allow banking entities to make parallel flow through to customers, clients, and securities markets, and the real investments alongside their covered investors in the form of reduced economy, particularly during times of funds without including the value of transaction costs and greater quality of adverse economic conditions. Moreover, those parallel investments within the private fund and other offerings and losses on investment portfolios may ownership limits imposed on a banking related financial services. discourage capital market participation entity. Similarly, the rule of The final rule may also impact capital by various groups of investors. Three construction may provide clarity to formation. For example, by reducing the important considerations may mitigate banking entities such that they will not scope of application of covered fund these potential risks. First, as discussed be prevented from making investments restrictions in the final rule, the final throughout this economic analysis, alongside their covered funds, as long as rule relaxes restrictions related to banking entities already engage in a those investments are otherwise banking entity underwriting and variety of permissible activities permissible under applicable laws and market-making of certain private funds. 788 involving risk, including extensions of regulations. In addition to removing Moreover, the final rule modifies certain credit, underwriting, and market- impediments for banking entities’ restrictions related to banking entity making, and the activities of many types otherwise permissible investments, the relationships with certain covered of private funds that are excluded under rule of construction in the final rule funds. Further, as discussed above, the the final rule largely replicate may enable banking entities to make final rule enables banking entities to permissible and traditional activities of investments alongside a covered fund engage indirectly (through a fund banking entities. Second, banking that will credibly signal the banking structure) in certain of the same entities subject to the final rule may also entity’s view of the quality of the activities that they are currently able to be subject to multiple prudential investment(s) to investors in the fund, engage in directly (extending credit or capital, margin, and liquidity and may also help align the incentives direct ownership stakes). To the degree requirements that facilitate the safety of banking entities, and their directors that the implementing regulations and soundness of banking entities and and employees, with those of the impede or otherwise constrain banking promote financial stability. Third, the covered funds and their investors. entity activities in such funds, the final additional exclusions from the 4. Efficiency, Competition, and Capital rule may result in a greater number of definition of covered fund each include Formation such private funds being launched by a number of conditions aimed at banking entities, increasing capital preventing evasion of section 13 of the As discussed above, the final rule formation via private funds. The effects BHC Act and the final rule, promoting excludes certain groups of private funds of the final rule on capital formation are safety and soundness, and/or allowing and other entities from the scope of the likely to flow through to investors (in for customer oriented financial services covered fund definition and modifies the form of greater availability or variety provided on arms-length, market terms. other covered fund restrictions or private funds available for investors) applicable to banking entities subject to as well as an increase in the supply of Under the final rule, a banking entity the final rule. Moreover, the final rule capital available to firms seeking to raise is not prohibited from acquiring or reduces compliance obligations of capital or obtain financing from private retaining an ownership interest in, or banking entities subject to the final rule. funds.789 acting as sponsor to, a covered fund if The SEC believes that the final rule may the banking entity organizes or offers 789 For example, the final rule could result in the covered fund and satisfies other additional venture capital being available in 786 Id. requirements. One such requirement is geographic areas where it has been relatively less that the banking entity provide specified 787 See supra note 784. available. See supra Section V.F.3.i. (Venture 788 See id. Capital Funds). disclosures to prospective and actual

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investors in the covered fund.790 Under companies, Investments, Penalties, foreign excluded fund. For purposes of the final rule, banking entities must Reporting and recordkeeping this paragraph (f), a qualifying foreign provide the disclosures specified by requirements, Securities, State excluded fund means a banking entity § ll.11(a)(8) to satisfy the exclusions nonmember banks, State savings that: for family wealth management vehicles associations, Trusts and trustees. (1) Is organized or established outside and customer facilitation vehicles and the United States, and the ownership to satisfy the exclusions for credit funds 12 CFR Part 351 interests of which are offered and sold and venture capital funds if the banking Banks, Banking, Capital, solely outside the United States; entity is a sponsor, investment adviser, Compensation, Conflicts of interest, (2)(i) Would be a covered fund if the or commodity trading advisor of the Credit, Derivatives, Government entity were organized or established in fund. To the extent that the final rule securities, Insurance, Insurance the United States, or leads banking entities to establish or companies, Investments, Penalties, (ii) Is, or holds itself out as being, an provide services to more of these Reporting and recordkeeping entity or arrangement that raises money vehicles, the volume of information requirements, Risk, Risk retention, from investors primarily for the purpose available to market participants could Securities, Trusts and trustees. of investing in financial instruments for increase. Specifically, if banking entities resale or other disposition or otherwise 17 CFR Part 75 respond to the final rule by establishing trading in financial instruments; or providing services to more of these Banks, Banking, Compensation, (3) Would not otherwise be a banking vehicles because they are excluded from Credit, Derivatives, Federal branches entity except by virtue of the acquisition the definition of ‘‘covered fund,’’ then and agencies, Federal savings or retention of an ownership interest in, the amount of such disclosures would associations, Government securities, sponsorship of, or relationship with the increase accordingly. Hedge funds, Insurance, Investments, entity, by another banking entity that Importantly, the magnitude of all of National banks, Penalties, Proprietary meets the following: the above effects on competition, capital trading, Reporting and recordkeeping (i) The banking entity is not formation, and allocative efficiency will requirements, Risk, Risk retention, organized, or directly or indirectly be influenced by a large number of Securities, Swap dealers, Trusts and controlled by a banking entity that is factors, such as prevailing trustees, Volcker rule. organized, under the laws of the United macroeconomic conditions, the States or of any State; and 17 CFR Part 255 financial condition of firms seeking to (ii) The banking entity’s acquisition or raise capital, and of funds seeking to Banks, Brokers, Dealers, Investment retention of an ownership interest in or transact with banking entities, market advisers, Recordkeeping, Reporting, sponsorship of the fund meets the saturation, and search for higher yields Securities. requirements for permitted covered fund activities and investments solely by investors during low interest rate DEPARTMENT OF THE TREASURY environments. Moreover, the relative outside the United States, as provided efficiency between fund structures and Office of the Comptroller of the in § 44.13(b); the direct provision of capital is likely Currency (4) Is established and operated as part of a bona fide asset management to vary widely among banking entities 12 CFR Chapter I and funds. The SEC recognizes that business; and such economic effects may be Authority and Issuance (5) Is not operated in a manner that dampened or magnified in different For the reasons stated in the Common enables the banking entity that sponsors phases of the macroeconomic cycle and Preamble, the Office of the Comptroller or controls the qualifying foreign across various types of banking entities. of the Currency amends chapter I of title excluded fund, or any of its affiliates, to 12, Code of Federal Regulations as evade the requirements of section 13 of G. Congressional Review Act follows: the BHC Act or this part. For the OCC, Board, FDIC, SEC, and Subpart C—Covered Funds Activities CFTC, the Office of Information and PART 44—PROPRIETARY TRADING Regulatory Affairs, pursuant to the AND CERTAIN INTERESTS IN AND and Investments Congressional Review Act, has RELATIONSHIPS WITH COVERED ■ 3. Amend § 44.10 by: designated this rule as a ‘‘major rule’’ as FUNDS ■ a. Revising paragraph (c)(1); defined by 5 U.S.C. 804(2). ■ b. Revising paragraph (c)(3)(i); ■ 1. The authority citation for part 44 ■ List of Subjects c. Revising paragraph (c)(8); continues to read as follows: ■ d. Revising the heading of paragraph 12 CFR Part 44 Authority: 7 U.S.C. 27 et seq., 12 U.S.C. 1, (c)(10) and revising paragraph (c)(10)(i); ■ Banks, Banking, Compensation, 24, 92a, 93a, 161, 1461, 1462a, 1463, 1464, e. Revising paragraph (c)(11); ■ Credit, Derivatives, Government 1467a, 1813(q), 1818, 1851, 3101, 3102, 3108, f. Adding paragraphs (c)(15), (16), 5412. securities, Insurance, Investments, (17), and (18); ■ g. Revising paragraph (d)(6); and National banks, Penalties, Reporting and Subpart B—Proprietary Trading ■ h. Adding paragraph (d)(11). recordkeeping requirements, Risk, Risk The revisions and additions read as ■ retention, Securities, Trusts and 2. Amend § 44.6 by adding paragraph follows: trustees. (f) to read as follows: § 44.10 Prohibition on acquiring or 12 CFR Part 248 § 44.6 Other permitted proprietary trading retaining an ownership interest in and Administrative practice and activities. having certain relationships with a covered procedure, Banks, banking, Conflict of * * * * * fund. interests, Credit, Foreign banking, (f) Permitted trading activities of * * * * * Government securities, Holding qualifying foreign excluded funds. The (c) * * * companies, Insurance, Insurance prohibition contained in § 44.3(a) does (1) Foreign public funds. (i) Subject to not apply to the purchase or sale of a paragraphs (c)(1)(ii) and (iii) of this 790 Implementing regulations § ll.11(a)(8). financial instrument by a qualifying section, an issuer that:

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(A) Is organized or established outside distribution of proceeds to holders of (c)(8)(i)(E) of this section, if those of the United States; and such securities and rights or other assets securities are: (B) Is authorized to offer and sell that are related or incidental to (A) Cash equivalents—which, for the ownership interests, and such interests purchasing or otherwise acquiring and purposes of this paragraph, means high are offered and sold, through one or holding the loans, provided that each quality, highly liquid investments more public offerings. asset that is a security (other than whose maturity corresponds to the (ii) With respect to a banking entity special units of beneficial interest and securitization’s expected or potential that is, or is controlled directly or collateral certificates meeting the need for funds and whose currency indirectly by a banking entity that is, requirements of paragraph (c)(8)(v) of corresponds to either the underlying located in or organized under the laws this section) meets the requirements of loans or the asset-backed securities—for of the United States or of any State and paragraph (c)(8)(iii) of this section; purposes of the rights and assets in any issuer for which such banking (C) Interest rate or foreign exchange paragraph (c)(8)(i)(B) of this section; or entity acts as sponsor, the sponsoring derivatives that meet the requirements (B) Securities received in lieu of debts banking entity may not rely on the of paragraph (c)(8)(iv) of this section; previously contracted with respect to exemption in paragraph (c)(1)(i) of this (D) Special units of beneficial interest the loans supporting the asset-backed section for such issuer unless more than and collateral certificates that meet the securities. 75 percent of the ownership interests in requirements of paragraph (c)(8)(v) of (iv) Derivatives. The holdings of the issuer are sold to persons other than: this section; and derivatives by the issuing entity shall be (A) Such sponsoring banking entity; (E) Debt securities, other than asset- limited to interest rate or foreign (B) Such issuer; backed securities and convertible exchange derivatives that satisfy all of (C) Affiliates of such sponsoring securities, provided that: the following conditions: banking entity or such issuer; and (1) The aggregate value of such debt (A) The written terms of the (D) Directors and senior executive securities does not exceed five percent derivatives directly relate to the loans, officers as defined in § 225.71(c) of the of the aggregate value of loans held the asset-backed securities, the Board’s Regulation Y (12 CFR 225.71(c)) under paragraph (c)(8)(i)(A) of this contractual rights or other assets of such entities. section, cash and cash equivalents held described in paragraph (c)(8)(i)(B) of (iii) For purposes of paragraph under paragraph (c)(8)(iii)(A) of this this section, or the debt securities (c)(1)(i)(B) of this section, the term section, and debt securities held under described in paragraph (c)(8)(i)(E) of this ‘‘public offering’’ means a distribution this paragraph (c)(8)(i)(E); and section; and (B) The derivatives reduce the interest (as defined in § 44.4(a)(3)) of securities (2) The aggregate value of the loans, rate and/or foreign exchange risks in any jurisdiction outside the United cash and cash equivalents, and debt related to the loans, the asset-backed States to investors, including retail securities for purposes of this paragraph securities, the contractual rights or other investors, provided that: is calculated at par value at the most assets described in paragraph (c)(8)(i)(B) (A) The distribution is subject to recent time any such debt security is of this section, or the debt securities substantive disclosure and retail acquired, except that the issuing entity described in paragraph (c)(8)(i)(E) of this investor protection laws or regulations; may instead determine the value of any (B) With respect to an issuer for section. such loan, cash equivalent, or debt (v) Special units of beneficial interest which the banking entity serves as the security based on its fair market value investment manager, investment and collateral certificates. The assets or if: holdings of the issuing entity may adviser, commodity trading advisor, (i) The issuing entity is required to commodity pool operator, or sponsor, include collateral certificates and use the fair market value of such assets special units of beneficial interest the distribution complies with all for purposes of calculating compliance applicable requirements in the issued by a special purpose vehicle, with concentration limitations or other provided that: jurisdiction in which such distribution similar calculations under its is being made; (A) The special purpose vehicle that transaction agreements, and issues the special unit of beneficial (C) The distribution does not restrict (ii) The issuing entity’s valuation availability to investors having a interest or collateral certificate meets methodology values similarly situated the requirements in this paragraph minimum level of net worth or net assets consistently. investment assets; and (c)(8); (ii) Impermissible assets. For purposes (B) The special unit of beneficial (D) The issuer has filed or submitted, of this paragraph (c)(8), except as interest or collateral certificate is used with the appropriate regulatory permitted under paragraph (c)(8)(i)(E) of for the sole purpose of transferring to authority in such jurisdiction, offering this section, the assets or holdings of the the issuing entity for the loan disclosure documents that are publicly issuing entity shall not include any of securitization the economic risks and available. the following: benefits of the assets that are * * * * * (A) A security, including an asset- permissible for loan securitizations (3) * * * backed security, or an interest in an under this paragraph (c)(8) and does not (i) Is composed of no more than 10 equity or debt security other than as directly or indirectly transfer any unaffiliated co-venturers; permitted in paragraphs (c)(8)(iii), (iv), interest in any other economic or * * * * * or (v) of this section; financial exposure; (8) Loan securitizations. (i) Scope. An (B) A derivative, other than a (C) The special unit of beneficial issuing entity for asset-backed securities derivative that meets the requirements interest or collateral certificate is that satisfies all the conditions of this of paragraph (c)(8)(iv) of this section; or created solely to satisfy legal paragraph (c)(8) and the assets or (C) A commodity forward contract. requirements or otherwise facilitate the holdings of which are composed solely (iii) Permitted securities. structuring of the loan securitization; of: Notwithstanding paragraph (c)(8)(ii)(A) and (A) Loans as defined in § 44.2(t); of this section, the issuing entity may (D) The special purpose vehicle that (B) Rights or other assets designed to hold securities, other than debt issues the special unit of beneficial assure the servicing or timely securities permitted under paragraph interest or collateral certificate and the

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issuing entity are established under the (other than investments in cash (B) Not issue asset-backed securities. direction of the same entity that equivalents, which, for the purposes of (iii) Requirements for a sponsor, initiated the loan securitization. this paragraph, means high quality, investment adviser, or commodity * * * * * highly liquid investments whose trading advisor. A banking entity that (10) Qualifying covered bonds. (i) maturity corresponds to the issuer’s acts as a sponsor, investment adviser, or Scope. An entity owning or holding a expected or potential need for funds and commodity trading advisor to an issuer dynamic or fixed pool of loans or other whose currency corresponds to the that meets the conditions in paragraphs assets as provided in paragraph (c)(8) of issuer’s assets) after such termination; or (c)(15)(i) and (ii) of this section may not this section for the benefit of the holders (iv) That is a qualified opportunity rely on this exclusion unless the of covered bonds, provided that the fund, as defined in 26 U.S.C. 1400Z– banking entity: assets in the pool are composed solely 2(d). (A) Provides in writing to any of assets that meet the conditions in * * * * * prospective and actual investor in the paragraph (c)(8)(i) of this section. (15) Credit funds. Subject to issuer the disclosures required under § 44.11(a)(8) of this subpart, as if the * * * * * paragraphs (c)(15)(iii), (iv), and (v) of issuer were a covered fund; (11) SBICs and public welfare this section, an issuer that satisfies the (B) Ensures that the activities of the investment funds. An issuer: asset and activity requirements of issuer are consistent with safety and (i) That is a small business investment paragraphs (c)(15)(i) and (ii) of this soundness standards that are company, as defined in section 103(3) of section. substantially similar to those that would the Small Business Investment Act of (i) Asset requirements. The issuer’s apply if the banking entity engaged in 1958 (15 U.S.C. 662), or that has assets must be composed solely of: the activities directly; and received from the Small Business (A) Loans as defined in § 44.2(t); (B) Debt instruments, subject to (C) Complies with the limitations Administration notice to proceed to imposed in § 44.14, as if the issuer were qualify for a license as a small business paragraph (c)(15)(iv) of this section; (C) Rights and other assets that are a covered fund, except the banking investment company, which notice or entity may acquire and retain any license has not been revoked, or that has related or incidental to acquiring, holding, servicing, or selling such loans ownership interest in the issuer. voluntarily surrendered its license to (iv) Additional Banking Entity or debt instruments, provided that: operate as a small business investment Requirements. A banking entity may not (1) Each right or asset held under this company in accordance with 13 CFR rely on this exclusion with respect to an paragraph (c)(15)(i)(C) that is a security 107.1900 and does not make any new issuer that meets the conditions in is either: investments (other than investments in paragraphs (c)(15)(i) and (ii) of this (i) A cash equivalent (which, for the cash equivalents, which, for the section unless: purposes of this paragraph, means high purposes of this paragraph, means high (A) The banking entity does not, quality, highly liquid investments quality, highly liquid investments directly or indirectly, guarantee, whose maturity corresponds to the whose maturity corresponds to the assume, or otherwise insure the issuer’s expected or potential need for issuer’s expected or potential need for obligations or performance of the issuer funds and whose currency corresponds funds and whose currency corresponds or of any entity to which such issuer to the issuer’s assets) after such to either the underlying loans or the extends credit or in which such issuer voluntary surrender; debt instruments); invests; and (ii) The business of which is to make (ii) A security received in lieu of debts (B) Any assets the issuer holds investments that are: previously contracted with respect to pursuant to paragraphs (c)(15)(i)(B) or (A) Designed primarily to promote the such loans or debt instruments; or (i)(C)(1)(iii) of this section would be public welfare, of the type permitted (iii) An equity security (or right to permissible for the banking entity to under paragraph (11) of section 5136 of acquire an equity security) received on acquire and hold directly under the Revised Statutes of the United States customary terms in connection with applicable federal banking laws and (12 U.S.C. 24), including the welfare of such loans or debt instruments; and regulations. low- and moderate-income communities (2) Rights or other assets held under (v) Investment and Relationship or families (such as providing housing, this paragraph (c)(15)(i)(C) of this Limits. A banking entity’s investment in, services, or jobs) and including section may not include commodity and relationship with, the issuer must: investments that qualify for forward contracts or any derivative; and (A) Comply with the limitations consideration under the regulations (D) Interest rate or foreign exchange imposed in § 44.15, as if the issuer were implementing the Community derivatives, if: a covered fund; and Reinvestment Act (12 U.S.C. 2901 et (1) The written terms of the derivative (B) Be conducted in compliance with, seq.); or directly relate to the loans, debt and subject to, applicable banking laws (B) Qualified rehabilitation instruments, or other rights or assets and regulations, including applicable expenditures with respect to a qualified described in paragraph (c)(15)(i)(C) of safety and soundness standards. rehabilitated building or certified this section; and (16) Qualifying venture capital funds. historic structure, as such terms are (2) The derivative reduces the interest (i) Subject to paragraphs (c)(16)(ii) defined in section 47 of the Internal rate and/or foreign exchange risks through (iv) of this section, an issuer Revenue Code of 1986 or a similar State related to the loans, debt instruments, or that: historic tax credit program; other rights or assets described in (A) Is a venture capital fund as (iii) That has elected to be regulated paragraph (c)(15)(i)(C) of this section. defined in 17 CFR 275.203(l)–1; and or is regulated as a rural business (ii) Activity requirements. To be (B) Does not engage in any activity investment company, as described in 15 eligible for the exclusion of paragraph that would constitute proprietary U.S.C. 80b–3(b)(8)(A) or (B), or that has (c)(15) of this section, an issuer must: trading under § 44.3(b)(1)(i), as if the terminated its participation as a rural (A) Not engage in any activity that issuer were a banking entity. business investment company in would constitute proprietary trading (ii) A banking entity that acts as a accordance with 7 CFR 4290.1900 and under § 44.3(b)(l)(i), as if the issuer were sponsor, investment adviser, or does not make any new investments a banking entity; and commodity trading advisor to an issuer

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that meets the conditions in paragraph (ii) A banking entity may rely on the section with respect to an issuer (c)(16)(i) of this section may not rely on exclusion in paragraph (c)(17)(i) of this provided that: this exclusion unless the banking entity: section with respect to an entity (A) All of the ownership interests of (A) Provides in writing to any provided that the banking entity (or an the issuer are owned by the customer prospective and actual investor in the affiliate): (which may include one or more of its issuer the disclosures required under (A) Provides bona fide trust, fiduciary, affiliates) for whom the issuer was § 44.11(a)(8), as if the issuer were a investment advisory, or commodity created; covered fund; trading advisory services to the entity; (B) Notwithstanding paragraph (B) Ensures that the activities of the (B) Does not, directly or indirectly, (c)(18)(ii)(A) of this section, up to an issuer are consistent with safety and guarantee, assume, or otherwise insure aggregate 0.5 percent of the issuer’s soundness standards that are the obligations or performance of such outstanding ownership interests may be substantially similar to those that would entity; acquired or retained by one or more apply if the banking entity engaged in (C) Complies with the disclosure entities that are not customers if the the activities directly; and obligations under § 44.11(a)(8), as if ownership interest is acquired or (C) Complies with the restrictions in such entity were a covered fund, retained by such parties for the purpose § 44.14 as if the issuer were a covered provided that the content may be of and to the extent necessary for fund (except the banking entity may modified to prevent the disclosure from establishing corporate separateness or acquire and retain any ownership being misleading and the manner of addressing bankruptcy, insolvency, or interest in the issuer). disclosure may be modified to similar concerns; and (iii) The banking entity must not, accommodate the specific (C) The banking entity and its directly or indirectly, guarantee, circumstances of the entity; affiliates: assume, or otherwise insure the (D) Does not acquire or retain, as (1) Maintain documentation outlining obligations or performance of the issuer. principal, an ownership interest in the how the banking entity intends to (iv) A banking entity’s ownership entity, other than as described in facilitate the customer’s exposure to interest in or relationship with the paragraph (c)(17)(i)(C) of this section; such transaction, investment strategy, or issuer must: (E) Complies with the requirements of service; (A) Comply with the limitations §§ 44.14(b) and 44.15, as if such entity (2) Do not, directly or indirectly, imposed in § 44.15, as if the issuer were were a covered fund; and guarantee, assume, or otherwise insure a covered fund; and (F) Except for riskless principal the obligations or performance of such (B) Be conducted in compliance with, transactions as defined in paragraph issuer; and subject to, applicable banking laws (d)(11) of this section, complies with the (3) Comply with the disclosure and regulations, including applicable requirements of 12 CFR 223.15(a), as if obligations under § 44.11(a)(8), as if safety and soundness standards. such banking entity and its affiliates such issuer were a covered fund, (17) Family wealth management were a member bank and the entity were provided that the content may be vehicles. (i) Subject to paragraph an affiliate thereof. modified to prevent the disclosure from (c)(17)(ii) of this section, any entity that (iii) For purposes of paragraph (c)(17) being misleading and the manner of is not, and does not hold itself out as of this section, the following definitions disclosure may be modified to being, an entity or arrangement that apply: accommodate the specific raises money from investors primarily (A) Closely related person means a circumstances of the issuer; for the purpose of investing in securities natural person (including the estate and (4) Do not acquire or retain, as for resale or other disposition or estate planning vehicles of such person) principal, an ownership interest in the otherwise trading in securities, and: who has longstanding business or issuer, other than as described in (A) If the entity is a trust, the personal relationships with any family paragraph (c)(18)(ii)(B) of this section; grantor(s) of the entity are all family customer. (5) Comply with the requirements of customers; and (B) Family customer means: §§ 44.14(b) and 44.15, as if such issuer (B) If the entity is not a trust: (1) A family client, as defined in Rule were a covered fund; and (1) A majority of the voting interests 202(a)(11)(G)–1(d)(4) of the Investment (6) Except for riskless principal in the entity are owned (directly or Advisers Act of 1940 (17 CFR transactions as defined in paragraph indirectly) by family customers; 275.202(a)(11)(G)–1(d)(4)); or (d)(11) of this section, comply with the (2) A majority of the interests in the (2) Any natural person who is a requirements of 12 CFR 223.15(a), as if entity are owned (directly or indirectly) father-in-law, mother-in-law, brother-in- such banking entity and its affiliates by family customers; law, sister-in-law, son-in-law or were a member bank and the issuer (3) The entity is owned only by family daughter-in-law of a family client, or a were an affiliate thereof. customers and up to 5 closely related spouse or a spousal equivalent of any of * * * * * persons of the family customers; and the foregoing. (d) * * * (C) Notwithstanding paragraph (18) Customer facilitation vehicles. (i) (6) Ownership interest. (i) Ownership (c)(17)(i)(A) and (B) of this section, up Subject to paragraph (c)(18)(ii) of this interest means any equity, partnership, to an aggregate 0.5 percent of the section, an issuer that is formed by or or other similar interest. An ‘‘other entity’s outstanding ownership interests at the request of a customer of the similar interest’’ means an interest that: may be acquired or retained by one or banking entity for the purpose of (A) Has the right to participate in the more entities that are not family providing such customer (which may selection or removal of a general customers or closely related persons if include one or more affiliates of such partner, managing member, member of the ownership interest is acquired or customer) with exposure to a the board of directors or trustees, retained by such parties for the purpose transaction, investment strategy, or investment manager, investment of and to the extent necessary for other service provided by the banking adviser, or commodity trading advisor establishing corporate separateness or entity. of the covered fund, excluding: addressing bankruptcy, insolvency, or (ii) A banking entity may rely on the (1) The rights of a creditor to exercise similar concerns. exclusion in paragraph (c)(18)(i) of this remedies upon the occurrence of an

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event of default or an acceleration event; (E) Provides under the terms of the the employee or former employee, or in and interest that the amounts payable by the connection with a sale of the business (2) The right to participate in the covered fund with respect to the interest that gave rise to the restricted profit removal of an investment manager for could be reduced based on losses arising interest by the entity (or employee or ‘‘cause’’ or participate in the selection of from the underlying assets of the former employee thereof) to an a replacement manager upon an covered fund, such as allocation of unaffiliated party that provides investment manager’s resignation or losses, write-downs or charge-offs of the investment management, investment removal. For purposes of this paragraph outstanding principal balance, or advisory, commodity trading advisory, (d)(6)(i)(A)(2), ‘‘cause’’ for removal of an reductions in the amount of interest due or other services to the fund. investment manager means one or more and payable on the interest; (B) Any senior loan or senior debt of the following events: (F) Receives income on a pass-through interest that has the following (i) The bankruptcy, insolvency, basis from the covered fund, or has a characteristics: conservatorship or receivership of the rate of return that is determined by (1) Under the terms of the interest the investment manager; reference to the performance of the holders of such interest do not have the (ii) The breach by the investment underlying assets of the covered fund; right to receive a share of the income, or manager of any material provision of the gains, or profits of the covered fund, but (G) Any synthetic right to have, covered fund’s transaction agreements are entitled to receive only: applicable to the investment manager; receive, or be allocated any of the rights in paragraphs (d)(6)(i)(A) through (F) of (i) Interest at a stated interest rate, as (iii) The breach by the investment well as commitment fees or other fees, manager of material representations or this section. (ii) Ownership interest does not which are not determined by reference warranties; include: to the performance of the underlying (iv) The occurrence of an act that (A) Restricted profit interest, which is assets of the covered fund; and constitutes fraud or criminal activity in an interest held by an entity (or an (ii) Repayment of a fixed principal the performance of the investment employee or former employee thereof) amount, on or before a maturity date, in manager’s obligations under the covered in a covered fund for which the entity a contractually-determined manner fund’s transaction agreements; (or employee thereof) serves as (which may include prepayment (v) The indictment of the investment investment manager, investment premiums intended solely to reflect, and manager for a criminal offense, or the adviser, commodity trading advisor, or compensate holders of the interest for, indictment of any officer, member, other service provider, so long as: forgone income resulting from an early partner or other principal of the (1) The sole purpose and effect of the prepayment); investment manager for a criminal interest is to allow the entity (or (2) The entitlement to payments offense materially related to his or her employee or former employee thereof) under the terms of the interest are investment management activities; to share in the profits of the covered absolute and could not be reduced (vi) A change in control with respect fund as performance compensation for based on losses arising from the to the investment manager; the investment management, investment underlying assets of the covered fund, (vii) The loss, separation or advisory, commodity trading advisory, such as allocation of losses, write- incapacitation of an individual critical or other services provided to the downs or charge-offs of the outstanding to the operation of the investment covered fund by the entity (or employee principal balance, or reductions in the manager or primarily responsible for the or former employee thereof), provided amount of interest due and payable on management of the covered fund’s that the entity (or employee or former the interest; and assets; or employee thereof) may be obligated (3) The holders of the interest are not (viii) Other similar events that under the terms of such interest to entitled to receive the underlying assets constitute ‘‘cause’’ for removal of an return profits previously received; of the covered fund after all other investment manager, provided that such (2) All such profit, once allocated, is interests have been redeemed or paid in events are not solely related to the distributed to the entity (or employee or full (excluding the rights of a creditor to performance of the covered fund or the former employee thereof) promptly after exercise remedies upon the occurrence investment manager’s exercise of being earned or, if not so distributed, is of an event of default or an acceleration investment discretion under the covered retained by the covered fund for the sole event). fund’s transaction agreements; purpose of establishing a reserve (B) Has the right under the terms of amount to satisfy contractual obligations * * * * * the interest to receive a share of the with respect to subsequent losses of the (11) Riskless principal transaction. income, gains or profits of the covered covered fund and such undistributed Riskless principal transaction means a fund; profit of the entity (or employee or transaction in which a banking entity, (C) Has the right to receive the former employee thereof) does not share after receiving an order from a customer underlying assets of the covered fund in the subsequent investment gains of to buy (or sell) a security, purchases (or after all other interests have been the covered fund; sells) the security in the secondary redeemed and/or paid in full (excluding (3) Any amounts invested in the market for its own account to offset a the rights of a creditor to exercise covered fund, including any amounts contemporaneous sale to (or purchase remedies upon the occurrence of an paid by the entity in connection with from) the customer. event of default or an acceleration obtaining the restricted profit interest, ■ 4. Amend § 44.12 by: event); are within the limits of § 44.12 of this ■ a. Revising paragraph (b)(1)(ii); (D) Has the right to receive all or a subpart; and ■ b. Revising paragraph (b)(4); portion of excess spread (the positive (4) The interest is not transferable by ■ c. Adding paragraph (b)(5); difference, if any, between the aggregate the entity (or employee or former ■ interest payments received from the employee thereof) except to an affiliate d. Revising paragraph (c)(1); and underlying assets of the covered fund thereof (or an employee of the banking ■ e. Revising paragraphs (d) and (e). and the aggregate interest paid to the entity or affiliate), to immediate family The revisions and addition read as holders of other outstanding interests); members, or through the intestacy, of follows:

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§ 44.12 Permitted investment in a covered (5) Parallel Investments and Co- (ii) The fair market value of the fund. Investments. (i) A banking entity shall banking entity’s ownership interests in * * * * * not be required to include in the the covered fund as determined under (b) * * * calculation of the investment limits paragraph (b)(2)(ii) or (b)(3) of this (1) * * * under paragraph (a)(2) of this section section (together with any amounts paid (ii) Treatment of registered investment any investment the banking entity by the entity in connection with companies, SEC-regulated business makes alongside a covered fund as long obtaining a restricted profit interest development companies, and foreign as the investment is made in under § 44.10(d)(6)(ii) of subpart C of public funds. For purposes of paragraph compliance with applicable laws and this part), if the banking entity accounts (b)(1)(i) of this section, a registered regulations, including applicable safety for the profits (or losses) of the fund investment company, SEC-regulated and soundness standards. investment in its financial statements. business development companies, or (ii) A banking entity shall not be (2) Treatment of employee and foreign public fund as described in restricted under this section in the director restricted profit interests § 44.10(c)(1) will not be considered to be amount of any investment the banking financed by the banking entity. For an affiliate of the banking entity so long entity makes alongside a covered fund purposes of paragraph (d)(1) of this as: as long as the investment is made in section, an investment by a director or (A) The banking entity, together with compliance with applicable laws and employee of a banking entity who its affiliates, does not own, control, or regulations, including applicable safety acquires a restricted profit interest in his hold with the power to vote 25 percent and soundness standards. or her personal capacity in a covered or more of the voting shares of the (c) * * * fund sponsored by the banking entity company or fund; and (1)(i) For purposes of paragraph will be attributed to the banking entity (B) The banking entity, or an affiliate (a)(2)(iii) of this section, the aggregate if the banking entity, directly or of the banking entity, provides value of all ownership interests held by indirectly, extends financing for the investment advisory, commodity trading a banking entity shall be the sum of all purpose of enabling the director or advisory, administrative, and other amounts paid or contributed by the employee to acquire the restricted profit services to the company or fund in banking entity in connection with interest in the fund and the financing is compliance with the limitations under acquiring or retaining an ownership used to acquire such ownership interest applicable regulation, order, or other interest in covered funds (together with in the covered fund. authority. any amounts paid by the entity in (e) Extension of time to divest an * * * * * connection with obtaining a restricted ownership interest. (1) Extension period. (4) Multi-tier fund investments. (i) profit interest under § 44.10(d)(6)(ii)), on Upon application by a banking entity, Master-feeder fund investments. If the a historical cost basis; the Board may extend the period under principal investment strategy of a (ii) Treatment of employee and paragraph (a)(2)(i) of this section for up covered fund (the ‘‘feeder fund’’) is to director restricted profit interests to 2 additional years if the Board finds invest substantially all of its assets in financed by the banking entity. For that an extension would be consistent another single covered fund (the purposes of paragraph (c)(1)(i) of this with safety and soundness and not ‘‘master fund’’), then for purposes of the section, an investment by a director or detrimental to the public interest. (2) Application requirements. An investment limitations in paragraphs employee of a banking entity who application for extension must: (a)(2)(i)(B) and (a)(2)(ii) of this section, acquires a restricted profit interest in his (i) Be submitted to the Board at least the banking entity’s permitted or her personal capacity in a covered 90 days prior to the expiration of the investment in such funds shall be fund sponsored by the banking entity will be attributed to the banking entity applicable time period; measured only by reference to the value (ii) Provide the reasons for of the master fund. The banking entity’s if the banking entity, directly or indirectly, extends financing for the application, including information that permitted investment in the master fund addresses the factors in paragraph (e)(3) shall include any investment by the purpose of enabling the director or employee to acquire the restricted profit of this section; and banking entity in the master fund, as (iii) Explain the banking entity’s plan interest in the fund and the financing is well as the banking entity’s pro-rata for reducing the permitted investment used to acquire such ownership interest share of any ownership interest in the in a covered fund through redemption, in the covered fund. master fund that is held through the sale, dilution or other methods as feeder fund; and * * * * * required in paragraph (a)(2) of this (ii) Fund-of-funds investments. If a (d) Capital treatment for a permitted section. banking entity organizes and offers a investment in a covered fund. For (3) Factors governing the Board covered fund pursuant to § 44.11 for the purposes of calculating compliance with determinations. In reviewing any purpose of investing in other covered the applicable regulatory capital application under paragraph (e)(1) of funds (a ‘‘fund of funds’’) and that fund requirements, a banking entity shall this section, the Board may consider all of funds itself invests in another deduct from the banking entity’s tier 1 the facts and circumstances related to covered fund that the banking entity is capital (as determined under paragraph the permitted investment in a covered permitted to own, then the banking (c)(2) of this section) the greater of: fund, including: entity’s permitted investment in that (1)(i) The sum of all amounts paid or (i) Whether the investment would other fund shall include any investment contributed by the banking entity in result, directly or indirectly, in a by the banking entity in that other fund, connection with acquiring or retaining material exposure by the banking entity as well as the banking entity’s pro-rata an ownership interest (together with any to high-risk assets or high-risk trading share of any ownership interest in the amounts paid by the entity in strategies; fund that is held through the fund of connection with obtaining a restricted (ii) The contractual terms governing funds. The investment of the banking profit interest under § 44.10(d)(6)(ii) of the banking entity’s interest in the entity may not represent more than 3 subpart C of this part), on a historical covered fund; percent of the amount or value of any cost basis, plus any earnings received; (iii) The date on which the covered single covered fund. and fund is expected to have attracted

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sufficient investments from investors interests of which are offered and sold (iv) Enter into a riskless principal unaffiliated with the banking entity to solely outside the United States; transaction with a covered fund; and enable the banking entity to comply (ii)(A) Would be a covered fund if the (v) Extend credit to or purchase assets with the limitations in paragraph entity were organized or established in from a covered fund, provided: (a)(2)(i) of this section; the United States, or (A) Each extension of credit or (iv) The total exposure of the covered (B) Is, or holds itself out as being, an purchase of assets is in the ordinary banking entity to the investment and the entity or arrangement that raises money course of business in connection with risks that disposing of, or maintaining, from investors primarily for the purpose payment transactions; settlement the investment in the covered fund may of investing in financial instruments for services; or futures, derivatives, and pose to the banking entity and the resale or other disposition or otherwise securities clearing; financial stability of the United States; trading in financial instruments; (B) Each extension of credit is repaid, (v) The cost to the banking entity of (iii) Would not otherwise be a banking sold, or terminated by the end of five divesting or disposing of the investment entity except by virtue of the acquisition business days; and within the applicable period; or retention of an ownership interest in, (C) The banking entity making each (vi) Whether the investment or the sponsorship of, or relationship with the extension of credit meets the divestiture or conformance of the entity, by another banking entity that requirements of § 223.42(l)(1)(i) and (ii) investment would involve or result in a meets the following: of the Board’s Regulation W (12 CFR material conflict of interest between the (A) The banking entity is not 223.42(l)(1)(i) and(ii)), as if the banking entity and unaffiliated parties, organized, or directly or indirectly extension of credit was an intraday including clients, customers, or controlled by a banking entity that is extension of credit, regardless of the counterparties to which it owes a duty; organized, under the laws of the United duration of the extension of credit. (vii) The banking entity’s prior efforts States or of any State; and (3) Any transaction or activity to reduce through redemption, sale, (B) The banking entity’s acquisition of permitted under paragraphs (a)(2)(iii), dilution, or other methods its ownership an ownership interest in or sponsorship (iv) or (v) of this section must comply interests in the covered fund, including of the fund by the foreign banking entity with the limitations in § 44.15. activities related to the marketing of meets the requirements for permitted * * * * * interests in such covered fund; covered fund activities and investments (c) Restrictions on other permitted (viii) Market conditions; and solely outside the United States, as transactions. Any transaction permitted (ix) Any other factor that the Board provided in § 44.13(b); under paragraphs (a)(2)(ii), (iii), or (iv) (iv) Is established and operated as part believes appropriate. of this section shall be subject to section of a bona fide asset management (4) Authority to impose restrictions on 23B of the Federal Reserve Act (12 business; and activities or investment during any U.S.C. 371c–1) as if the counterparty (v) Is not operated in a manner that extension period. The Board may were an affiliate of the banking entity enables the banking entity that sponsors impose such conditions on any under section 23B. or controls the qualifying foreign extension approved under paragraph excluded fund, or any of its affiliates, to Subpart D—Compliance Program (e)(1) of this section as the Board evade the requirements of section 13 of Requirements; Violations determines are necessary or appropriate the BHC Act or this part. to protect the safety and soundness of ■ ■ 6. Amend § 44.14 by: 7. Amend § 44.20 by: the banking entity or the financial ■ ■ a. Revising paragraph (a)(2)(i); a. Revising paragraph (a); stability of the United States, address ■ ■ b. Revising paragraph (a)(2)(ii)(C); b. Revising the heading of paragraph material conflicts of interest or other ■ c. Adding paragraphs (a)(2)(iii), (iv), (d) and revising paragraph (d)(1); and unsound banking practices, or otherwise ■ (v), and (3); and c. Revising the introductory text of further the purposes of section 13 of the ■ d. Revising paragraph (c). paragraph (e). BHC Act and this part. The revisions and addition read as The revisions and additions read as (5) Consultation. In the case of a follows: follows: banking entity that is primarily § 44.20 Program for compliance; reporting. regulated by another Federal banking § 44.14 Limitations on relationships with a agency, the SEC, or the CFTC, the Board covered fund. (a) Program requirement. Each will consult with such agency prior to (a) * * * banking entity (other than a banking acting on an application by the banking (2) * * * entity with limited trading assets and entity for an extension under paragraph (i) Acquire and retain any ownership liabilities or a qualifying foreign (e)(1) of this section. interest in a covered fund in accordance excluded fund under section 44.6(f) or ■ 5. Amend § 44.13 by adding paragraph with the requirements of §§ 44.11, 44.13(d)) shall develop and provide for (d) to read as follows: 44.12, or 44.13; the continued administration of a (ii) * * * compliance program reasonably § 44.13 Other permitted covered fund (C) The Board has not determined that designed to ensure and monitor activities and investments. such transaction is inconsistent with the compliance with the prohibitions and * * * * * safe and sound operation and condition restrictions on proprietary trading and (d) Permitted covered fund activities of the banking entity; and covered fund activities and investments and investments of qualifying foreign (iii) Enter into a transaction with a set forth in section 13 of the BHC Act excluded funds. (1) The prohibition covered fund that would be an exempt and this part. The terms, scope, and contained in § 44.10(a) does not apply to covered transaction under 12 U.S.C. detail of the compliance program shall a qualifying foreign excluded fund. 371c(d) or § 223.42 of the Board’s be appropriate for the types, size, scope, (2) For purposes of this paragraph (d), Regulation W (12 CFR 223.42) subject to and complexity of activities and a qualifying foreign excluded fund the limitations specified under 12 business structure of the banking entity. means a banking entity that: U.S.C. 371c(d) or § 223.42 of the Board’s * * * * * (i) Is organized or established outside Regulation W (12 CFR 223.42), as (d) Reporting requirements under the United States, and the ownership applicable, appendix A to this part. (1) A banking

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entity (other than a qualifying foreign sponsorship of, or relationship with the (A) Such sponsoring banking entity; excluded fund under section 44.6(f) or entity, by another banking entity that (B) Such issuer; 44.13(d)) engaged in proprietary trading meets the following: (C) Affiliates of such sponsoring activity permitted under subpart B shall (i) The banking entity is not banking entity or such issuer; and comply with the reporting requirements organized, or directly or indirectly (D) Directors and senior executive described in appendix A to this part, if: controlled by a banking entity that is officers as defined in § 225.71(c) of the * * * * * organized, under the laws of the United Board’s Regulation Y (12 CFR 225.71(c)) (e) Additional documentation for States or of any State; and of such entities. covered funds. A banking entity with (ii) The banking entity’s acquisition or (iii) For purposes of paragraph significant trading assets and liabilities retention of an ownership interest in or (c)(1)(i)(B) of this section, the term (other than a qualifying foreign sponsorship of the fund meets the ‘‘public offering’’ means a distribution excluded fund under section 44.6(f) or requirements for permitted covered (as defined in § 248.4(a)(3)) of securities 44.13(d)) shall maintain records that fund activities and investments solely in any jurisdiction outside the United include: outside the United States, as provided States to investors, including retail * * * * * in § 248.13(b); investors, provided that: (4) Is established and operated as part (A) The distribution is subject to BOARD OF GOVERNORS OF THE of a bona fide asset management substantive disclosure and retail FEDERAL RESERVE business; and investor protection laws or regulations; 12 CFR Chapter II (5) Is not operated in a manner that (B) With respect to an issuer for enables the banking entity that sponsors which the banking entity serves as the Authority and Issuance or controls the qualifying foreign investment manager, investment For the reasons stated in the Common excluded fund, or any of its affiliates, to adviser, commodity trading advisor, Preamble, the Board amends chapter II evade the requirements of section 13 of commodity pool operator, or sponsor, of title 12, Code of Federal Regulations the BHC Act or this part. the distribution complies with all as follows: applicable requirements in the Subpart C—Covered Funds Activities jurisdiction in which such distribution PART 248—PROPRIETARY TRADING and Investments is being made; AND CERTAIN INTERESTS IN AND (C) The distribution does not restrict ■ RELATIONSHIPS WITH COVERED 10. Amend § 248.10 by: availability to investors having a ■ FUNDS (Regulation VV) a. Revising paragraph (c)(1); minimum level of net worth or net ■ b. Revising paragraph (c)(3)(i); investment assets; and ■ 8. The authority citation for part 248 ■ c. Revising paragraph (c)(8); (D) The issuer has filed or submitted, continues to read as follows: ■ d. Revising the heading of paragraph with the appropriate regulatory Authority: 12 U.S.C. 1851, 12 U.S.C. 221 et (c)(10) and revising paragraph (c)(10)(i); authority in such jurisdiction, offering ■ seq., 12 U.S.C. 1818, 12 U.S.C. 1841 et seq., e. Revising paragraph (c)(11); disclosure documents that are publicly ■ and 12 U.S.C. 3103 et seq. f. Adding paragraphs (c)(15), (16), available. (17), and (18); Subpart B—Proprietary Trading ■ g. Revising paragraph (d)(6); and * * * * * ■ h. Adding paragraph (d)(11). (3) * * * ■ 9. Amend § 248.6 by adding paragraph (i) Is composed of no more than 10 (f) to read as follows: The revisions and additions read as unaffiliated co-venturers; follows: § 248.6 Other permitted proprietary trading * * * * * activities. § 248.10 Prohibition on acquiring or (8) Loan securitizations. (i) Scope. An * * * * * retaining an ownership interest in and issuing entity for asset-backed securities (f) Permitted trading activities of having certain relationships with a covered that satisfies all the conditions of this fund. qualifying foreign excluded funds. The paragraph (c)(8) and the assets or prohibition contained in § 248.3(a) does * * * * * holdings of which are composed solely not apply to the purchase or sale of a (c) * * * of: financial instrument by a qualifying (1) Foreign public funds. (i) Subject to (A) Loans as defined in § 248.2(t); foreign excluded fund. For purposes of paragraphs (c)(1)(ii) and (iii) of this (B) Rights or other assets designed to this paragraph (f), a qualifying foreign section, an issuer that: assure the servicing or timely excluded fund means a banking entity (A) Is organized or established outside distribution of proceeds to holders of that: of the United States; and such securities and rights or other assets (1) Is organized or established outside (B) Is authorized to offer and sell that are related or incidental to the United States, and the ownership ownership interests, and such interests purchasing or otherwise acquiring and interests of which are offered and sold are offered and sold, through one or holding the loans, provided that each solely outside the United States; more public offerings. asset that is a security (other than (2)(i) Would be a covered fund if the (ii) With respect to a banking entity special units of beneficial interest and entity were organized or established in that is, or is controlled directly or collateral certificates meeting the the United States, or indirectly by a banking entity that is, requirements of paragraph (c)(8)(v) of (ii) Is, or holds itself out as being, an located in or organized under the laws this section) meets the requirements of entity or arrangement that raises money of the United States or of any State and paragraph (c)(8)(iii) of this section; from investors primarily for the purpose any issuer for which such banking (C) Interest rate or foreign exchange of investing in financial instruments for entity acts as sponsor, the sponsoring derivatives that meet the requirements resale or other disposition or otherwise banking entity may not rely on the of paragraph (c)(8)(iv) of this section; trading in financial instruments; exemption in paragraph (c)(1)(i) of this (D) Special units of beneficial interest (3) Would not otherwise be a banking section for such issuer unless more than and collateral certificates that meet the entity except by virtue of the acquisition 75 percent of the ownership interests in requirements of paragraph (c)(8)(v) of or retention of an ownership interest in, the issuer are sold to persons other than: this section; and

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(E) Debt securities, other than asset- exchange derivatives that satisfy all of the Small Business Investment Act of backed securities and convertible the following conditions: 1958 (15 U.S.C. 662), or that has securities, provided that: (A) The written terms of the received from the Small Business (1) The aggregate value of such debt derivatives directly relate to the loans, Administration notice to proceed to securities does not exceed five percent the asset-backed securities, the qualify for a license as a small business of the aggregate value of loans held contractual rights or other assets investment company, which notice or under paragraph (c)(8)(i)(A) of this described in paragraph (c)(8)(i)(B) of license has not been revoked, or that has section, cash and cash equivalents held this section, or the debt securities voluntarily surrendered its license to under paragraph (c)(8)(iii)(A) of this described in paragraph (c)(8)(i)(E) of this operate as a small business investment section, and debt securities held under section; and company in accordance with 13 CFR this paragraph (c)(8)(i)(E); and (B) The derivatives reduce the interest 107.1900 and does not make any new (2) The aggregate value of the loans, rate and/or foreign exchange risks investments (other than investments in cash and cash equivalents, and debt related to the loans, the asset-backed cash equivalents, which, for the securities for purposes of this paragraph securities, the contractual rights or other purposes of this paragraph, means high is calculated at par value at the most assets described in paragraph (c)(8)(i)(B) quality, highly liquid investments recent time any such debt security is of this section, or the debt securities whose maturity corresponds to the acquired, except that the issuing entity described in paragraph (c)(8)(i)(E) of this issuer’s expected or potential need for may instead determine the value of any section. funds and whose currency corresponds such loan, cash equivalent, or debt (v) Special units of beneficial interest to the issuer’s assets) after such security based on its fair market value and collateral certificates. The assets or voluntary surrender; if: holdings of the issuing entity may (ii) The business of which is to make (i) The issuing entity is required to include collateral certificates and investments that are: use the fair market value of such assets special units of beneficial interest (A) Designed primarily to promote the for purposes of calculating compliance issued by a special purpose vehicle, public welfare, of the type permitted with concentration limitations or other provided that: under paragraph (11) of section 5136 of similar calculations under its (A) The special purpose vehicle that the Revised Statutes of the United States transaction agreements, and issues the special unit of beneficial (12 U.S.C. 24), including the welfare of (ii) The issuing entity’s valuation interest or collateral certificate meets low- and moderate-income communities methodology values similarly situated the requirements in this paragraph or families (such as providing housing, assets consistently. (c)(8); services, or jobs) and including (ii) Impermissible assets. For purposes (B) The special unit of beneficial investments that qualify for of this paragraph (c)(8), except as interest or collateral certificate is used consideration under the regulations permitted under paragraph (c)(8)(i)(E) of for the sole purpose of transferring to implementing the Community this section, the assets or holdings of the the issuing entity for the loan Reinvestment Act (12 U.S.C. 2901 et issuing entity shall not include any of securitization the economic risks and seq.); or the following: benefits of the assets that are (B) Qualified rehabilitation (A) A security, including an asset- permissible for loan securitizations expenditures with respect to a qualified backed security, or an interest in an under this paragraph (c)(8) and does not rehabilitated building or certified equity or debt security other than as directly or indirectly transfer any historic structure, as such terms are permitted in paragraphs (c)(8)(iii), (iv), interest in any other economic or defined in section 47 of the Internal or (v) of this section; financial exposure; Revenue Code of 1986 or a similar State (B) A derivative, other than a (C) The special unit of beneficial historic tax credit program; derivative that meets the requirements interest or collateral certificate is (iii) That has elected to be regulated of paragraph (c)(8)(iv) of this section; or created solely to satisfy legal or is regulated as a rural business (C) A commodity forward contract. requirements or otherwise facilitate the (iii) Permitted securities. investment company, as described in 15 structuring of the loan securitization; Notwithstanding paragraph (c)(8)(ii)(A) U.S.C. 80b-3(b)(8)(A) or (B), or that has and of this section, the issuing entity may terminated its participation as a rural (D) The special purpose vehicle that hold securities, other than debt business investment company in issues the special unit of beneficial securities permitted under paragraph accordance with 7 CFR 4290.1900 and interest or collateral certificate and the (c)(8)(i)(E) of this section, if those does not make any new investments issuing entity are established under the securities are: (other than investments in cash direction of the same entity that (A) Cash equivalents—which, for the equivalents, which, for the purposes of initiated the loan securitization. purposes of this paragraph, means high this paragraph, means high quality, quality, highly liquid investments * * * * * highly liquid investments whose whose maturity corresponds to the (10) Qualifying covered bonds. (i) maturity corresponds to the issuer’s securitization’s expected or potential Scope. An entity owning or holding a expected or potential need for funds and need for funds and whose currency dynamic or fixed pool of loans or other whose currency corresponds to the corresponds to either the underlying assets as provided in paragraph (c)(8) of issuer’s assets) after such termination; or loans or the asset-backed securities—for this section for the benefit of the holders (iv) That is a qualified opportunity purposes of the rights and assets in of covered bonds, provided that the fund, as defined in 26 U.S.C. 1400Z– paragraph (c)(8)(i)(B) of this section; or assets in the pool are composed solely 2(d). (B) Securities received in lieu of debts of assets that meet the conditions in * * * * * previously contracted with respect to paragraph (c)(8)(i) of this section. (15) Credit funds. Subject to the loans supporting the asset-backed * * * * * paragraphs (c)(15)(iii), (iv), and (v) of securities. (11) SBICs and public welfare this section, an issuer that satisfies the (iv) Derivatives. The holdings of investment funds. An issuer: asset and activity requirements of derivatives by the issuing entity shall be (i) That is a small business investment paragraphs (c)(15)(i) and (ii) of this limited to interest rate or foreign company, as defined in section 103(3) of section.

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(i) Asset requirements. The issuer’s apply if the banking entity engaged in (iii) The banking entity must not, assets must be composed solely of: the activities directly; and directly or indirectly, guarantee, (A) Loans as defined in § 248.2(t); (C) Complies with the limitations assume, or otherwise insure the (B) Debt instruments, subject to imposed in § 248.14, as if the issuer obligations or performance of the issuer. paragraph (c)(15)(iv) of this section; were a covered fund, except the banking (iv) A banking entity’s ownership (C) Rights and other assets that are entity may acquire and retain any interest in or relationship with the related or incidental to acquiring, ownership interest in the issuer. issuer must: holding, servicing, or selling such loans (iv) Additional Banking Entity (A) Comply with the limitations or debt instruments, provided that: Requirements. A banking entity may not imposed in § 248.15, as if the issuer (1) Each right or asset held under this rely on this exclusion with respect to an were a covered fund; and paragraph (c)(15)(i)(C) that is a security issuer that meets the conditions in (B) Be conducted in compliance with, is either: paragraphs (c)(15)(i) and (ii) of this and subject to, applicable banking laws (i) A cash equivalent (which, for the section unless: and regulations, including applicable purposes of this paragraph, means high (A) The banking entity does not, safety and soundness standards. quality, highly liquid investments directly or indirectly, guarantee, (17) Family wealth management whose maturity corresponds to the assume, or otherwise insure the vehicles. (i) Subject to paragraph issuer’s expected or potential need for obligations or performance of the issuer (c)(17)(ii) of this section, any entity that funds and whose currency corresponds or of any entity to which such issuer is not, and does not hold itself out as to either the underlying loans or the extends credit or in which such issuer being, an entity or arrangement that debt instruments); invests; and raises money from investors primarily (ii) A security received in lieu of debts (B) Any assets the issuer holds for the purpose of investing in securities previously contracted with respect to pursuant to paragraphs (c)(15)(i)(B) or for resale or other disposition or such loans or debt instruments; or (i)(C)(1)(iii) of this section would be otherwise trading in securities, and: (iii) An equity security (or right to permissible for the banking entity to (A) If the entity is a trust, the acquire an equity security) received on acquire and hold directly under grantor(s) of the entity are all family customary terms in connection with applicable federal banking laws and customers; and such loans or debt instruments; and regulations. (B) If the entity is not a trust: (2) Rights or other assets held under (v) Investment and Relationship (1) A majority of the voting interests this paragraph (c)(15)(i)(C) of this Limits. A banking entity’s investment in, in the entity are owned (directly or section may not include commodity and relationship with, the issuer must: indirectly) by family customers; forward contracts or any derivative; and (A) Comply with the limitations (2) A majority of the interests in the (D) Interest rate or foreign exchange imposed in § 248.15, as if the issuer entity are owned (directly or indirectly) derivatives, if: were a covered fund; and (1) The written terms of the derivative (B) Be conducted in compliance with, by family customers; directly relate to the loans, debt and subject to, applicable banking laws (3) The entity is owned only by family instruments, or other rights or assets and regulations, including applicable customers and up to 5 closely related described in paragraph (c)(15)(i)(C) of safety and soundness standards. persons of the family customers; and this section; and (16) Qualifying venture capital funds. (C) Notwithstanding paragraph (2) The derivative reduces the interest (i) Subject to paragraphs (c)(16)(ii) (c)(17)(i)(A) and (B) of this section, up rate and/or foreign exchange risks through (iv) of this section, an issuer to an aggregate 0.5 percent of the related to the loans, debt instruments, or that: entity’s outstanding ownership interests other rights or assets described in (A) Is a venture capital fund as may be acquired or retained by one or paragraph (c)(15)(i)(C) of this section. defined in 17 CFR 275.203(l)–1; and more entities that are not family (ii) Activity requirements. To be (B) Does not engage in any activity customers or closely related persons if eligible for the exclusion of paragraph that would constitute proprietary the ownership interest is acquired or (c)(15) of this section, an issuer must: trading under § 248.3(b)(1)(i), as if the retained by such parties for the purpose (A) Not engage in any activity that issuer were a banking entity. of and to the extent necessary for would constitute proprietary trading (ii) A banking entity that acts as a establishing corporate separateness or under § 248.3(b)(l)(i), as if the issuer sponsor, investment adviser, or addressing bankruptcy, insolvency, or were a banking entity; and commodity trading advisor to an issuer similar concerns. (B) Not issue asset-backed securities. that meets the conditions in paragraph (ii) A banking entity may rely on the (iii) Requirements for a sponsor, (c)(16)(i) of this section may not rely on exclusion in paragraph (c)(17)(i) of this investment adviser, or commodity this exclusion unless the banking entity: section with respect to an entity trading advisor. A banking entity that (A) Provides in writing to any provided that the banking entity (or an acts as a sponsor, investment adviser, or prospective and actual investor in the affiliate): commodity trading advisor to an issuer issuer the disclosures required under (A) Provides bona fide trust, fiduciary, that meets the conditions in paragraphs § 248.11(a)(8), as if the issuer were a investment advisory, or commodity (c)(15)(i) and (ii) of this section may not covered fund; trading advisory services to the entity; rely on this exclusion unless the (B) Ensures that the activities of the (B) Does not, directly or indirectly, banking entity: issuer are consistent with safety and guarantee, assume, or otherwise insure (A) Provides in writing to any soundness standards that are the obligations or performance of such prospective and actual investor in the substantially similar to those that would entity; issuer the disclosures required under apply if the banking entity engaged in (C) Complies with the disclosure § 248.11(a)(8) of this subpart, as if the the activities directly; and obligations under § 248.11(a)(8), as if issuer were a covered fund; (C) Complies with the restrictions in such entity were a covered fund, (B) Ensures that the activities of the § 248.14 as if the issuer were a covered provided that the content may be issuer are consistent with safety and fund (except the banking entity may modified to prevent the disclosure from soundness standards that are acquire and retain any ownership being misleading and the manner of substantially similar to those that would interest in the issuer). disclosure may be modified to

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accommodate the specific (C) The banking entity and its (iii) The breach by the investment circumstances of the entity; affiliates: manager of material representations or (D) Does not acquire or retain, as (1) Maintain documentation outlining warranties; principal, an ownership interest in the how the banking entity intends to (iv) The occurrence of an act that entity, other than as described in facilitate the customer’s exposure to constitutes fraud or criminal activity in paragraph (c)(17)(i)(C) of this section; such transaction, investment strategy, or the performance of the investment (E) Complies with the requirements of service; manager’s obligations under the covered §§ 248.14(b) and 248.15, as if such (2) Do not, directly or indirectly, fund’s transaction agreements; entity were a covered fund; and guarantee, assume, or otherwise insure (v) The indictment of the investment (F) Except for riskless principal the obligations or performance of such manager for a criminal offense, or the transactions as defined in paragraph issuer; indictment of any officer, member, (d)(11) of this section, complies with the (3) Comply with the disclosure partner or other principal of the requirements of 12 CFR 223.15(a), as if obligations under § 248.11(a)(8), as if investment manager for a criminal such banking entity and its affiliates such issuer were a covered fund, offense materially related to his or her were a member bank and the entity were provided that the content may be investment management activities; an affiliate thereof. modified to prevent the disclosure from (vi) A change in control with respect (iii) For purposes of paragraph (c)(17) being misleading and the manner of to the investment manager; of this section, the following definitions disclosure may be modified to (vii) The loss, separation or apply: accommodate the specific incapacitation of an individual critical (A) Closely related person means a circumstances of the issuer; to the operation of the investment natural person (including the estate and (4) Do not acquire or retain, as manager or primarily responsible for the estate planning vehicles of such person) principal, an ownership interest in the management of the covered fund’s who has longstanding business or issuer, other than as described in assets; or personal relationships with any family paragraph (c)(18)(ii)(B) of this section; (viii) Other similar events that customer. (5) Comply with the requirements of constitute ‘‘cause’’ for removal of an (B) Family customer means: §§ 248.14(b) and 248.15, as if such investment manager, provided that such (1) A family client, as defined in Rule issuer were a covered fund; and events are not solely related to the 202(a)(11)(G)–1(d)(4) of the Investment (6) Except for riskless principal performance of the covered fund or the Advisers Act of 1940 (17 CFR transactions as defined in paragraph investment manager’s exercise of 275.202(a)(11)(G)–1(d)(4)); or (d)(11) of this section, comply with the investment discretion under the covered (2) Any natural person who is a requirements of 12 CFR 223.15(a), as if fund’s transaction agreements; father-in-law, mother-in-law, brother-in- such banking entity and its affiliates (B) Has the right under the terms of law, sister-in-law, son-in-law or were a member bank and the issuer the interest to receive a share of the daughter-in-law of a family client, or a were an affiliate thereof. income, gains or profits of the covered spouse or a spousal equivalent of any of fund; * * * * * the foregoing. (C) Has the right to receive the (18) Customer facilitation vehicles. (i) (d) * * * underlying assets of the covered fund Subject to paragraph (c)(18)(ii) of this (6) Ownership interest. (i) Ownership after all other interests have been section, an issuer that is formed by or interest means any equity, partnership, redeemed and/or paid in full (excluding at the request of a customer of the or other similar interest. An ‘‘other the rights of a creditor to exercise banking entity for the purpose of similar interest’’ means an interest that: remedies upon the occurrence of an providing such customer (which may (A) Has the right to participate in the event of default or an acceleration include one or more affiliates of such selection or removal of a general event); customer) with exposure to a partner, managing member, member of (D) Has the right to receive all or a transaction, investment strategy, or the board of directors or trustees, portion of excess spread (the positive other service provided by the banking investment manager, investment difference, if any, between the aggregate entity. adviser, or commodity trading advisor interest payments received from the (ii) A banking entity may rely on the of the covered fund, excluding: underlying assets of the covered fund exclusion in paragraph (c)(18)(i) of this (1) The rights of a creditor to exercise and the aggregate interest paid to the section with respect to an issuer remedies upon the occurrence of an holders of other outstanding interests); provided that: event of default or an acceleration event; (E) Provides under the terms of the (A) All of the ownership interests of and interest that the amounts payable by the the issuer are owned by the customer (2) The right to participate in the covered fund with respect to the interest (which may include one or more of its removal of an investment manager for could be reduced based on losses arising affiliates) for whom the issuer was ‘‘cause’’ or participate in the selection of from the underlying assets of the created; a replacement manager upon an covered fund, such as allocation of (B) Notwithstanding paragraph investment manager’s resignation or losses, write-downs or charge-offs of the (c)(18)(ii)(A) of this section, up to an removal. For purposes of this paragraph outstanding principal balance, or aggregate 0.5 percent of the issuer’s (d)(6)(i)(A)(2), ‘‘cause’’ for removal of an reductions in the amount of interest due outstanding ownership interests may be investment manager means one or more and payable on the interest; acquired or retained by one or more of the following events: (F) Receives income on a pass-through entities that are not customers if the (i) The bankruptcy, insolvency, basis from the covered fund, or has a ownership interest is acquired or conservatorship or receivership of the rate of return that is determined by retained by such parties for the purpose investment manager; reference to the performance of the of and to the extent necessary for (ii) The breach by the investment underlying assets of the covered fund; establishing corporate separateness or manager of any material provision of the or addressing bankruptcy, insolvency, or covered fund’s transaction agreements (G) Any synthetic right to have, similar concerns; and applicable to the investment manager; receive, or be allocated any of the rights

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in paragraphs (d)(6)(i)(A) through (F) of (i) Interest at a stated interest rate, as or more of the voting shares of the this section. well as commitment fees or other fees, company or fund; and (ii) Ownership interest does not which are not determined by reference (B) The banking entity, or an affiliate include: to the performance of the underlying of the banking entity, provides (A) Restricted profit interest, which is assets of the covered fund; and investment advisory, commodity trading an interest held by an entity (or an (ii) Repayment of a fixed principal advisory, administrative, and other employee or former employee thereof) amount, on or before a maturity date, in services to the company or fund in in a covered fund for which the entity a contractually-determined manner compliance with the limitations under (or employee thereof) serves as (which may include prepayment applicable regulation, order, or other investment manager, investment premiums intended solely to reflect, and authority. adviser, commodity trading advisor, or compensate holders of the interest for, * * * * * other service provider, so long as: forgone income resulting from an early (4) Multi-tier fund investments. (i) (1) The sole purpose and effect of the prepayment); Master-feeder fund investments. If the interest is to allow the entity (or (2) The entitlement to payments principal investment strategy of a employee or former employee thereof) under the terms of the interest are covered fund (the ‘‘feeder fund’’) is to to share in the profits of the covered absolute and could not be reduced invest substantially all of its assets in fund as performance compensation for based on losses arising from the another single covered fund (the the investment management, investment underlying assets of the covered fund, ‘‘master fund’’), then for purposes of the advisory, commodity trading advisory, such as allocation of losses, write- investment limitations in paragraphs or other services provided to the downs or charge-offs of the outstanding (a)(2)(i)(B) and (a)(2)(ii) of this section, covered fund by the entity (or employee principal balance, or reductions in the the banking entity’s permitted or former employee thereof), provided amount of interest due and payable on investment in such funds shall be that the entity (or employee or former the interest; and measured only by reference to the value employee thereof) may be obligated (3) The holders of the interest are not of the master fund. The banking entity’s under the terms of such interest to entitled to receive the underlying assets permitted investment in the master fund return profits previously received; of the covered fund after all other shall include any investment by the (2) All such profit, once allocated, is interests have been redeemed or paid in banking entity in the master fund, as distributed to the entity (or employee or full (excluding the rights of a creditor to well as the banking entity’s pro-rata former employee thereof) promptly after exercise remedies upon the occurrence share of any ownership interest in the being earned or, if not so distributed, is of an event of default or an acceleration master fund that is held through the retained by the covered fund for the sole event). feeder fund; and purpose of establishing a reserve * * * * * (ii) Fund-of-funds investments. If a amount to satisfy contractual obligations (11) Riskless principal transaction. banking entity organizes and offers a with respect to subsequent losses of the Riskless principal transaction means a covered fund pursuant to § 248.11 for covered fund and such undistributed transaction in which a banking entity, the purpose of investing in other profit of the entity (or employee or after receiving an order from a customer covered funds (a ‘‘fund of funds’’) and former employee thereof) does not share to buy (or sell) a security, purchases (or that fund of funds itself invests in in the subsequent investment gains of sells) the security in the secondary another covered fund that the banking the covered fund; market for its own account to offset a entity is permitted to own, then the (3) Any amounts invested in the contemporaneous sale to (or purchase banking entity’s permitted investment covered fund, including any amounts from) the customer. in that other fund shall include any paid by the entity in connection with ■ 11. Amend § 248.12 by: investment by the banking entity in that obtaining the restricted profit interest, ■ a. Revising paragraph (b)(1)(ii); other fund, as well as the banking are within the limits of § 248.12 of this ■ b. Revising paragraph (b)(4); entity’s pro-rata share of any ownership subpart; and ■ c. Adding paragraph (b)(5); interest in the fund that is held through ■ (4) The interest is not transferable by d. Revising paragraph (c)(1); and the fund of funds. The investment of the ■ the entity (or employee or former e. Revising paragraphs (d) and (e). banking entity may not represent more The revisions and addition read as employee thereof) except to an affiliate than 3 percent of the amount or value follows: thereof (or an employee of the banking of any single covered fund. entity or affiliate), to immediate family § 248.12 Permitted investment in a (5) Parallel Investments and Co- members, or through the intestacy, of covered fund. Investments. (i) A banking entity shall the employee or former employee, or in * * * * * not be required to include in the connection with a sale of the business (b) * * * calculation of the investment limits that gave rise to the restricted profit (1) * * * under paragraph (a)(2) of this section interest by the entity (or employee or (ii) Treatment of registered investment any investment the banking entity former employee thereof) to an companies, SEC-regulated business makes alongside a covered fund as long unaffiliated party that provides development companies, and foreign as the investment is made in investment management, investment public funds. For purposes of paragraph compliance with applicable laws and advisory, commodity trading advisory, (b)(1)(i) of this section, a registered regulations, including applicable safety or other services to the fund. investment company, SEC-regulated and soundness standards. (B) Any senior loan or senior debt business development companies, or (ii) A banking entity shall not be interest that has the following foreign public fund as described in restricted under this section in the characteristics: § 248.10(c)(1) will not be considered to amount of any investment the banking (1) Under the terms of the interest the be an affiliate of the banking entity so entity makes alongside a covered fund holders of such interest do not have the long as: as long as the investment is made in right to receive a share of the income, (A) The banking entity, together with compliance with applicable laws and gains, or profits of the covered fund, but its affiliates, does not own, control, or regulations, including applicable safety are entitled to receive only: hold with the power to vote 25 percent and soundness standards.

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(c) * * * fund sponsored by the banking entity including clients, customers, or (1)(i) For purposes of paragraph will be attributed to the banking entity counterparties to which it owes a duty; (a)(2)(iii) of this section, the aggregate if the banking entity, directly or (vii) The banking entity’s prior efforts value of all ownership interests held by indirectly, extends financing for the to reduce through redemption, sale, a banking entity shall be the sum of all purpose of enabling the director or dilution, or other methods its ownership amounts paid or contributed by the employee to acquire the restricted profit interests in the covered fund, including banking entity in connection with interest in the fund and the financing is activities related to the marketing of acquiring or retaining an ownership used to acquire such ownership interest interests in such covered fund; interest in covered funds (together with in the covered fund. (viii) Market conditions; and any amounts paid by the entity in (e) Extension of time to divest an (ix) Any other factor that the Board connection with obtaining a restricted ownership interest. (1) Extension period. believes appropriate. profit interest under § 248.10(d)(6)(ii)), Upon application by a banking entity, (4) Authority to impose restrictions on on a historical cost basis; the Board may extend the period under activities or investment during any (ii) Treatment of employee and paragraph (a)(2)(i) of this section for up extension period. The Board may director restricted profit interests to 2 additional years if the Board finds impose such conditions on any financed by the banking entity. For that an extension would be consistent extension approved under paragraph purposes of paragraph (c)(1)(i) of this with safety and soundness and not (e)(1) of this section as the Board section, an investment by a director or detrimental to the public interest. determines are necessary or appropriate employee of a banking entity who (2) Application requirements. An to protect the safety and soundness of acquires a restricted profit interest in his application for extension must: the banking entity or the financial or her personal capacity in a covered (i) Be submitted to the Board at least stability of the United States, address fund sponsored by the banking entity 90 days prior to the expiration of the material conflicts of interest or other will be attributed to the banking entity applicable time period; unsound banking practices, or otherwise if the banking entity, directly or (ii) Provide the reasons for further the purposes of section 13 of the indirectly, extends financing for the application, including information that BHC Act and this part. purpose of enabling the director or addresses the factors in paragraph (e)(3) (5) Consultation. In the case of a employee to acquire the restricted profit of this section; and banking entity that is primarily interest in the fund and the financing is (iii) Explain the banking entity’s plan regulated by another Federal banking used to acquire such ownership interest for reducing the permitted investment agency, the SEC, or the CFTC, the Board in the covered fund. in a covered fund through redemption, will consult with such agency prior to sale, dilution or other methods as acting on an application by the banking * * * * * required in paragraph (a)(2) of this entity for an extension under paragraph (d) Capital treatment for a permitted section. (e)(1) of this section. investment in a covered fund. For (3) Factors governing the Board ■ purposes of calculating compliance with 12. Amend § 248.13 by adding determinations. In reviewing any paragraph (d) to read as follows: the applicable regulatory capital application under paragraph (e)(1) of requirements, a banking entity shall this section, the Board may consider all § 248.13 Other permitted covered fund deduct from the banking entity’s tier 1 the facts and circumstances related to activities and investments. capital (as determined under paragraph the permitted investment in a covered * * * * * (c)(2) of this section) the greater of: fund, including: (d) Permitted covered fund activities (1)(i) The sum of all amounts paid or (i) Whether the investment would and investments of qualifying foreign contributed by the banking entity in result, directly or indirectly, in a excluded funds. (1) The prohibition connection with acquiring or retaining material exposure by the banking entity contained in § 248.10(a) does not apply an ownership interest (together with any to high-risk assets or high-risk trading to a qualifying foreign excluded fund. amounts paid by the entity in strategies; (2) For purposes of this paragraph (d), connection with obtaining a restricted (ii) The contractual terms governing a qualifying foreign excluded fund profit interest under § 248.10(d)(6)(ii) of the banking entity’s interest in the means a banking entity that: subpart C of this part), on a historical covered fund; (i) Is organized or established outside cost basis, plus any earnings received; (iii) The date on which the covered the United States, and the ownership and fund is expected to have attracted interests of which are offered and sold (ii) The fair market value of the sufficient investments from investors solely outside the United States; banking entity’s ownership interests in unaffiliated with the banking entity to (ii)(A) Would be a covered fund if the the covered fund as determined under enable the banking entity to comply entity were organized or established in paragraph (b)(2)(ii) or (b)(3) of this with the limitations in paragraph the United States, or section (together with any amounts paid (a)(2)(i) of this section; (B) Is, or holds itself out as being, an by the entity in connection with (iv) The total exposure of the covered entity or arrangement that raises money obtaining a restricted profit interest banking entity to the investment and the from investors primarily for the purpose under § 248.10(d)(6)(ii) of subpart C of risks that disposing of, or maintaining, of investing in financial instruments for this part), if the banking entity accounts the investment in the covered fund may resale or other disposition or otherwise for the profits (or losses) of the fund pose to the banking entity and the trading in financial instruments; investment in its financial statements. financial stability of the United States; (iii) Would not otherwise be a banking (2) Treatment of employee and (v) The cost to the banking entity of entity except by virtue of the acquisition director restricted profit interests divesting or disposing of the investment or retention of an ownership interest in, financed by the banking entity. For within the applicable period; sponsorship of, or relationship with the purposes of paragraph (d)(1) of this (vi) Whether the investment or the entity, by another banking entity that section, an investment by a director or divestiture or conformance of the meets the following: employee of a banking entity who investment would involve or result in a (A) The banking entity is not acquires a restricted profit interest in his material conflict of interest between the organized, or directly or indirectly or her personal capacity in a covered banking entity and unaffiliated parties, controlled by a banking entity that is

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organized, under the laws of the United (3) Any transaction or activity FEDERAL DEPOSIT INSURANCE States or of any State; and permitted under paragraphs (a)(2)(iii), CORPORATION (B) The banking entity’s acquisition of (iv) or (v) must comply with the 12 CFR Chapter III an ownership interest in or sponsorship limitations in § 248.15. of the fund by the foreign banking entity * * * * * Authority and Issuance meets the requirements for permitted For the reasons set forth in the covered fund activities and investments (c) Restrictions on other permitted transactions. Any transaction permitted Common Preamble, the Federal Deposit solely outside the United States, as Insurance Corporation amends chapter provided in § 248.13(b); under paragraphs (a)(2)(ii), (iii), or (iv) of this section shall be subject to section III of title 12, Code of Federal (iv) Is established and operated as part Regulations as follows: of a bona fide asset management 23B of the Federal Reserve Act (12 business; and U.S.C. 371c–1) as if the counterparty PART 351—PROPRIETARY TRADING (v) Is not operated in a manner that were an affiliate of the banking entity AND CERTAIN INTERESTS IN AND enables the banking entity that sponsors under section 23B. RELATIONSHIPS WITH COVERED or controls the qualifying foreign FUNDS excluded fund, or any of its affiliates, to Subpart D—Compliance Program evade the requirements of section 13 of Requirements; Violations ■ 15. The authority citation for part 351 the BHC Act or this part. continues to read as follows: ■ ■ 14. Amend § 248.20 by: 13. Amend § 248.14 by: Authority: 12 U.S.C. 1851; 1811 et seq.; ■ a. Revising paragraph (a)(2)(i); ■ a. Revising paragraph (a); 3101 et seq.; and 5412. ■ b. Revising paragraph (a)(2)(ii)(C); ■ b. Revising the heading of paragraph ■ c. Adding paragraphs (a)(2)(iii), (iv), Subpart B—Proprietary Trading (v), and (3); and (d) and revising paragraph (d)(1) ; and ■ d. Revising paragraph (c). ■ c. Revising the introductory text of ■ 16. Amend § 351.6 by adding The revisions and additions read as paragraph (e). paragraph (f) to read as follows: follows: The revisions and addition read as § 351.6 Other permitted proprietary trading § 248.14 Limitations on relationships with follows: activities. a covered fund. § 248.20 Program for compliance; * * * * * (a) * * * reporting. (f) Permitted trading activities of (2) * * * qualifying foreign excluded funds. The (i) Acquire and retain any ownership (a) Program requirement. Each prohibition contained in § 351.3(a) does interest in a covered fund in accordance banking entity (other than a banking not apply to the purchase or sale of a with the requirements of §§ 248.11, entity with limited trading assets and financial instrument by a qualifying 248.12, or 248.13; liabilities or a qualifying foreign foreign excluded fund. For purposes of (ii) * * * excluded fund under §§ 248.6(f) or this paragraph (f), a qualifying foreign (C) The Board has not determined that 248.13(d)) shall develop and provide for such transaction is inconsistent with the excluded fund means a banking entity the continued administration of a that: safe and sound operation and condition compliance program reasonably of the banking entity; and (1) Is organized or established outside designed to ensure and monitor the United States, and the ownership (iii) Enter into a transaction with a compliance with the prohibitions and covered fund that would be an exempt interests of which are offered and sold restrictions on proprietary trading and solely outside the United States; covered transaction under 12 U.S.C. covered fund activities and investments 371c(d) or § 223.42 of the Board’s (2)(i) Would be a covered fund if the set forth in section 13 of the BHC Act entity were organized or established in Regulation W (12 CFR 223.42) subject to and this part. The terms, scope, and the limitations specified under 12 the United States, or detail of the compliance program shall (ii) Is, or holds itself out as being, an U.S.C. 371c(d) or § 223.42 of the Board’s be appropriate for the types, size, scope, Regulation W (12 CFR 223.42), as entity or arrangement that raises money and complexity of activities and from investors primarily for the purpose applicable, business structure of the banking entity. (iv) Enter into a riskless principal of investing in financial instruments for transaction with a covered fund; and * * * * * resale or other disposition or otherwise (v) Extend credit to or purchase assets (d) Reporting requirements under trading in financial instruments; from a covered fund, provided: appendix A to this part. (1) A banking (3) Would not otherwise be a banking (A) Each extension of credit or entity (other than a qualifying foreign entity except by virtue of the acquisition purchase of assets is in the ordinary excluded fund under section 248.6(f) or or retention of an ownership interest in, course of business in connection with 248.13(d)) engaged in proprietary sponsorship of, or relationship with the payment transactions; settlement trading activity permitted under subpart entity, by another banking entity that services; or futures, derivatives, and B shall comply with the reporting meets the following: securities clearing; requirements described in appendix A (i) The banking entity is not (B) Each extension of credit is repaid, to this part, if: organized, or directly or indirectly sold, or terminated by the end of five * * * * * controlled by a banking entity that is business days; and organized, under the laws of the United (C) The banking entity making each (e) Additional documentation for States or of any State; and extension of credit meets the covered funds. A banking entity with (ii) The banking entity’s acquisition or requirements of § 223.42(l)(1)(i) and (ii) significant trading assets and liabilities retention of an ownership interest in or of the Board’s Regulation W (12 CFR (other than a qualifying foreign sponsorship of the fund meets the 223.42(l)(1)(i) and(ii)), as if the excluded fund under section 248.6(f) or requirements for permitted covered extension of credit was an intraday 248.13(d)) shall maintain records that fund activities and investments solely extension of credit, regardless of the include: outside the United States, as provided duration of the extension of credit. * * * * * in § 351.13(b);

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(4) Is established and operated as part (A) The distribution is subject to recent time any such debt security is of a bona fide asset management substantive disclosure and retail acquired, except that the issuing entity business; and investor protection laws or regulations; may instead determine the value of any (5) Is not operated in a manner that (B) With respect to an issuer for such loan, cash equivalent, or debt enables the banking entity that sponsors which the banking entity serves as the security based on its fair market value or controls the qualifying foreign investment manager, investment if: excluded fund, or any of its affiliates, to adviser, commodity trading advisor, (i) The issuing entity is required to evade the requirements of section 13 of commodity pool operator, or sponsor, use the fair market value of such assets the BHC Act or this part. the distribution complies with all for purposes of calculating compliance applicable requirements in the with concentration limitations or other Subpart C—Covered Funds Activities jurisdiction in which such distribution similar calculations under its and Investments is being made; transaction agreements, and (C) The distribution does not restrict (ii) The issuing entity’s valuation ■ 17. Amend § 351.10 by: availability to investors having a methodology values similarly situated ■ a. Revising paragraph (c)(1); minimum level of net worth or net assets consistently. ■ b. Revising paragraph (c)(3)(i); investment assets; and (ii) Impermissible assets. For purposes ■ c. Revising paragraph (c)(8); (D) The issuer has filed or submitted, of this paragraph (c)(8), except as ■ d. Revising the heading of paragraph with the appropriate regulatory permitted under paragraph (c)(8)(i)(E) of (c)(10) and revising paragraph (c)(10)(i); authority in such jurisdiction, offering this section, the assets or holdings of the ■ e. Revising paragraph (c)(11); disclosure documents that are publicly issuing entity shall not include any of ■ f. Adding paragraphs (c)(15), (16), available. the following: (17), and (18); (A) A security, including an asset- ■ * * * * * g. Revising paragraph (d)(6); and (3) * * * backed security, or an interest in an ■ h. Adding paragraph (d)(11). (i) Is composed of no more than 10 equity or debt security other than as The revisions and additions read as unaffiliated co-venturers; permitted in paragraphs (c)(8)(iii), (iv), follows: or (v) of this section; * * * * * (B) A derivative, other than a § 351.10 Prohibition on acquiring or (8) Loan securitizations. (i) Scope. An derivative that meets the requirements retaining an ownership interest in and issuing entity for asset-backed securities of paragraph (c)(8)(iv) of this section; or having certain relationships with a covered that satisfies all the conditions of this fund. (C) A commodity forward contract. paragraph (c)(8) and the assets or (iii) Permitted securities. * * * * * holdings of which are composed solely Notwithstanding paragraph (c)(8)(ii)(A) (c) * * * of: of this section, the issuing entity may (1) Foreign public funds. (i) Subject to (A) Loans as defined in § 351.2(t); hold securities, other than debt paragraphs (c)(1)(ii) and (iii) of this (B) Rights or other assets designed to securities permitted under paragraph section, an issuer that: assure the servicing or timely (c)(8)(i)(E) of this section, if those (A) Is organized or established outside distribution of proceeds to holders of securities are: of the United States; and such securities and rights or other assets (A) Cash equivalents—which, for the (B) Is authorized to offer and sell that are related or incidental to purposes of this paragraph, means high ownership interests, and such interests purchasing or otherwise acquiring and quality, highly liquid investments are offered and sold, through one or holding the loans, provided that each whose maturity corresponds to the more public offerings. asset that is a security (other than securitization’s expected or potential (ii) With respect to a banking entity special units of beneficial interest and need for funds and whose currency that is, or is controlled directly or collateral certificates meeting the corresponds to either the underlying indirectly by a banking entity that is, requirements of paragraph (c)(8)(v) of loans or the asset-backed securities—for located in or organized under the laws this section) meets the requirements of purposes of the rights and assets in of the United States or of any State and paragraph (c)(8)(iii) of this section; paragraph (c)(8)(i)(B) of this section; or any issuer for which such banking (C) Interest rate or foreign exchange (B) Securities received in lieu of debts entity acts as sponsor, the sponsoring derivatives that meet the requirements previously contracted with respect to banking entity may not rely on the of paragraph (c)(8)(iv) of this section; the loans supporting the asset-backed exemption in paragraph (c)(1)(i) of this (D) Special units of beneficial interest securities. section for such issuer unless more than and collateral certificates that meet the (iv) Derivatives. The holdings of 75 percent of the ownership interests in requirements of paragraph (c)(8)(v) of derivatives by the issuing entity shall be the issuer are sold to persons other than: this section; and limited to interest rate or foreign (A) Such sponsoring banking entity; (E) Debt securities, other than asset- exchange derivatives that satisfy all of (B) Such issuer; backed securities and convertible the following conditions: (C) Affiliates of such sponsoring securities, provided that: (A) The written terms of the banking entity or such issuer; and (1) The aggregate value of such debt derivatives directly relate to the loans, (D) Directors and senior executive securities does not exceed five percent the asset-backed securities, the officers as defined in § 225.71(c) of the of the aggregate value of loans held contractual rights or other assets Board’s Regulation Y (12 CFR 225.71(c)) under paragraph (c)(8)(i)(A) of this described in paragraph (c)(8)(i)(B) of of such entities. section, cash and cash equivalents held this section, or the debt securities (iii) For purposes of paragraph under paragraph (c)(8)(iii)(A) of this described in paragraph (c)(8)(i)(E) of this (c)(1)(i)(B) of this section, the term section, and debt securities held under section; and public offering means a distribution (as this paragraph (c)(8)(i)(E); and (B) The derivatives reduce the interest defined in § 351.4(a)(3)) of securities in (2) The aggregate value of the loans, rate and/or foreign exchange risks any jurisdiction outside the United cash and cash equivalents, and debt related to the loans, the asset-backed States to investors, including retail securities for purposes of this paragraph securities, the contractual rights or other investors, provided that: is calculated at par value at the most assets described in paragraph (c)(8)(i)(B)

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of this section, or the debt securities whose maturity corresponds to the whose maturity corresponds to the described in paragraph (c)(8)(i)(E) of this issuer’s expected or potential need for issuer’s expected or potential need for section. funds and whose currency corresponds funds and whose currency corresponds (v) Special units of beneficial interest to the issuer’s assets) after such to either the underlying loans or the and collateral certificates. The assets or voluntary surrender; debt instruments); holdings of the issuing entity may (ii) The business of which is to make (ii) A security received in lieu of debts include collateral certificates and investments that are: previously contracted with respect to special units of beneficial interest (A) Designed primarily to promote the such loans or debt instruments; or issued by a special purpose vehicle, public welfare, of the type permitted (iii) An equity security (or right to provided that: under paragraph (11) of section 5136 of acquire an equity security) received on (A) The special purpose vehicle that the Revised Statutes of the United States customary terms in connection with issues the special unit of beneficial (12 U.S.C. 24), including the welfare of such loans or debt instruments; and interest or collateral certificate meets low- and moderate-income communities (2) Rights or other assets held under the requirements in this paragraph or families (such as providing housing, this paragraph (c)(15)(i)(C) of this (c)(8); services, or jobs) and including section may not include commodity (B) The special unit of beneficial investments that qualify for forward contracts or any derivative; and interest or collateral certificate is used consideration under the regulations (D) Interest rate or foreign exchange for the sole purpose of transferring to implementing the Community derivatives, if: the issuing entity for the loan Reinvestment Act (12 U.S.C. 2901 et (1) The written terms of the derivative securitization the economic risks and seq.); or directly relate to the loans, debt benefits of the assets that are (B) Qualified rehabilitation instruments, or other rights or assets permissible for loan securitizations expenditures with respect to a qualified described in paragraph (c)(15)(i)(C) of under this paragraph (c)(8) and does not rehabilitated building or certified this section; and directly or indirectly transfer any historic structure, as such terms are (2) The derivative reduces the interest interest in any other economic or defined in section 47 of the Internal rate and/or foreign exchange risks financial exposure; Revenue Code of 1986 or a similar State related to the loans, debt instruments, or (C) The special unit of beneficial historic tax credit program; other rights or assets described in interest or collateral certificate is (iii) That has elected to be regulated paragraph (c)(15)(i)(C) of this section. created solely to satisfy legal or is regulated as a rural business (ii) Activity requirements. To be requirements or otherwise facilitate the investment company, as described in 15 eligible for the exclusion of paragraph structuring of the loan securitization; U.S.C. 80b–3(b)(8)(A) or (B), or that has (c)(15) of this section, an issuer must: (A) Not engage in any activity that and terminated its participation as a rural would constitute proprietary trading (D) The special purpose vehicle that business investment company in under § 351.3(b)(l)(i), as if the issuer issues the special unit of beneficial accordance with 7 CFR 4290.1900 and were a banking entity; and interest or collateral certificate and the does not make any new investments issuing entity are established under the (B) Not issue asset-backed securities. (other than investments in cash (iii) Requirements for a sponsor, direction of the same entity that equivalents, which, for the purposes of initiated the loan securitization. investment adviser, or commodity this paragraph, means high quality, trading advisor. A banking entity that * * * * * highly liquid investments whose acts as a sponsor, investment adviser, or (10) Qualifying covered bonds. (i) maturity corresponds to the issuer’s commodity trading advisor to an issuer Scope. An entity owning or holding a expected or potential need for funds and that meets the conditions in paragraphs dynamic or fixed pool of loans or other whose currency corresponds to the (c)(15)(i) and (ii) of this section may not assets as provided in paragraph (c)(8) of issuer’s assets) after such termination; or rely on this exclusion unless the this section for the benefit of the holders (iv) That is a qualified opportunity banking entity: of covered bonds, provided that the fund, as defined in 26 U.S.C. 1400Z– (A) Provides in writing to any assets in the pool are composed solely 2(d). prospective and actual investor in the of assets that meet the conditions in * * * * * issuer the disclosures required under paragraph (c)(8)(i) of this section. (15) Credit funds. Subject to § 351.11(a)(8) of this subpart, as if the * * * * * paragraphs (c)(15)(iii), (iv), and (v) of issuer were a covered fund; (11) SBICs and public welfare this section, an issuer that satisfies the (B) Ensures that the activities of the investment funds. An issuer: asset and activity requirements of issuer are consistent with safety and (i) That is a small business investment paragraphs (c)(15)(i) and (ii) of this soundness standards that are company, as defined in section 103(3) of section. substantially similar to those that would the Small Business Investment Act of (i) Asset requirements. The issuer’s apply if the banking entity engaged in 1958 (15 U.S.C. 662), or that has assets must be composed solely of: the activities directly; and received from the Small Business (A) Loans as defined in § 351.2(t); (C) Complies with the limitations Administration notice to proceed to (B) Debt instruments, subject to imposed in § 351.14, as if the issuer qualify for a license as a small business paragraph (c)(15)(iv) of this section; were a covered fund, except the banking investment company, which notice or (C) Rights and other assets that are entity may acquire and retain any license has not been revoked, or that has related or incidental to acquiring, ownership interest in the issuer. voluntarily surrendered its license to holding, servicing, or selling such loans (iv) Additional Banking Entity operate as a small business investment or debt instruments, provided that: Requirements. A banking entity may not company in accordance with 13 CFR (1) Each right or asset held under this rely on this exclusion with respect to an 107.1900 and does not make any new paragraph (c)(15)(i)(C) that is a security issuer that meets the conditions in investments (other than investments in is either: paragraphs (c)(15)(i) and (ii) of this cash equivalents, which, for the (i) A cash equivalent (which, for the section unless: purposes of this paragraph, means high purposes of this paragraph, means high (A) The banking entity does not, quality, highly liquid investments quality, highly liquid investments directly or indirectly, guarantee,

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assume, or otherwise insure the (c)(17)(ii) of this section, any entity that (iii) For purposes of paragraph (c)(17) obligations or performance of the issuer is not, and does not hold itself out as of this section, the following definitions or of any entity to which such issuer being, an entity or arrangement that apply: extends credit or in which such issuer raises money from investors primarily (A) Closely related person means a invests; and for the purpose of investing in securities natural person (including the estate and (B) Any assets the issuer holds for resale or other disposition or estate planning vehicles of such person) pursuant to paragraphs (c)(15)(i)(B) or otherwise trading in securities, and: who has longstanding business or (i)(C)(1)(iii) of this section would be (A) If the entity is a trust, the personal relationships with any family permissible for the banking entity to grantor(s) of the entity are all family customer. acquire and hold directly under customers; and (B) Family customer means: applicable federal banking laws and (B) If the entity is not a trust: (1) A family client, as defined in Rule regulations. (1) A majority of the voting interests 202(a)(11)(G)–1(d)(4) of the Investment (v) Investment and Relationship in the entity are owned (directly or Advisers Act of 1940 (17 CFR Limits. A banking entity’s investment in, indirectly) by family customers; 275.202(a)(11)(G)–1(d)(4)); or and relationship with, the issuer must: (2) A majority of the interests in the (2) Any natural person who is a (A) Comply with the limitations entity are owned (directly or indirectly) father-in-law, mother-in-law, brother-in- imposed in § 351.15, as if the issuer by family customers; law, sister-in-law, son-in-law or were a covered fund; and (3) The entity is owned only by family daughter-in-law of a family client, or a (B) Be conducted in compliance with, spouse or a spousal equivalent of any of and subject to, applicable banking laws customers and up to 5 closely related persons of the family customers; and the foregoing. and regulations, including applicable (18) Customer facilitation vehicles. (i) (C) Notwithstanding paragraph safety and soundness standards. Subject to paragraph (c)(18)(ii) of this (c)(17)(i)(A) and (B) of this section, up (16) Qualifying venture capital funds. section, an issuer that is formed by or to an aggregate 0.5 percent of the (i) Subject to paragraphs (c)(16)(ii) at the request of a customer of the entity’s outstanding ownership interests through (iv) of this section, an issuer banking entity for the purpose of may be acquired or retained by one or that: providing such customer (which may more entities that are not family (A) Is a venture capital fund as include one or more affiliates of such customers or closely related persons if defined in 17 CFR 275.203(l)–1; and customer) with exposure to a the ownership interest is acquired or (B) Does not engage in any activity transaction, investment strategy, or retained by such parties for the purpose that would constitute proprietary other service provided by the banking of and to the extent necessary for trading under § 351.3(b)(1)(i), as if the entity. establishing corporate separateness or issuer were a banking entity. (ii) A banking entity may rely on the addressing bankruptcy, insolvency, or (ii) A banking entity that acts as a exclusion in paragraph (c)(18)(i) of this sponsor, investment adviser, or similar concerns. section with respect to an issuer commodity trading advisor to an issuer (ii) A banking entity may rely on the provided that: that meets the conditions in paragraph exclusion in paragraph (c)(17)(i) of this (A) All of the ownership interests of (c)(16)(i) of this section may not rely on section with respect to an entity the issuer are owned by the customer this exclusion unless the banking entity: provided that the banking entity (or an (which may include one or more of its (A) Provides in writing to any affiliate): affiliates) for whom the issuer was prospective and actual investor in the (A) Provides bona fide trust, fiduciary, created; issuer the disclosures required under investment advisory, or commodity (B) Notwithstanding paragraph § 351.11(a)(8), as if the issuer were a trading advisory services to the entity; (c)(18)(ii)(A) of this section, up to an covered fund; (B) Does not, directly or indirectly, aggregate 0.5 percent of the issuer’s (B) Ensures that the activities of the guarantee, assume, or otherwise insure issuer are consistent with safety and outstanding ownership interests may be the obligations or performance of such acquired or retained by one or more soundness standards that are entity; substantially similar to those that would entities that are not customers if the (C) Complies with the disclosure ownership interest is acquired or apply if the banking entity engaged in obligations under § 351.11(a)(8), as if the activities directly; and retained by such parties for the purpose such entity were a covered fund, of and to the extent necessary for (C) Complies with the restrictions in provided that the content may be § 351.14 as if the issuer were a covered establishing corporate separateness or modified to prevent the disclosure from addressing bankruptcy, insolvency, or fund (except the banking entity may being misleading and the manner of acquire and retain any ownership similar concerns; and disclosure may be modified to interest in the issuer). (C) The banking entity and its accommodate the specific (iii) The banking entity must not, affiliates: directly or indirectly, guarantee, circumstances of the entity; (1) Maintain documentation outlining assume, or otherwise insure the (D) Does not acquire or retain, as how the banking entity intends to obligations or performance of the issuer. principal, an ownership interest in the facilitate the customer’s exposure to (iv) A banking entity’s ownership entity, other than as described in such transaction, investment strategy, or interest in or relationship with the paragraph (c)(17)(i)(C) of this section; service; issuer must: (E) Complies with the requirements of (2) Do not, directly or indirectly, (A) Comply with the limitations §§ 351.14(b) and 351.15, as if such guarantee, assume, or otherwise insure imposed in § 351.15, as if the issuer entity were a covered fund; and the obligations or performance of such were a covered fund; and (F) Except for riskless principal issuer; (B) Be conducted in compliance with, transactions as defined in paragraph (3) Comply with the disclosure and subject to, applicable banking laws (d)(11) of this section, complies with the obligations under § 351.11(a)(8), as if and regulations, including applicable requirements of 12 CFR 223.15(a), as if such issuer were a covered fund, safety and soundness standards. such banking entity and its affiliates provided that the content may be (17) Family wealth management were a member bank and the entity were modified to prevent the disclosure from vehicles. (i) Subject to paragraph an affiliate thereof. being misleading and the manner of

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disclosure may be modified to to the operation of the investment covered fund by the entity (or employee accommodate the specific manager or primarily responsible for the or former employee thereof), provided circumstances of the issuer; management of the covered fund’s that the entity (or employee or former (4) Do not acquire or retain, as assets; or employee thereof) may be obligated principal, an ownership interest in the (viii) Other similar events that under the terms of such interest to issuer, other than as described in constitute ‘‘cause’’ for removal of an return profits previously received; paragraph (c)(18)(ii)(B) of this section; investment manager, provided that such (2) All such profit, once allocated, is (5) Comply with the requirements of events are not solely related to the distributed to the entity (or employee or §§ 351.14(b) and 351.15, as if such performance of the covered fund or the former employee thereof) promptly after issuer were a covered fund; and investment manager’s exercise of being earned or, if not so distributed, is (6) Except for riskless principal investment discretion under the covered retained by the covered fund for the sole transactions as defined in paragraph fund’s transaction agreements; purpose of establishing a reserve (d)(11) of this section, comply with the (B) Has the right under the terms of amount to satisfy contractual obligations requirements of 12 CFR 223.15(a), as if the interest to receive a share of the with respect to subsequent losses of the such banking entity and its affiliates income, gains or profits of the covered covered fund and such undistributed were a member bank and the issuer fund; profit of the entity (or employee or were an affiliate thereof. (C) Has the right to receive the former employee thereof) does not share * * * * * underlying assets of the covered fund in the subsequent investment gains of (d) * * * after all other interests have been the covered fund; (6) Ownership interest. (i) Ownership redeemed and/or paid in full (excluding (3) Any amounts invested in the interest means any equity, partnership, the rights of a creditor to exercise covered fund, including any amounts or other similar interest. An other remedies upon the occurrence of an paid by the entity in connection with similar interest means an interest that: event of default or an acceleration obtaining the restricted profit interest, (A) Has the right to participate in the event); are within the limits of § 351.12 of this selection or removal of a general (D) Has the right to receive all or a subpart; and partner, managing member, member of portion of excess spread (the positive (4) The interest is not transferable by the board of directors or trustees, difference, if any, between the aggregate the entity (or employee or former investment manager, investment interest payments received from the employee thereof) except to an affiliate adviser, or commodity trading advisor underlying assets of the covered fund thereof (or an employee of the banking of the covered fund, excluding: and the aggregate interest paid to the entity or affiliate), to immediate family (1) The rights of a creditor to exercise holders of other outstanding interests); members, or through the intestacy, of remedies upon the occurrence of an (E) Provides under the terms of the the employee or former employee, or in event of default or an acceleration event; interest that the amounts payable by the connection with a sale of the business and covered fund with respect to the interest that gave rise to the restricted profit (2) The right to participate in the could be reduced based on losses arising interest by the entity (or employee or removal of an investment manager for from the underlying assets of the former employee thereof) to an ‘‘cause’’ or participate in the selection of covered fund, such as allocation of unaffiliated party that provides a replacement manager upon an losses, write-downs or charge-offs of the investment management, investment investment manager’s resignation or outstanding principal balance, or advisory, commodity trading advisory, removal. For purposes of this paragraph reductions in the amount of interest due or other services to the fund. (d)(6)(i)(A)(2), ‘‘cause’’ for removal of an and payable on the interest; (B) Any senior loan or senior debt investment manager means one or more (F) Receives income on a pass-through interest that has the following of the following events: (i) The basis from the covered fund, or has a characteristics: bankruptcy, insolvency, conservatorship rate of return that is determined by (1) Under the terms of the interest the or receivership of the investment reference to the performance of the holders of such interest do not have the manager; underlying assets of the covered fund; right to receive a share of the income, (ii) The breach by the investment or gains, or profits of the covered fund, but manager of any material provision of the (G) Any synthetic right to have, are entitled to receive only: covered fund’s transaction agreements receive, or be allocated any of the rights (i) Interest at a stated interest rate, as applicable to the investment manager; in paragraphs (d)(6)(i)(A) through (F) of well as commitment fees or other fees, (iii) The breach by the investment this section. which are not determined by reference manager of material representations or (ii) Ownership interest does not to the performance of the underlying warranties; include: assets of the covered fund; and (iv) The occurrence of an act that (A) Restricted profit interest, which is (ii) Repayment of a fixed principal constitutes fraud or criminal activity in an interest held by an entity (or an amount, on or before a maturity date, in the performance of the investment employee or former employee thereof) a contractually-determined manner manager’s obligations under the covered in a covered fund for which the entity (which may include prepayment fund’s transaction agreements; (or employee thereof) serves as premiums intended solely to reflect, and (v) The indictment of the investment investment manager, investment compensate holders of the interest for, manager for a criminal offense, or the adviser, commodity trading advisor, or forgone income resulting from an early indictment of any officer, member, other service provider, so long as: prepayment); partner or other principal of the (1) The sole purpose and effect of the (2) The entitlement to payments investment manager for a criminal interest is to allow the entity (or under the terms of the interest are offense materially related to his or her employee or former employee thereof) absolute and could not be reduced investment management activities; to share in the profits of the covered based on losses arising from the (vi) A change in control with respect fund as performance compensation for underlying assets of the covered fund, to the investment manager; the investment management, investment such as allocation of losses, write- (vii) The loss, separation or advisory, commodity trading advisory, downs or charge-offs of the outstanding incapacitation of an individual critical or other services provided to the principal balance, or reductions in the

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amount of interest due and payable on the banking entity’s permitted fund sponsored by the banking entity the interest; and investment in such funds shall be will be attributed to the banking entity (3) The holders of the interest are not measured only by reference to the value if the banking entity, directly or entitled to receive the underlying assets of the master fund. The banking entity’s indirectly, extends financing for the of the covered fund after all other permitted investment in the master fund purpose of enabling the director or interests have been redeemed or paid in shall include any investment by the employee to acquire the restricted profit full (excluding the rights of a creditor to banking entity in the master fund, as interest in the fund and the financing is exercise remedies upon the occurrence well as the banking entity’s pro-rata used to acquire such ownership interest of an event of default or an acceleration share of any ownership interest in the in the covered fund. event). master fund that is held through the * * * * * feeder fund; and * * * * * (d) Capital treatment for a permitted (11) Riskless principal transaction. (ii) Fund-of-funds investments. If a banking entity organizes and offers a investment in a covered fund. For Riskless principal transaction means a purposes of calculating compliance with transaction in which a banking entity, covered fund pursuant to § 351.11 for the purpose of investing in other the applicable regulatory capital after receiving an order from a customer requirements, a banking entity shall to buy (or sell) a security, purchases (or covered funds (a ‘‘fund of funds’’) and that fund of funds itself invests in deduct from the banking entity’s tier 1 sells) the security in the secondary capital (as determined under paragraph market for its own account to offset a another covered fund that the banking entity is permitted to own, then the (c)(2) of this section) the greater of: contemporaneous sale to (or purchase (1)(i) The sum of all amounts paid or from) the customer. banking entity’s permitted investment in that other fund shall include any contributed by the banking entity in ■ 18. Amend § 351.12 by: investment by the banking entity in that connection with acquiring or retaining ■ a. Revising paragraph (b)(1)(ii); other fund, as well as the banking an ownership interest (together with any ■ b. Revising paragraph (b)(4); entity’s pro-rata share of any ownership amounts paid by the entity in ■ c. Adding paragraph (b)(5); interest in the fund that is held through connection with obtaining a restricted ■ d. Revising paragraph (c)(1); and the fund of funds. The investment of the profit interest under § 351.10(d)(6)(ii) of ■ e. Revising paragraphs (d) and (e). banking entity may not represent more subpart C of this part), on a historical The revisions and addition read as than 3 percent of the amount or value cost basis, plus any earnings received; follows: of any single covered fund. and § 351.12 Permitted investment in a (5) Parallel Investments and Co- (ii) The fair market value of the covered fund. Investments. (i) A banking entity shall banking entity’s ownership interests in not be required to include in the * * * * * the covered fund as determined under calculation of the investment limits (b) * * * paragraph (b)(2)(ii) or (b)(3) of this under paragraph (a)(2) of this section (1) * * * section (together with any amounts paid any investment the banking entity (ii) Treatment of registered investment by the entity in connection with makes alongside a covered fund as long companies, SEC-regulated business obtaining a restricted profit interest as the investment is made in development companies, and foreign under § 351.10(d)(6)(ii) of subpart C of compliance with applicable laws and public funds. For purposes of paragraph this part), if the banking entity accounts regulations, including applicable safety (b)(1)(i) of this section, a registered for the profits (or losses) of the fund and soundness standards. investment in its financial statements. investment company, SEC-regulated (ii) A banking entity shall not be business development companies, or (2) Treatment of employee and restricted under this section in the director restricted profit interests foreign public fund as described in amount of any investment the banking § 351.10(c)(1) will not be considered to financed by the banking entity. For entity makes alongside a covered fund purposes of paragraph (d)(1) of this be an affiliate of the banking entity so as long as the investment is made in long as: section, an investment by a director or compliance with applicable laws and employee of a banking entity who (A) The banking entity, together with regulations, including applicable safety its affiliates, does not own, control, or acquires a restricted profit interest in his and soundness standards. or her personal capacity in a covered hold with the power to vote 25 percent (c) * * * or more of the voting shares of the (1)(i) For purposes of paragraph fund sponsored by the banking entity company or fund; and (a)(2)(iii) of this section, the aggregate will be attributed to the banking entity (B) The banking entity, or an affiliate value of all ownership interests held by if the banking entity, directly or of the banking entity, provides a banking entity shall be the sum of all indirectly, extends financing for the investment advisory, commodity trading amounts paid or contributed by the purpose of enabling the director or advisory, administrative, and other banking entity in connection with employee to acquire the restricted profit services to the company or fund in acquiring or retaining an ownership interest in the fund and the financing is compliance with the limitations under interest in covered funds (together with used to acquire such ownership interest applicable regulation, order, or other any amounts paid by the entity in in the covered fund. authority. connection with obtaining a restricted (e) Extension of time to divest an * * * * * profit interest under § 351.10(d)(6)(ii)), ownership interest. (1) Extension period. (4) Multi-tier fund investments. (i) on a historical cost basis; Upon application by a banking entity, Master-feeder fund investments. If the (ii) Treatment of employee and the Board may extend the period under principal investment strategy of a director restricted profit interests paragraph (a)(2)(i) of this section for up covered fund (the ‘‘feeder fund’’) is to financed by the banking entity. For to 2 additional years if the Board finds invest substantially all of its assets in purposes of paragraph (c)(1)(i) of this that an extension would be consistent another single covered fund (the section, an investment by a director or with safety and soundness and not ‘‘master fund’’), then for purposes of the employee of a banking entity who detrimental to the public interest. investment limitations in paragraphs acquires a restricted profit interest in his (2) Application requirements. An (a)(2)(i)(B) and (a)(2)(ii) of this section, or her personal capacity in a covered application for extension must:

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(i) Be submitted to the Board at least stability of the United States, address ■ b. Revising paragraph (a)(2)(ii)(C); 90 days prior to the expiration of the material conflicts of interest or other ■ c. Adding paragraphs (a)(2)(iii), (iv), applicable time period; unsound banking practices, or otherwise (v), and (3); and (ii) Provide the reasons for further the purposes of section 13 of the ■ d. Revising paragraph (c). application, including information that BHC Act and this part. The revisions and additions read as addresses the factors in paragraph (e)(3) (5) Consultation. In the case of a follows: of this section; and banking entity that is primarily (iii) Explain the banking entity’s plan regulated by another Federal banking § 351.14 Limitations on relationships with a covered fund. for reducing the permitted investment agency, the SEC, or the CFTC, the Board in a covered fund through redemption, will consult with such agency prior to (a) * * * sale, dilution or other methods as acting on an application by the banking (2) * * * required in paragraph (a)(2) of this entity for an extension under paragraph (i) Acquire and retain any ownership section. (e)(1) of this section. interest in a covered fund in accordance with the requirements of §§ 351.11, (3) Factors governing the Board ■ 19. Amend § 351.13 by adding 351.12, or 351.13; determinations. In reviewing any paragraph (d) to read as follows: application under paragraph (e)(1) of (ii) * * * this section, the Board may consider all § 351.13 Other permitted covered fund (C) The Board has not determined that the facts and circumstances related to activities and investments. such transaction is inconsistent with the the permitted investment in a covered * * * * * safe and sound operation and condition fund, including: (d) Permitted covered fund activities of the banking entity; and (i) Whether the investment would and investments of qualifying foreign (iii) Enter into a transaction with a result, directly or indirectly, in a excluded funds. (1) The prohibition covered fund that would be an exempt material exposure by the banking entity contained in § 351.10(a) does not apply covered transaction under 12 U.S.C. to high-risk assets or high-risk trading to a qualifying foreign excluded fund. 371c(d) or § 223.42 of the Board’s strategies; (2) For purposes of this paragraph (d), Regulation W (12 CFR 223.42) subject to (ii) The contractual terms governing a qualifying foreign excluded fund the limitations specified under 12 the banking entity’s interest in the means a banking entity that: U.S.C. 371c(d) or § 223.42 of the Board’s covered fund; (i) Is organized or established outside Regulation W (12 CFR 223.42), as (iii) The date on which the covered the United States, and the ownership applicable, fund is expected to have attracted interests of which are offered and sold (iv) Enter into a riskless principal sufficient investments from investors solely outside the United States; transaction with a covered fund; and unaffiliated with the banking entity to (ii)(A) Would be a covered fund if the (v) Extend credit to or purchase assets enable the banking entity to comply entity were organized or established in from a covered fund, provided: with the limitations in paragraph the United States, or (A) Each extension of credit or (a)(2)(i) of this section; (B) Is, or holds itself out as being, an purchase of assets is in the ordinary (iv) The total exposure of the covered entity or arrangement that raises money course of business in connection with banking entity to the investment and the from investors primarily for the purpose payment transactions; settlement risks that disposing of, or maintaining, of investing in financial instruments for services; or futures, derivatives, and the investment in the covered fund may resale or other disposition or otherwise securities clearing; pose to the banking entity and the trading in financial instruments; (B) Each extension of credit is repaid, financial stability of the United States; (iii) Would not otherwise be a banking sold, or terminated by the end of five (v) The cost to the banking entity of entity except by virtue of the acquisition business days; and divesting or disposing of the investment or retention of an ownership interest in, (C) The banking entity making each within the applicable period; sponsorship of, or relationship with the extension of credit meets the (vi) Whether the investment or the entity, by another banking entity that requirements of § 223.42(l)(1)(i) and (ii) divestiture or conformance of the meets the following: of the Board’s Regulation W (12 CFR investment would involve or result in a (A) The banking entity is not 223.42(l)(1)(i) and(ii)), as if the material conflict of interest between the organized, or directly or indirectly extension of credit was an intraday banking entity and unaffiliated parties, controlled by a banking entity that is extension of credit, regardless of the including clients, customers, or organized, under the laws of the United duration of the extension of credit. counterparties to which it owes a duty; States or of any State; and (3) Any transaction or activity (vii) The banking entity’s prior efforts (B) The banking entity’s acquisition of permitted under paragraphs (a)(2)(iii), to reduce through redemption, sale, an ownership interest in or sponsorship (iv) or (v) must comply with the dilution, or other methods its ownership of the fund by the foreign banking entity limitations in § 351.15. interests in the covered fund, including meets the requirements for permitted * * * * * activities related to the marketing of covered fund activities and investments (c) Restrictions on other permitted interests in such covered fund; solely outside the United States, as transactions. Any transaction permitted (viii) Market conditions; and provided in § 351.13(b); under paragraphs (a)(2)(ii), (iii), or (iv) (ix) Any other factor that the Board (iv) Is established and operated as part of this section shall be subject to section believes appropriate. of a bona fide asset management 23B of the Federal Reserve Act (12 (4) Authority to impose restrictions on business; and U.S.C. 371c–1) as if the counterparty (v) Is not operated in a manner that activities or investment during any were an affiliate of the banking entity enables the banking entity that sponsors extension period. The Board may under section 23B. impose such conditions on any or controls the qualifying foreign extension approved under paragraph excluded fund, or any of its affiliates, to Subpart D—Compliance Program (e)(1) of this section as the Board evade the requirements of section 13 of Requirements; Violations determines are necessary or appropriate the BHC Act or this part. to protect the safety and soundness of ■ 20. Amend § 351.14 by: ■ 21. Amend § 351.20 by: the banking entity or the financial ■ a. Revising paragraph (a)(2)(i); ■ a. Revising paragraph (a);

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■ b. Revising the heading of paragraph Subpart B—Proprietary Trading ■ g. Revising paragraph (d)(6); and (d) and revising paragraph (d)(1); and ■ h. Adding paragraph (d)(11). ■ 23. Amend § 75.6 by adding paragraph ■ c. Revising the introductory text of The revisions and additions read as (f) to read as follows: paragraph (e). follows: The revisions and addition read as § 75.6 Other permitted proprietary trading § 75.10 Prohibition on acquiring or follows: activities. retaining an ownership interest in and * * * * * having certain relationships with a covered § 351.20 Program for compliance; (f) Permitted trading activities of fund. reporting. qualifying foreign excluded funds. The * * * * * (a) Program requirement. Each prohibition contained in § 75.3(a) does (c) * * * banking entity (other than a banking not apply to the purchase or sale of a (1) Foreign public funds. (i) Subject to entity with limited trading assets and financial instrument by a qualifying paragraphs (c)(1)(ii) and (iii) of this liabilities or a qualifying foreign foreign excluded fund. For purposes of section, an issuer that: excluded fund under section 351.6(f) or this paragraph (f), a qualifying foreign (A) Is organized or established outside 351.13(d)) shall develop and provide for excluded fund means a banking entity of the United States; and the continued administration of a that: (B) Is authorized to offer and sell compliance program reasonably (1) Is organized or established outside ownership interests, and such interests designed to ensure and monitor the United States, and the ownership are offered and sold, through one or compliance with the prohibitions and interests of which are offered and sold more public offerings. restrictions on proprietary trading and solely outside the United States; (ii) With respect to a banking entity covered fund activities and investments (2)(i) Would be a covered fund if the that is, or is controlled directly or set forth in section 13 of the BHC Act entity were organized or established in indirectly by a banking entity that is, and this part. The terms, scope, and the United States, or located in or organized under the laws detail of the compliance program shall (ii) Is, or holds itself out as being, an of the United States or of any State and be appropriate for the types, size, scope, entity or arrangement that raises money any issuer for which such banking and complexity of activities and from investors primarily for the purpose entity acts as sponsor, the sponsoring business structure of the banking entity. of investing in financial instruments for banking entity may not rely on the resale or other disposition or otherwise exemption in paragraph (c)(1)(i) of this * * * * * trading in financial instruments; section for such issuer unless more than (d) Reporting requirements under (3) Would not otherwise be a banking 75 percent of the ownership interests in appendix A to this part. (1) A banking entity except by virtue of the acquisition the issuer are sold to persons other than: entity (other than a qualifying foreign or retention of an ownership interest in, (A) Such sponsoring banking entity; excluded fund under section 351.6(f) or sponsorship of, or relationship with the (B) Such issuer; 351.13(d)) engaged in proprietary entity, by another banking entity that (C) Affiliates of such sponsoring trading activity permitted under subpart meets the following: banking entity or such issuer; and B shall comply with the reporting (i) The banking entity is not (D) Directors and senior executive requirements described in appendix A organized, or directly or indirectly officers as defined in § 225.71(c) of the to this part, if: controlled by a banking entity that is Board’s Regulation Y (12 CFR 225.71(c)) * * * * * organized, under the laws of the United of such entities. States or of any State; and (iii) For purposes of paragraph (e) Additional documentation for (ii) The banking entity’s acquisition or (c)(1)(i)(B) of this section, the term covered funds. A banking entity with retention of an ownership interest in or ‘‘public offering’’ means a distribution significant trading assets and liabilities sponsorship of the fund meets the (as defined in § 75.4(a)(3)) of securities (other than a qualifying foreign requirements for permitted covered in any jurisdiction outside the United excluded fund under section 351.6(f) or fund activities and investments solely States to investors, including retail 351.13(d)) shall maintain records that outside the United States, as provided investors, provided that: include: in § 75.13(b); (A) The distribution is subject to * * * * * (4) Is established and operated as part substantive disclosure and retail COMMODITY FUTURES TRADING of a bona fide asset management investor protection laws or regulations; COMMISSION business; and (B) With respect to an issuer for (5) Is not operated in a manner that which the banking entity serves as the 17 CFR Chapter I enables the banking entity that sponsors investment manager, investment Authority and Issuance or controls the qualifying foreign adviser, commodity trading advisor, excluded fund, or any of its affiliates, to commodity pool operator, or sponsor, For the reasons set forth in the evade the requirements of section 13 of the distribution complies with all Common Preamble, the Commodity the BHC Act or this part. applicable requirements in the Futures Trading Commission amends jurisdiction in which such distribution part 75 to chapter I of title 17 of the Subpart C—Covered Funds Activities is being made; Code of Federal Regulations as follows: and Investments (C) The distribution does not restrict availability to investors having a ■ 24. Amend § 75.10 by: PART 75—PROPRIETARY TRADING minimum level of net worth or net ■ a. Revising paragraph (c)(1); AND CERTAIN INTERESTS IN AND investment assets; and RELATIONSHIPS WITH COVERED ■ b. Revising paragraph (c)(3)(i); ■ (D) The issuer has filed or submitted, FUNDS c. Revising paragraph (c)(8); ■ d. Revising the heading of paragraph with the appropriate regulatory (c)(10) and revising paragraph (c)(10)(i); authority in such jurisdiction, offering ■ 22. The authority citation for part 75 ■ e. Revising paragraph (c)(11); disclosure documents that are publicly continues to read as follows: ■ f. Adding paragraphs (c)(15), (16), available. Authority: 12 U.S.C. 1851. (17), and (18); * * * * *

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(3) * * * equity or debt security other than as directly or indirectly transfer any (i) Is composed of no more than 10 permitted in paragraphs (c)(8)(iii), (iv), interest in any other economic or unaffiliated co-venturers; or (v) of this section; financial exposure; * * * * * (B) A derivative, other than a (C) The special unit of beneficial (8) Loan securitizations. (i) Scope. An derivative that meets the requirements interest or collateral certificate is issuing entity for asset-backed securities of paragraph (c)(8)(iv) of this section; or created solely to satisfy legal that satisfies all the conditions of this (C) A commodity forward contract. requirements or otherwise facilitate the paragraph (c)(8) and the assets or (iii) Permitted securities. structuring of the loan securitization; holdings of which are composed solely Notwithstanding paragraph (c)(8)(ii)(A) and of: of this section, the issuing entity may (D) The special purpose vehicle that (A) Loans as defined in § 75.2(t); hold securities, other than debt issues the special unit of beneficial (B) Rights or other assets designed to securities permitted under paragraph interest or collateral certificate and the assure the servicing or timely (c)(8)(i)(E) of this section, if those issuing entity are established under the distribution of proceeds to holders of securities are: direction of the same entity that such securities and rights or other assets (A) Cash equivalents—which, for the initiated the loan securitization. that are related or incidental to purposes of this paragraph, means high * * * * * purchasing or otherwise acquiring and quality, highly liquid investments (10) Qualifying covered bonds. (i) holding the loans, provided that each whose maturity corresponds to the Scope. An entity owning or holding a asset that is a security (other than securitization’s expected or potential dynamic or fixed pool of loans or other special units of beneficial interest and need for funds and whose currency assets as provided in paragraph (c)(8) of collateral certificates meeting the corresponds to either the underlying this section for the benefit of the holders requirements of paragraph (c)(8)(v) of loans or the asset-backed securities—for of covered bonds, provided that the this section) meets the requirements of purposes of the rights and assets in assets in the pool are composed solely paragraph (c)(8)(iii) of this section; paragraph (c)(8)(i)(B) of this section; or of assets that meet the conditions in (B) Securities received in lieu of debts (C) Interest rate or foreign exchange paragraph (c)(8)(i) of this section. derivatives that meet the requirements previously contracted with respect to * * * * * of paragraph (c)(8)(iv) of this section; the loans supporting the asset-backed (11) * * * (D) Special units of beneficial interest securities. (i) That is a small business investment and collateral certificates that meet the (iv) Derivatives. The holdings of company, as defined in section 103(3) of requirements of paragraph (c)(8)(v) of derivatives by the issuing entity shall be the Small Business Investment Act of this section; and limited to interest rate or foreign (E) Debt securities, other than asset- exchange derivatives that satisfy all of 1958 (15 U.S.C. 662), or that has backed securities and convertible the following conditions: received from the Small Business securities, provided that: (A) The written terms of the Administration notice to proceed to (1) The aggregate value of such debt derivatives directly relate to the loans, qualify for a license as a small business securities does not exceed five percent the asset-backed securities, the investment company, which notice or of the aggregate value of loans held contractual rights or other assets license has not been revoked, or that has under paragraph (c)(8)(i)(A) of this described in paragraph (c)(8)(i)(B) of voluntarily surrendered its license to section, cash and cash equivalents held this section, or the debt securities operate as a small business investment under paragraph (c)(8)(iii)(A) of this described in paragraph (c)(8)(i)(E) of this company in accordance with 13 CFR section, and debt securities held under section; and 107.1900 and does not make any new this paragraph (c)(8)(i)(E); and (B) The derivatives reduce the interest investments (other than investments in (2) The aggregate value of the loans, rate and/or foreign exchange risks cash equivalents, which, for the cash and cash equivalents, and debt related to the loans, the asset-backed purposes of this paragraph, means high securities for purposes of this paragraph securities, the contractual rights or other quality, highly liquid investments is calculated at par value at the most assets described in paragraph (c)(8)(i)(B) whose maturity corresponds to the recent time any such debt security is of this section, or the debt securities issuer’s expected or potential need for acquired, except that the issuing entity described in paragraph (c)(8)(i)(E) of this funds and whose currency corresponds may instead determine the value of any section. to the issuer’s assets) after such such loan, cash equivalent, or debt (v) Special units of beneficial interest voluntary surrender; security based on its fair market value and collateral certificates. The assets or (ii) The business of which is to make if: holdings of the issuing entity may investments that are: (i) The issuing entity is required to include collateral certificates and (A) Designed primarily to promote the use the fair market value of such assets special units of beneficial interest public welfare, of the type permitted for purposes of calculating compliance issued by a special purpose vehicle, under paragraph (11) of section 5136 of with concentration limitations or other provided that: the Revised Statutes of the United States similar calculations under its (A) The special purpose vehicle that (12 U.S.C. 24), including the welfare of transaction agreements, and issues the special unit of beneficial low- and moderate-income communities (ii) The issuing entity’s valuation interest or collateral certificate meets or families (such as providing housing, methodology values similarly situated the requirements in this paragraph services, or jobs) and including assets consistently. (c)(8); investments that qualify for (ii) Impermissible assets. For purposes (B) The special unit of beneficial consideration under the regulations of this paragraph (c)(8), except as interest or collateral certificate is used implementing the Community permitted under paragraph (c)(8)(i)(E) of for the sole purpose of transferring to Reinvestment Act (12 U.S.C. 2901 et this section, the assets or holdings of the the issuing entity for the loan seq.); or issuing entity shall not include any of securitization the economic risks and (B) Qualified rehabilitation the following: benefits of the assets that are expenditures with respect to a qualified (A) A security, including an asset- permissible for loan securitizations rehabilitated building or certified backed security, or an interest in an under this paragraph (c)(8) and does not historic structure, as such terms are

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defined in section 47 of the Internal related to the loans, debt instruments, or through (iv) of this section, an issuer Revenue Code of 1986 or a similar State other rights or assets described in that: historic tax credit program; paragraph (c)(15)(i)(C) of this section. (A) Is a venture capital fund as (iii) That has elected to be regulated (ii) Activity requirements. To be defined in 17 CFR 275.203(l)–1; and or is regulated as a rural business eligible for the exclusion of paragraph (B) Does not engage in any activity investment company, as described in 15 (c)(15) of this section, an issuer must: that would constitute proprietary U.S.C. 80b–3(b)(8)(A) or (B), or that has (A) Not engage in any activity that trading under § 75.3(b)(1)(i), as if the terminated its participation as a rural would constitute proprietary trading issuer were a banking entity. business investment company in under § 75.3(b)(l)(i), as if the issuer were (ii) A banking entity that acts as a accordance with 7 CFR 4290.1900 and a banking entity; and sponsor, investment adviser, or does not make any new investments (B) Not issue asset-backed securities. commodity trading advisor to an issuer (other than investments in cash (iii) Requirements for a sponsor, that meets the conditions in paragraph equivalents, which, for the purposes of investment adviser, or commodity (c)(16)(i) of this section may not rely on this paragraph, means high quality, trading advisor. A banking entity that this exclusion unless the banking entity: highly liquid investments whose acts as a sponsor, investment adviser, or (A) Provides in writing to any maturity corresponds to the issuer’s commodity trading advisor to an issuer prospective and actual investor in the expected or potential need for funds and that meets the conditions in paragraphs issuer the disclosures required under whose currency corresponds to the (c)(15)(i) and (ii) of this section may not § 75.11(a)(8), as if the issuer were a issuer’s assets) after such termination; or rely on this exclusion unless the covered fund; (iv) That is a qualified opportunity banking entity: (B) Ensures that the activities of the fund, as defined in 26 U.S.C. 1400Z– (A) Provides in writing to any issuer are consistent with safety and 2(d). prospective and actual investor in the soundness standards that are * * * * * issuer the disclosures required under substantially similar to those that would (15) Credit funds. Subject to § 75.11(a)(8) of this subpart, as if the apply if the banking entity engaged in paragraphs (c)(15)(iii), (iv), and (v) of issuer were a covered fund; the activities directly; and this section, an issuer that satisfies the (B) Ensures that the activities of the (C) Complies with the restrictions in asset and activity requirements of issuer are consistent with safety and § 75.14 as if the issuer were a covered paragraphs (c)(15)(i) and (ii) of this soundness standards that are fund (except the banking entity may section. substantially similar to those that would acquire and retain any ownership (i) Asset requirements. The issuer’s apply if the banking entity engaged in interest in the issuer). (iii) The banking entity must not, assets must be composed solely of: the activities directly; and directly or indirectly, guarantee, (A) Loans as defined in § 75.2(t); (C) Complies with the limitations assume, or otherwise insure the (B) Debt instruments, subject to imposed in § 75.14, as if the issuer were obligations or performance of the issuer. paragraph (c)(15)(iv) of this section; a covered fund, except the banking (iv) A banking entity’s ownership (C) Rights and other assets that are entity may acquire and retain any interest in or relationship with the related or incidental to acquiring, ownership interest in the issuer. holding, servicing, or selling such loans issuer must: (iv) Additional Banking Entity (A) Comply with the limitations or debt instruments, provided that: Requirements. A banking entity may not (1) Each right or asset held under this imposed in § 75.15, as if the issuer were rely on this exclusion with respect to an paragraph (c)(15)(i)(C) that is a security a covered fund; and issuer that meets the conditions in is either: (B) Be conducted in compliance with, (i) A cash equivalent (which, for the paragraphs (c)(15)(i) and (ii) of this and subject to, applicable banking laws purposes of this paragraph, means high section unless: and regulations, including applicable quality, highly liquid investments (A) The banking entity does not, safety and soundness standards. whose maturity corresponds to the directly or indirectly, guarantee, (17) Family wealth management issuer’s expected or potential need for assume, or otherwise insure the vehicles. (i) Subject to paragraph funds and whose currency corresponds obligations or performance of the issuer (c)(17)(ii) of this section, any entity that to either the underlying loans or the or of any entity to which such issuer is not, and does not hold itself out as debt instruments); extends credit or in which such issuer being, an entity or arrangement that (ii) A security received in lieu of debts invests; and raises money from investors primarily previously contracted with respect to (B) Any assets the issuer holds for the purpose of investing in securities such loans or debt instruments; or pursuant to paragraphs (c)(15)(i)(B) or for resale or other disposition or (iii) An equity security (or right to (i)(C)(l)(iii) of this section would be otherwise trading in securities, and: acquire an equity security) received on permissible for the banking entity to (A) If the entity is a trust, the customary terms in connection with acquire and hold directly under grantor(s) of the entity are all family such loans or debt instruments; and applicable federal banking laws and customers; and (2) Rights or other assets held under regulations. (B) If the entity is not a trust: this paragraph (c)(15)(i)(C) of this (v) Investment and Relationship (1) A majority of the voting interests section may not include commodity Limits. A banking entity’s investment in, in the entity are owned (directly or forward contracts or any derivative; and and relationship with, the issuer must: indirectly) by family customers; (D) Interest rate or foreign exchange (A) Comply with the limitations (2) A majority of the interests in the derivatives, if: imposed in § 75.15, as if the issuer were entity are owned (directly or indirectly) (1) The written terms of the derivative a covered fund; and by family customers; directly relate to the loans, debt (B) Be conducted in compliance with, (3) The entity is owned only by family instruments, or other rights or assets and subject to, applicable banking laws customers and up to 5 closely related described in paragraph (c)(15)(i)(C) of and regulations, including applicable persons of the family customers; and this section; and safety and soundness standards. (C) Notwithstanding paragraph (2) The derivative reduces the interest (16) Qualifying venture capital funds. (c)(17)(i)(A) and (B) of this section, up rate and/or foreign exchange risks (i) Subject to paragraphs (c)(16)(ii) to an aggregate 0.5 percent of the

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entity’s outstanding ownership interests banking entity for the purpose of (A) Has the right to participate in the may be acquired or retained by one or providing such customer (which may selection or removal of a general more entities that are not family include one or more affiliates of such partner, managing member, member of customers or closely related persons if customer) with exposure to a the board of directors or trustees, the ownership interest is acquired or transaction, investment strategy, or investment manager, investment retained by such parties for the purpose other service provided by the banking adviser, or commodity trading advisor of and to the extent necessary for entity. of the covered fund, excluding: establishing corporate separateness or (ii) A banking entity may rely on the (1) The rights of a creditor to exercise addressing bankruptcy, insolvency, or exclusion in paragraph (c)(18)(i) of this remedies upon the occurrence of an similar concerns. section with respect to an issuer event of default or an acceleration event; (ii) A banking entity may rely on the provided that: and exclusion in paragraph (c)(17)(i) of this (A) All of the ownership interests of (2) The right to participate in the section with respect to an entity the issuer are owned by the customer removal of an investment manager for provided that the banking entity (or an (which may include one or more of its ‘‘cause’’ or participate in the selection of affiliate): affiliates) for whom the issuer was a replacement manager upon an (A) Provides bona fide trust, fiduciary, created; investment manager’s resignation or investment advisory, or commodity (B) Notwithstanding paragraph removal. For purposes of this paragraph trading advisory services to the entity; (c)(18)(ii)(A) of this section, up to an (d)(6)(i)(A)(2), ‘‘cause’’ for removal of an (B) Does not, directly or indirectly, aggregate 0.5 percent of the issuer’s investment manager means one or more guarantee, assume, or otherwise insure outstanding ownership interests may be of the following events: the obligations or performance of such acquired or retained by one or more (i) The bankruptcy, insolvency, entity; entities that are not customers if the conservatorship or receivership of the (C) Complies with the disclosure ownership interest is acquired or investment manager; obligations under § 75.11(a)(8), as if retained by such parties for the purpose (ii) The breach by the investment such entity were a covered fund, of and to the extent necessary for manager of any material provision of the provided that the content may be establishing corporate separateness or covered fund’s transaction agreements modified to prevent the disclosure from addressing bankruptcy, insolvency, or applicable to the investment manager; being misleading and the manner of similar concerns; and (iii) The breach by the investment disclosure may be modified to (C) The banking entity and its manager of material representations or accommodate the specific affiliates: warranties; circumstances of the entity; (1) Maintain documentation outlining (iv) The occurrence of an act that (D) Does not acquire or retain, as how the banking entity intends to constitutes fraud or criminal activity in principal, an ownership interest in the facilitate the customer’s exposure to the performance of the investment entity, other than as described in such transaction, investment strategy, or manager’s obligations under the covered paragraph (c)(17)(i)(C) of this section; service; fund’s transaction agreements; (E) Complies with the requirements of (2) Do not, directly or indirectly, (v) The indictment of the investment §§ 75.14(b) and 75.15, as if such entity guarantee, assume, or otherwise insure manager for a criminal offense, or the were a covered fund; and the obligations or performance of such indictment of any officer, member, (F) Except for riskless principal issuer; transactions as defined in paragraph partner or other principal of the (3) Comply with the disclosure investment manager for a criminal (d)(11) of this section, complies with the obligations under § 75.11(a)(8), as if requirements of 12 CFR 223.15(a), as if offense materially related to his or her such issuer were a covered fund, investment management activities; such banking entity and its affiliates provided that the content may be were a member bank and the entity were (vi) A change in control with respect modified to prevent the disclosure from to the investment manager; an affiliate thereof. being misleading and the manner of (iii) For purposes of paragraph (c)(17) (vii) The loss, separation or disclosure may be modified to of this section, the following definitions incapacitation of an individual critical accommodate the specific apply: to the operation of the investment (A) Closely related person means a circumstances of the issuer; manager or primarily responsible for the natural person (including the estate and (4) Do not acquire or retain, as management of the covered fund’s estate planning vehicles of such person) principal, an ownership interest in the assets; or who has longstanding business or issuer, other than as described in (viii) Other similar events that personal relationships with any family paragraph (c)(18)(ii)(B) of this section; constitute ‘‘cause’’ for removal of an customer. (5) Comply with the requirements of investment manager, provided that such (B) Family customer means: §§ 75.14(b) and 75.15, as if such issuer events are not solely related to the (1) A family client, as defined in Rule were a covered fund; and performance of the covered fund or the 202(a)(11)(G)–1(d)(4) of the Investment (6) Except for riskless principal investment manager’s exercise of Advisers Act of 1940 (17 CFR transactions as defined in paragraph investment discretion under the covered 275.202(a)(11)(G)–1(d)(4)); or (d)(11) of this section, comply with the fund’s transaction agreements; (2) Any natural person who is a requirements of 12 CFR 223.15(a), as if (B) Has the right under the terms of father-in-law, mother-in-law, brother-in- such banking entity and its affiliates the interest to receive a share of the law, sister-in-law, son-in-law or were a member bank and the issuer income, gains or profits of the covered daughter-in-law of a family client, or a were an affiliate thereof. fund; spouse or a spousal equivalent of any of * * * * * (C) Has the right to receive the the foregoing. (d) * * * underlying assets of the covered fund (18) Customer facilitation vehicles. (i) (6) Ownership interest. (i) Ownership after all other interests have been Subject to paragraph (c)(18)(ii) of this interest means any equity, partnership, redeemed and/or paid in full (excluding section, an issuer that is formed by or or other similar interest. An ‘‘other the rights of a creditor to exercise at the request of a customer of the similar interest’’ means an interest that: remedies upon the occurrence of an

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event of default or an acceleration obtaining the restricted profit interest, ■ a. Revising paragraph (b)(1)(ii); event); are within the limits of § 75.12 of this ■ b. Revising paragraph (b)(4); (D) Has the right to receive all or a subpart; and ■ c. Adding paragraph (b)(5); portion of excess spread (the positive (4) The interest is not transferable by ■ d. Revising paragraph (c)(1); and difference, if any, between the aggregate the entity (or employee or former ■ e. Revising paragraphs (d) and (e). interest payments received from the employee thereof) except to an affiliate The revisions and addition read as underlying assets of the covered fund thereof (or an employee of the banking follows: and the aggregate interest paid to the entity or affiliate), to immediate family § 75.12 Permitted investment in a covered holders of other outstanding interests); members, or through the intestacy, of fund. (E) Provides under the terms of the the employee or former employee, or in * * * * * interest that the amounts payable by the connection with a sale of the business covered fund with respect to the interest (b) * * * that gave rise to the restricted profit (1) * * * could be reduced based on losses arising interest by the entity (or employee or (ii) Treatment of registered investment from the underlying assets of the former employee thereof) to an companies, SEC-regulated business covered fund, such as allocation of unaffiliated party that provides development companies, and foreign losses, write-downs or charge-offs of the investment management, investment public funds. For purposes of paragraph outstanding principal balance, or advisory, commodity trading advisory, (b)(1)(i) of this section, a registered reductions in the amount of interest due or other services to the fund. investment company, SEC-regulated and payable on the interest; (B) Any senior loan or senior debt business development companies, or (F) Receives income on a pass-through interest that has the following foreign public fund as described in basis from the covered fund, or has a characteristics: § 75.10(c)(1) will not be considered to be rate of return that is determined by (1) Under the terms of the interest the an affiliate of the banking entity so long reference to the performance of the holders of such interest do not have the as: underlying assets of the covered fund; right to receive a share of the income, (A) The banking entity, together with or gains, or profits of the covered fund, but (G) Any synthetic right to have, its affiliates, does not own, control, or are entitled to receive only: hold with the power to vote 25 percent receive, or be allocated any of the rights (i) Interest at a stated interest rate, as in paragraphs (d)(6)(i)(A) through (F) of or more of the voting shares of the well as commitment fees or other fees, company or fund; and this section. which are not determined by reference (ii) Ownership interest does not (B) The banking entity, or an affiliate to the performance of the underlying of the banking entity, provides include: assets of the covered fund; and (A) Restricted profit interest, which is investment advisory, commodity trading (ii) Repayment of a fixed principal advisory, administrative, and other an interest held by an entity (or an amount, on or before a maturity date, in employee or former employee thereof) services to the company or fund in a contractually-determined manner compliance with the limitations under in a covered fund for which the entity (which may include prepayment (or employee thereof) serves as applicable regulation, order, or other premiums intended solely to reflect, and authority. investment manager, investment compensate holders of the interest for, adviser, commodity trading advisor, or * * * * * forgone income resulting from an early (4) Multi-tier fund investments. (i) other service provider, so long as: prepayment); (1) The sole purpose and effect of the Master-feeder fund investments. If the (2) The entitlement to payments interest is to allow the entity (or principal investment strategy of a under the terms of the interest are employee or former employee thereof) covered fund (the ‘‘feeder fund’’) is to absolute and could not be reduced to share in the profits of the covered invest substantially all of its assets in based on losses arising from the fund as performance compensation for another single covered fund (the underlying assets of the covered fund, the investment management, investment ‘‘master fund’’), then for purposes of the such as allocation of losses, write- advisory, commodity trading advisory, investment limitations in paragraphs downs or charge-offs of the outstanding or other services provided to the (a)(2)(i)(B) and (a)(2)(ii) of this section, principal balance, or reductions in the covered fund by the entity (or employee the banking entity’s permitted amount of interest due and payable on or former employee thereof), provided investment in such funds shall be the interest; and that the entity (or employee or former measured only by reference to the value (3) The holders of the interest are not employee thereof) may be obligated of the master fund. The banking entity’s entitled to receive the underlying assets under the terms of such interest to permitted investment in the master fund of the covered fund after all other return profits previously received; shall include any investment by the (2) All such profit, once allocated, is interests have been redeemed or paid in banking entity in the master fund, as distributed to the entity (or employee or full (excluding the rights of a creditor to well as the banking entity’s pro-rata former employee thereof) promptly after exercise remedies upon the occurrence share of any ownership interest in the being earned or, if not so distributed, is of an event of default or an acceleration master fund that is held through the retained by the covered fund for the sole event). feeder fund; and purpose of establishing a reserve * * * * * (ii) Fund-of-funds investments. If a amount to satisfy contractual obligations (11) Riskless principal transaction. banking entity organizes and offers a with respect to subsequent losses of the Riskless principal transaction means a covered fund pursuant to § 75.11 for the covered fund and such undistributed transaction in which a banking entity, purpose of investing in other covered profit of the entity (or employee or after receiving an order from a customer funds (a ‘‘fund of funds’’) and that fund former employee thereof) does not share to buy (or sell) a security, purchases (or of funds itself invests in another in the subsequent investment gains of sells) the security in the secondary covered fund that the banking entity is the covered fund; market for its own account to offset a permitted to own, then the banking (3) Any amounts invested in the contemporaneous sale to (or purchase entity’s permitted investment in that covered fund, including any amounts from) the customer. other fund shall include any investment paid by the entity in connection with ■ 26. Amend § 75.12 by: by the banking entity in that other fund,

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as well as the banking entity’s pro-rata an ownership interest (together with any to high-risk assets or high-risk trading share of any ownership interest in the amounts paid by the entity in strategies; fund that is held through the fund of connection with obtaining a restricted (ii) The contractual terms governing funds. The investment of the banking profit interest under § 75.10(d)(6)(ii) of the banking entity’s interest in the entity may not represent more than 3 subpart C of this part), on a historical covered fund; percent of the amount or value of any cost basis, plus any earnings received; (iii) The date on which the covered single covered fund. and fund is expected to have attracted (5) Parallel Investments and Co- (ii) The fair market value of the sufficient investments from investors Investments. (i) A banking entity shall banking entity’s ownership interests in unaffiliated with the banking entity to not be required to include in the the covered fund as determined under enable the banking entity to comply calculation of the investment limits paragraph (b)(2)(ii) or (b)(3) of this with the limitations in paragraph under paragraph (a)(2) of this section section (together with any amounts paid (a)(2)(i) of this section; any investment the banking entity by the entity in connection with (iv) The total exposure of the covered makes alongside a covered fund as long obtaining a restricted profit interest banking entity to the investment and the as the investment is made in under § 75.10(d)(6)(ii) of subpart C of risks that disposing of, or maintaining, compliance with applicable laws and this part), if the banking entity accounts the investment in the covered fund may regulations, including applicable safety for the profits (or losses) of the fund pose to the banking entity and the and soundness standards. investment in its financial statements. financial stability of the United States; (ii) A banking entity shall not be (2) Treatment of employee and (v) The cost to the banking entity of restricted under this section in the director restricted profit interests divesting or disposing of the investment amount of any investment the banking financed by the banking entity. For within the applicable period; entity makes alongside a covered fund purposes of paragraph (d)(1) of this (vi) Whether the investment or the as long as the investment is made in section, an investment by a director or divestiture or conformance of the compliance with applicable laws and employee of a banking entity who investment would involve or result in a regulations, including applicable safety acquires a restricted profit interest in his material conflict of interest between the and soundness standards. or her personal capacity in a covered banking entity and unaffiliated parties, (c) * * * fund sponsored by the banking entity including clients, customers, or (1)(i) For purposes of paragraph will be attributed to the banking entity counterparties to which it owes a duty; (a)(2)(iii) of this section, the aggregate if the banking entity, directly or (vii) The banking entity’s prior efforts value of all ownership interests held by indirectly, extends financing for the to reduce through redemption, sale, a banking entity shall be the sum of all purpose of enabling the director or dilution, or other methods its ownership amounts paid or contributed by the employee to acquire the restricted profit interests in the covered fund, including banking entity in connection with interest in the fund and the financing is activities related to the marketing of acquiring or retaining an ownership used to acquire such ownership interest interests in such covered fund; interest in covered funds (together with in the covered fund. (viii) Market conditions; and (e) Extension of time to divest an any amounts paid by the entity in (ix) Any other factor that the Board ownership interest. (1) Extension period. connection with obtaining a restricted believes appropriate. Upon application by a banking entity, profit interest under § 75.10(d)(6)(ii)), on (4) Authority to impose restrictions on the Board may extend the period under a historical cost basis; activities or investment during any paragraph (a)(2)(i) of this section for up (ii) Treatment of employee and extension period. The Board may to 2 additional years if the Board finds director restricted profit interests impose such conditions on any that an extension would be consistent financed by the banking entity. For extension approved under paragraph with safety and soundness and not purposes of paragraph (c)(1)(i) of this (e)(1) of this section as the Board section, an investment by a director or detrimental to the public interest. (2) Application requirements. An determines are necessary or appropriate employee of a banking entity who to protect the safety and soundness of acquires a restricted profit interest in his application for extension must: (i) Be submitted to the Board at least the banking entity or the financial or her personal capacity in a covered 90 days prior to the expiration of the stability of the United States, address fund sponsored by the banking entity applicable time period; material conflicts of interest or other will be attributed to the banking entity (ii) Provide the reasons for unsound banking practices, or otherwise if the banking entity, directly or application, including information that further the purposes of section 13 of the indirectly, extends financing for the addresses the factors in paragraph (e)(3) BHC Act and this part. purpose of enabling the director or of this section; and (5) Consultation. In the case of a employee to acquire the restricted profit (iii) Explain the banking entity’s plan banking entity that is primarily interest in the fund and the financing is for reducing the permitted investment regulated by another Federal banking used to acquire such ownership interest in a covered fund through redemption, agency, the SEC, or the CFTC, the Board in the covered fund. sale, dilution or other methods as will consult with such agency prior to * * * * * required in paragraph (a)(2) of this acting on an application by the banking (d) Capital treatment for a permitted section. entity for an extension under paragraph investment in a covered fund. For (3) Factors governing the Board (e)(1) of this section. purposes of calculating compliance with determinations. In reviewing any ■ 26. Amend § 75.13 by adding the applicable regulatory capital application under paragraph (e)(1) of paragraph (d) to read as follows: requirements, a banking entity shall this section, the Board may consider all deduct from the banking entity’s tier 1 the facts and circumstances related to § 75.13 Other permitted covered fund capital (as determined under paragraph the permitted investment in a covered activities and investments. (c)(2) of this section) the greater of: fund, including: * * * * * (1)(i) The sum of all amounts paid or (i) Whether the investment would (d) Permitted covered fund activities contributed by the banking entity in result, directly or indirectly, in a and investments of qualifying foreign connection with acquiring or retaining material exposure by the banking entity excluded funds. (1) The prohibition

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contained in § 75.10(a) does not apply to covered transaction under 12 U.S.C. detail of the compliance program shall a qualifying foreign excluded fund. 371c(d) or § 223.42 of the Board’s be appropriate for the types, size, scope, (2) For purposes of this paragraph (d), Regulation W (12 CFR 223.42) subject to and complexity of activities and a qualifying foreign excluded fund the limitations specified under 12 business structure of the banking entity. means a banking entity that: U.S.C. 371c(d) or § 223.42 of the Board’s * * * * * (i) Is organized or established outside Regulation W (12 CFR 223.42), as (d) Reporting requirements under the United States, and the ownership applicable, appendix A to this part. (1) A banking interests of which are offered and sold (iv) Enter into a riskless principal entity (other than a qualifying foreign solely outside the United States; transaction with a covered fund; and excluded fund under section 75.6(f) or (ii)(A) Would be a covered fund if the (v) Extend credit to or purchase assets 75.13(d)) engaged in proprietary trading entity were organized or established in from a covered fund, provided: activity permitted under subpart B shall the United States, or (A) Each extension of credit or comply with the reporting requirements (B) Is, or holds itself out as being, an purchase of assets is in the ordinary described in appendix A to this part, if: entity or arrangement that raises money course of business in connection with * * * * * from investors primarily for the purpose payment transactions; settlement (e) Additional documentation for of investing in financial instruments for services; or futures, derivatives, and covered funds. A banking entity with resale or other disposition or otherwise securities clearing; significant trading assets and liabilities trading in financial instruments; (B) Each extension of credit is repaid, (other than a qualifying foreign (iii) Would not otherwise be a banking sold, or terminated by the end of five excluded fund under section 75.6(f) or entity except by virtue of the acquisition business days; and 75.13(d)) shall maintain records that or retention of an ownership interest in, (C) The banking entity making each include: sponsorship of, or relationship with the extension of credit meets the entity, by another banking entity that requirements of § 223.42(l)(1)(i) and (ii) * * * * * meets the following: of the Board’s Regulation W (12 CFR SECURITIES AND EXCHANGE (A) The banking entity is not 223.42(l)(1)(i) and(ii)), as if the COMMISSION organized, or directly or indirectly extension of credit was an intraday controlled by a banking entity that is extension of credit, regardless of the 17 CFR Chapter II organized, under the laws of the United duration of the extension of credit. Authority and Issuance States or of any State; and (3) Any transaction or activity For the reasons set forth in the (B) The banking entity’s acquisition of permitted under paragraphs (a)(2)(iii), Common Preamble, the Securities and an ownership interest in or sponsorship (iv) or (v) must comply with the Exchange Commission amends part 255 of the fund by the foreign banking entity limitations in § 75.15. to chapter II of title 17 of the Code of meets the requirements for permitted * * * * * Federal Regulations as follows: covered fund activities and investments (c) Restrictions on other permitted solely outside the United States, as transactions. Any transaction permitted PART 255—PROPRIETARY TRADING provided in § 75.13(b); under paragraphs (a)(2)(ii), (iii), or (iv) AND CERTAIN INTERESTS IN AND (iv) Is established and operated as part of this section shall be subject to section RELATIONSHIPS WITH COVERED of a bona fide asset management 23B of the Federal Reserve Act (12 FUNDS business; and U.S.C. 371c–1) as if the counterparty (v) Is not operated in a manner that were an affiliate of the banking entity ■ 29. The authority citation for part 255 enables the banking entity that sponsors under section 23B. continues to read as follows: or controls the qualifying foreign Authority: 12 U.S.C. 1851. excluded fund, or any of its affiliates, to Subpart D—Compliance Program evade the requirements of section 13 of Requirements; Violations Subpart B—Proprietary Trading the BHC Act or this part. ■ 27. Amend § 75.14 by: ■ 28. Amend § 75.20 by: ■ 30. Amend § 255.6 by adding ■ a. Revising paragraph (a)(2)(i); ■ a. Revising paragraph (a); paragraph (f) to read as follows: ■ ■ b. Revising the heading of paragraph b. Revising paragraph (a)(2)(ii)(C); § 255.6 Other permitted proprietary trading ■ (d) and revising paragraph (d)(1); and c. Adding paragraphs (a)(2)(iii), (iv), activities. (v), and (3); and ■ c. Revising the introductory text of ■ d. Revising paragraph (c). paragraph (e). * * * * * The revisions and additions read as The revisions and addition read as (f) Permitted trading activities of follows: follows: qualifying foreign excluded funds. The prohibition contained in § 255.3(a) does § 75.14 Limitations on relationships with a § 75.20 Program for compliance; reporting. not apply to the purchase or sale of a covered fund. (a) Program requirement. Each financial instrument by a qualifying (a) * * * banking entity (other than a banking foreign excluded fund. For purposes of (2) * * * entity with limited trading assets and this paragraph (f), a qualifying foreign (i) Acquire and retain any ownership liabilities or a qualifying foreign excluded fund means a banking entity interest in a covered fund in accordance excluded fund under section 75.6(f) or that: with the requirements of §§ 75.11, 75.13(d)) shall develop and provide for (1) Is organized or established outside 75.12, or 75.13; the continued administration of a the United States, and the ownership (ii) * * * compliance program reasonably interests of which are offered and sold (C) The Board has not determined that designed to ensure and monitor solely outside the United States; such transaction is inconsistent with the compliance with the prohibitions and (2)(i) Would be a covered fund if the safe and sound operation and condition restrictions on proprietary trading and entity were organized or established in of the banking entity; and covered fund activities and investments the United States, or (iii) Enter into a transaction with a set forth in section 13 of the BHC Act (ii) Is, or holds itself out as being, an covered fund that would be an exempt and this part. The terms, scope, and entity or arrangement that raises money

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from investors primarily for the purpose entity acts as sponsor, the sponsoring (C) Interest rate or foreign exchange of investing in financial instruments for banking entity may not rely on the derivatives that meet the requirements resale or other disposition or otherwise exemption in paragraph (c)(1)(i) of this of paragraph (c)(8)(iv) of this section; trading in financial instruments; section for such issuer unless more than (D) Special units of beneficial interest (3) Would not otherwise be a banking 75 percent of the ownership interests in and collateral certificates that meet the entity except by virtue of the acquisition the issuer are sold to persons other than: requirements of paragraph (c)(8)(v) of or retention of an ownership interest in, (A) Such sponsoring banking entity; this section; and sponsorship of, or relationship with the (B) Such issuer; (E) Debt securities, other than asset- entity, by another banking entity that (C) Affiliates of such sponsoring backed securities and convertible meets the following: banking entity or such issuer; and securities, provided that: (1) The aggregate value of such debt (i) The banking entity is not (D) Directors and senior executive securities does not exceed five percent organized, or directly or indirectly officers as defined in § 225.71(c) of the of the aggregate value of loans held controlled by a banking entity that is Board’s Regulation Y (12 CFR 225.71(c)) under paragraph (c)(8)(i)(A) of this organized, under the laws of the United of such entities. section, cash and cash equivalents held States or of any State; and (iii) For purposes of paragraph (ii) The banking entity’s acquisition or under paragraph (c)(8)(iii)(A) of this (c)(1)(i)(B) of this section, the term retention of an ownership interest in or section, and debt securities held under ‘‘public offering’’ means a distribution sponsorship of the fund meets the this paragraph (c)(8)(i)(E); and (as defined in § 255.4(a)(3)) of securities requirements for permitted covered (2) The aggregate value of the loans, in any jurisdiction outside the United fund activities and investments solely cash and cash equivalents, and debt States to investors, including retail outside the United States, as provided securities for purposes of this paragraph investors, provided that: in § 255.13(b); is calculated at par value at the most (4) Is established and operated as part (A) The distribution is subject to recent time any such debt security is of a bona fide asset management substantive disclosure and retail acquired, except that the issuing entity business; and investor protection laws or regulations; may instead determine the value of any (5) Is not operated in a manner that (B) With respect to an issuer for such loan, cash equivalent, or debt enables the banking entity that sponsors which the banking entity serves as the security based on its fair market value or controls the qualifying foreign investment manager, investment if: excluded fund, or any of its affiliates, to adviser, commodity trading advisor, (i) The issuing entity is required to evade the requirements of section 13 of commodity pool operator, or sponsor, use the fair market value of such assets the BHC Act or this part. the distribution complies with all for purposes of calculating compliance applicable requirements in the with concentration limitations or other Subpart C—Covered Funds Activities jurisdiction in which such distribution similar calculations under its and Investments is being made; transaction agreements, and (C) The distribution does not restrict (ii) The issuing entity’s valuation ■ 31. Amend § 255.10 by: availability to investors having a methodology values similarly situated ■ a. Revising paragraph (c)(1); minimum level of net worth or net assets consistently. ■ b. Revising paragraph (c)(3)(i); investment assets; and (ii) Impermissible assets. For purposes ■ c. Revising paragraph (c)(8); of this paragraph (c)(8), except as ■ (D) The issuer has filed or submitted, d. Revising the heading of paragraph with the appropriate regulatory permitted under paragraph (c)(8)(i)(E) of (c)(10) and revising paragraph (c)(10)(i); authority in such jurisdiction, offering this section, the assets or holdings of the ■ e. Revising paragraph (c)(11); disclosure documents that are publicly issuing entity shall not include any of ■ f. Adding paragraphs (c)(15), (16), available. the following: (17), and (18); (A) A security, including an asset- ■ g. Revising paragraph (d)(6); and * * * * * backed security, or an interest in an ■ h. Adding paragraph (d)(11). (3) * * * equity or debt security other than as The revisions and additions read as (i) Is composed of no more than 10 permitted in paragraphs (c)(8)(iii), (iv), follows: unaffiliated co-venturers; or (v) of this section; § 255.10 Prohibition on acquiring or * * * * * (B) A derivative, other than a retaining an ownership interest in and (8) Loan securitizations. (i) Scope. An derivative that meets the requirements having certain relationships with a covered issuing entity for asset-backed securities of paragraph (c)(8)(iv) of this section; or fund. that satisfies all the conditions of this (C) A commodity forward contract. * * * * * paragraph (c)(8) and the assets or (iii) Permitted securities. (c) * * * holdings of which are composed solely Notwithstanding paragraph (c)(8)(ii)(A) (1) Foreign public funds. (i) Subject to of: of this section, the issuing entity may paragraphs (c)(1)(ii) and (iii) of this (A) Loans as defined in § 255.2(t); hold securities, other than debt section, an issuer that: (B) Rights or other assets designed to securities permitted under paragraph (A) Is organized or established outside assure the servicing or timely (c)(8)(i)(E) of this section, if those of the United States; and distribution of proceeds to holders of securities are: (B) Is authorized to offer and sell such securities and rights or other assets (A) Cash equivalents—which, for the ownership interests, and such interests that are related or incidental to purposes of this paragraph, means high are offered and sold, through one or purchasing or otherwise acquiring and quality, highly liquid investments more public offerings. holding the loans, provided that each whose maturity corresponds to the (ii) With respect to a banking entity asset that is a security (other than securitization’s expected or potential that is, or is controlled directly or special units of beneficial interest and need for funds and whose currency indirectly by a banking entity that is, collateral certificates meeting the corresponds to either the underlying located in or organized under the laws requirements of paragraph (c)(8)(v) of loans or the asset-backed securities—for of the United States or of any State and this section) meets the requirements of purposes of the rights and assets in any issuer for which such banking paragraph (c)(8)(iii) of this section; paragraph (c)(8)(i)(B) of this section; or

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(B) Securities received in lieu of debts of assets that meet the conditions in (15) Credit funds. Subject to previously contracted with respect to paragraph (c)(8)(i) of this section. paragraphs (c)(15)(iii), (iv), and (v) of the loans supporting the asset-backed * * * * * this section, an issuer that satisfies the securities. (11) * * * asset and activity requirements of (iv) Derivatives. The holdings of (i) That is a small business investment paragraphs (c)(15)(i) and (ii) of this derivatives by the issuing entity shall be company, as defined in section 103(3) of section. limited to interest rate or foreign the Small Business Investment Act of (i) Asset requirements. The issuer’s exchange derivatives that satisfy all of 1958 (15 U.S.C. 662), or that has assets must be composed solely of: the following conditions: received from the Small Business (A) Loans as defined in § 255.2(t); (A) The written terms of the Administration notice to proceed to (B) Debt instruments, subject to derivatives directly relate to the loans, qualify for a license as a small business paragraph (c)(15)(iv) of this section; the asset-backed securities, the investment company, which notice or (C) Rights and other assets that are contractual rights or other assets license has not been revoked, or that has related or incidental to acquiring, described in paragraph (c)(8)(i)(B) of voluntarily surrendered its license to holding, servicing, or selling such loans this section, or the debt securities operate as a small business investment or debt instruments, provided that: described in paragraph (c)(8)(i)(E) of this company in accordance with 13 CFR (1) Each right or asset held under this section; and 107.1900 and does not make any new paragraph (c)(15)(i)(C) that is a security (B) The derivatives reduce the interest investments (other than investments in is either: rate and/or foreign exchange risks cash equivalents, which, for the (i) A cash equivalent (which, for the related to the loans, the asset-backed purposes of this paragraph, means high purposes of this paragraph, means high securities, the contractual rights or other quality, highly liquid investments quality, highly liquid investments assets described in paragraph (c)(8)(i)(B) whose maturity corresponds to the whose maturity corresponds to the of this section, or the debt securities issuer’s expected or potential need for issuer’s expected or potential need for described in paragraph (c)(8)(i)(E) of this funds and whose currency corresponds funds and whose currency corresponds section. to the issuer’s assets) after such to either the underlying loans or the (v) Special units of beneficial interest voluntary surrender; debt instruments); (ii) A security received in lieu of debts and collateral certificates. The assets or (ii) The business of which is to make previously contracted with respect to holdings of the issuing entity may investments that are: include collateral certificates and (A) Designed primarily to promote the such loans or debt instruments; or (iii) An equity security (or right to special units of beneficial interest public welfare, of the type permitted acquire an equity security) received on issued by a special purpose vehicle, under paragraph (11) of section 5136 of customary terms in connection with provided that: the Revised Statutes of the United States such loans or debt instruments; and (A) The special purpose vehicle that (12 U.S.C. 24), including the welfare of (2) Rights or other assets held under issues the special unit of beneficial low- and moderate-income communities this paragraph (c)(15)(i)(C) of this interest or collateral certificate meets or families (such as providing housing, section may not include commodity the requirements in this paragraph services, or jobs) and including forward contracts or any derivative; and (c)(8); investments that qualify for (D) Interest rate or foreign exchange (B) The special unit of beneficial consideration under the regulations derivatives, if: interest or collateral certificate is used implementing the Community (1) The written terms of the derivative for the sole purpose of transferring to Reinvestment Act (12 U.S.C. 2901 et directly relate to the loans, debt the issuing entity for the loan seq.); or instruments, or other rights or assets securitization the economic risks and (B) Qualified rehabilitation described in paragraph (c)(15)(i)(C) of benefits of the assets that are expenditures with respect to a qualified this section; and permissible for loan securitizations rehabilitated building or certified (2) The derivative reduces the interest under this paragraph (c)(8) and does not historic structure, as such terms are rate and/or foreign exchange risks directly or indirectly transfer any defined in section 47 of the Internal related to the loans, debt instruments, or interest in any other economic or Revenue Code of 1986 or a similar State other rights or assets described in financial exposure; historic tax credit program; paragraph (c)(15)(i)(C) of this section. (C) The special unit of beneficial (iii) That has elected to be regulated (ii) Activity requirements. To be interest or collateral certificate is or is regulated as a rural business eligible for the exclusion of paragraph created solely to satisfy legal investment company, as described in 15 (c)(15) of this section, an issuer must: requirements or otherwise facilitate the U.S.C. 80b–3(b)(8)(A) or (B), or that has (A) Not engage in any activity that structuring of the loan securitization; terminated its participation as a rural would constitute proprietary trading and business investment company in under § 255.3(b)(l)(i), as if the issuer (D) The special purpose vehicle that accordance with 7 CFR 4290.1900 and were a banking entity; and issues the special unit of beneficial does not make any new investments (B) Not issue asset-backed securities. interest or collateral certificate and the (other than investments in cash (iii) Requirements for a sponsor, issuing entity are established under the equivalents, which, for the purposes of investment adviser, or commodity direction of the same entity that this paragraph, means high quality, trading advisor. A banking entity that initiated the loan securitization. highly liquid investments whose acts as a sponsor, investment adviser, or * * * * * maturity corresponds to the issuer’s commodity trading advisor to an issuer (10) Qualifying covered bonds. (i) expected or potential need for funds and that meets the conditions in paragraphs Scope. An entity owning or holding a whose currency corresponds to the (c)(15)(i) and (ii) of this section may not dynamic or fixed pool of loans or other issuer’s assets) after such termination; or rely on this exclusion unless the assets as provided in paragraph (c)(8) of (iv) That is a qualified opportunity banking entity: this section for the benefit of the holders fund, as defined in 26 U.S.C. 1400Z– (A) Provides in writing to any of covered bonds, provided that the 2(d). prospective and actual investor in the assets in the pool are composed solely * * * * * issuer the disclosures required under

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§ 255.11(a)(8) of this subpart, as if the apply if the banking entity engaged in such entity were a covered fund, issuer were a covered fund; the activities directly; and provided that the content may be (B) Ensures that the activities of the (C) Complies with the restrictions in modified to prevent the disclosure from issuer are consistent with safety and § 255.14 as if the issuer were a covered being misleading and the manner of soundness standards that are fund (except the banking entity may disclosure may be modified to substantially similar to those that would acquire and retain any ownership accommodate the specific apply if the banking entity engaged in interest in the issuer). circumstances of the entity; the activities directly; and (iii) The banking entity must not, (D) Does not acquire or retain, as (C) Complies with the limitations directly or indirectly, guarantee, principal, an ownership interest in the imposed in § 255.14, as if the issuer assume, or otherwise insure the entity, other than as described in were a covered fund, except the banking obligations or performance of the issuer. paragraph (c)(17)(i)(C) of this section; entity may acquire and retain any (iv) A banking entity’s ownership (E) Complies with the requirements of ownership interest in the issuer. interest in or relationship with the §§ 255.14(b) and 255.15, as if such (iv) Additional Banking Entity issuer must: entity were a covered fund; and (A) Comply with the limitations Requirements. A banking entity may not (F) Except for riskless principal imposed in § 255.15, as if the issuer rely on this exclusion with respect to an transactions as defined in paragraph were a covered fund; and (d)(11) of this section, complies with the issuer that meets the conditions in (B) Be conducted in compliance with, paragraphs (c)(15)(i) and (ii) of this requirements of 12 CFR 223.15(a), as if and subject to, applicable banking laws such banking entity and its affiliates section unless: and regulations, including applicable (A) The banking entity does not, were a member bank and the entity were safety and soundness standards. an affiliate thereof. directly or indirectly, guarantee, (17) Family wealth management assume, or otherwise insure the (iii) For purposes of paragraph (c)(17) vehicles. (i) Subject to paragraph of this section, the following definitions obligations or performance of the issuer (c)(17)(ii) of this section, any entity that or of any entity to which such issuer apply: is not, and does not hold itself out as (A) Closely related person means a extends credit or in which such issuer being, an entity or arrangement that invests; and natural person (including the estate and raises money from investors primarily estate planning vehicles of such person) (B) Any assets the issuer holds for the purpose of investing in securities who has longstanding business or pursuant to paragraphs (c)(15)(i)(B) or for resale or other disposition or personal relationships with any family (i)(C)(1)(iii) of this section would be otherwise trading in securities, and: customer. permissible for the banking entity to (A) If the entity is a trust, the (B) Family customer means: acquire and hold directly under grantor(s) of the entity are all family (1) A family client, as defined in Rule applicable federal banking laws and customers; and 202(a)(11)(G)–1(d)(4) of the Investment regulations. (B) If the entity is not a trust: Advisers Act of 1940 (17 CFR (1) A majority of the voting interests (v) Investment and Relationship 275.202(a)(11)(G)–1(d)(4)); or Limits. A banking entity’s investment in, in the entity are owned (directly or (2) Any natural person who is a and relationship with, the issuer must: indirectly) by family customers; father-in-law, mother-in-law, brother-in- (2) A majority of the interests in the (A) Comply with the limitations law, sister-in-law, son-in-law or entity are owned (directly or indirectly) imposed in § 255.15, as if the issuer daughter-in-law of a family client, or a were a covered fund; and by family customers; (3) The entity is owned only by family spouse or a spousal equivalent of any of (B) Be conducted in compliance with, the foregoing. and subject to, applicable banking laws customers and up to 5 closely related persons of the family customers; and (18) Customer facilitation vehicles. (i) and regulations, including applicable Subject to paragraph (c)(18)(ii) of this safety and soundness standards. (C) Notwithstanding paragraph (c)(17)(i)(A) and (B) of this section, up section, an issuer that is formed by or (16) Qualifying venture capital funds. at the request of a customer of the (i) Subject to paragraphs (c)(16)(ii) to an aggregate 0.5 percent of the entity’s outstanding ownership interests banking entity for the purpose of through (iv) of this section, an issuer may be acquired or retained by one or providing such customer (which may that: more entities that are not family include one or more affiliates of such (A) Is a venture capital fund as customers or closely related persons if customer) with exposure to a defined in 17 CFR 275.203(l)–1; and the ownership interest is acquired or transaction, investment strategy, or (B) Does not engage in any activity retained by such parties for the purpose other service provided by the banking that would constitute proprietary of and to the extent necessary for entity. trading under § 255.3(b)(1)(i), as if the establishing corporate separateness or (ii) A banking entity may rely on the issuer were a banking entity. addressing bankruptcy, insolvency, or exclusion in paragraph (c)(18)(i) of this (ii) A banking entity that acts as a similar concerns. section with respect to an issuer sponsor, investment adviser, or (ii) A banking entity may rely on the provided that: commodity trading advisor to an issuer exclusion in paragraph (c)(17)(i) of this (A) All of the ownership interests of that meets the conditions in paragraph section with respect to an entity the issuer are owned by the customer (c)(16)(i) of this section may not rely on provided that the banking entity (or an (which may include one or more of its this exclusion unless the banking entity: affiliate): affiliates) for whom the issuer was (A) Provides in writing to any (A) Provides bona fide trust, fiduciary, created; prospective and actual investor in the investment advisory, or commodity (B) Notwithstanding paragraph issuer the disclosures required under trading advisory services to the entity; (c)(18)(ii)(A) of this section, up to an § 255.11(a)(8), as if the issuer were a (B) Does not, directly or indirectly, aggregate 0.5 percent of the issuer’s covered fund; guarantee, assume, or otherwise insure outstanding ownership interests may be (B) Ensures that the activities of the the obligations or performance of such acquired or retained by one or more issuer are consistent with safety and entity; entities that are not customers if the soundness standards that are (C) Complies with the disclosure ownership interest is acquired or substantially similar to those that would obligations under § 255.11(a)(8), as if retained by such parties for the purpose

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of and to the extent necessary for covered fund’s transaction agreements (G) Any synthetic right to have, establishing corporate separateness or applicable to the investment manager; receive, or be allocated any of the rights addressing bankruptcy, insolvency, or (iii) The breach by the investment in paragraphs (d)(6)(i)(A) through (F) of similar concerns; and manager of material representations or this section. (C) The banking entity and its warranties; (ii) Ownership interest does not affiliates: (iv) The occurrence of an act that include: (1) Maintain documentation outlining constitutes fraud or criminal activity in (A) Restricted profit interest, which is how the banking entity intends to the performance of the investment an interest held by an entity (or an facilitate the customer’s exposure to manager’s obligations under the covered employee or former employee thereof) such transaction, investment strategy, or fund’s transaction agreements; in a covered fund for which the entity service; (v) The indictment of the investment (or employee thereof) serves as (2) Do not, directly or indirectly, manager for a criminal offense, or the investment manager, investment guarantee, assume, or otherwise insure indictment of any officer, member, adviser, commodity trading advisor, or the obligations or performance of such partner or other principal of the other service provider, so long as: issuer; investment manager for a criminal (1) The sole purpose and effect of the (3) Comply with the disclosure offense materially related to his or her interest is to allow the entity (or obligations under § 255.11(a)(8), as if investment management activities; employee or former employee thereof) such issuer were a covered fund, (vi) A change in control with respect to share in the profits of the covered provided that the content may be to the investment manager; fund as performance compensation for modified to prevent the disclosure from (vii) The loss, separation or the investment management, investment being misleading and the manner of incapacitation of an individual critical advisory, commodity trading advisory, disclosure may be modified to to the operation of the investment or other services provided to the accommodate the specific manager or primarily responsible for the covered fund by the entity (or employee circumstances of the issuer; management of the covered fund’s or former employee thereof), provided (4) Do not acquire or retain, as assets; or that the entity (or employee or former principal, an ownership interest in the (viii) Other similar events that employee thereof) may be obligated issuer, other than as described in constitute ‘‘cause’’ for removal of an under the terms of such interest to paragraph (c)(18)(ii)(B) of this section; investment manager, provided that such return profits previously received; (5) Comply with the requirements of events are not solely related to the (2) All such profit, once allocated, is §§ 255.14(b) and 255.15, as if such performance of the covered fund or the distributed to the entity (or employee or issuer were a covered fund; and (6) Except for riskless principal investment manager’s exercise of former employee thereof) promptly after transactions as defined in paragraph investment discretion under the covered being earned or, if not so distributed, is (d)(11) of this section, comply with the fund’s transaction agreements; retained by the covered fund for the sole requirements of 12 CFR 223.15(a), as if (B) Has the right under the terms of purpose of establishing a reserve such banking entity and its affiliates the interest to receive a share of the amount to satisfy contractual obligations were a member bank and the issuer income, gains or profits of the covered with respect to subsequent losses of the were an affiliate thereof. fund; covered fund and such undistributed (C) Has the right to receive the profit of the entity (or employee or * * * * * underlying assets of the covered fund former employee thereof) does not share (d) * * * (6) Ownership interest. (i) Ownership after all other interests have been in the subsequent investment gains of interest means any equity, partnership, redeemed and/or paid in full (excluding the covered fund; or other similar interest. An ‘‘other the rights of a creditor to exercise (3) Any amounts invested in the similar interest’’ means an interest that: remedies upon the occurrence of an covered fund, including any amounts (A) Has the right to participate in the event of default or an acceleration paid by the entity in connection with selection or removal of a general event); obtaining the restricted profit interest, partner, managing member, member of (D) Has the right to receive all or a are within the limits of § 255.12 of this the board of directors or trustees, portion of excess spread (the positive subpart; and investment manager, investment difference, if any, between the aggregate (4) The interest is not transferable by adviser, or commodity trading advisor interest payments received from the the entity (or employee or former of the covered fund, excluding: underlying assets of the covered fund employee thereof) except to an affiliate (1) The rights of a creditor to exercise and the aggregate interest paid to the thereof (or an employee of the banking remedies upon the occurrence of an holders of other outstanding interests); entity or affiliate), to immediate family event of default or an acceleration event; (E) Provides under the terms of the members, or through the intestacy, of and interest that the amounts payable by the the employee or former employee, or in (2) The right to participate in the covered fund with respect to the interest connection with a sale of the business removal of an investment manager for could be reduced based on losses arising that gave rise to the restricted profit ‘‘cause’’ or participate in the selection of from the underlying assets of the interest by the entity (or employee or a replacement manager upon an covered fund, such as allocation of former employee thereof) to an investment manager’s resignation or losses, write-downs or charge-offs of the unaffiliated party that provides removal. For purposes of this paragraph outstanding principal balance, or investment management, investment (d)(6)(i)(A)(2), ‘‘cause’’ for removal of an reductions in the amount of interest due advisory, commodity trading advisory, investment manager means one or more and payable on the interest; or other services to the fund. of the following events: (F) Receives income on a pass-through (B) Any senior loan or senior debt (i) The bankruptcy, insolvency, basis from the covered fund, or has a interest that has the following conservatorship or receivership of the rate of return that is determined by characteristics: investment manager; reference to the performance of the (1) Under the terms of the interest the (ii) The breach by the investment underlying assets of the covered fund; holders of such interest do not have the manager of any material provision of the or right to receive a share of the income,

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gains, or profits of the covered fund, but (A) The banking entity, together with compliance with applicable laws and are entitled to receive only: its affiliates, does not own, control, or regulations, including applicable safety (i) Interest at a stated interest rate, as hold with the power to vote 25 percent and soundness standards. well as commitment fees or other fees, or more of the voting shares of the (c) * * * which are not determined by reference company or fund; and (1)(i) For purposes of paragraph to the performance of the underlying (B) The banking entity, or an affiliate (a)(2)(iii) of this section, the aggregate assets of the covered fund; and of the banking entity, provides value of all ownership interests held by (ii) Repayment of a fixed principal investment advisory, commodity trading a banking entity shall be the sum of all amount, on or before a maturity date, in advisory, administrative, and other amounts paid or contributed by the a contractually-determined manner services to the company or fund in banking entity in connection with (which may include prepayment compliance with the limitations under acquiring or retaining an ownership premiums intended solely to reflect, and applicable regulation, order, or other interest in covered funds (together with compensate holders of the interest for, authority. any amounts paid by the entity in forgone income resulting from an early * * * * * connection with obtaining a restricted prepayment); (4) Multi-tier fund investments. (i) profit interest under § 255.10(d)(6)(ii)), (2) The entitlement to payments Master-feeder fund investments. If the on a historical cost basis; under the terms of the interest are principal investment strategy of a (ii) Treatment of employee and absolute and could not be reduced covered fund (the ‘‘feeder fund’’) is to director restricted profit interests based on losses arising from the invest substantially all of its assets in financed by the banking entity. For underlying assets of the covered fund, another single covered fund (the purposes of paragraph (c)(1)(i) of this such as allocation of losses, write- ‘‘master fund’’), then for purposes of the section, an investment by a director or downs or charge-offs of the outstanding investment limitations in paragraphs employee of a banking entity who principal balance, or reductions in the (a)(2)(i)(B) and (a)(2)(ii) of this section, acquires a restricted profit interest in his amount of interest due and payable on the banking entity’s permitted or her personal capacity in a covered the interest; and investment in such funds shall be fund sponsored by the banking entity (3) The holders of the interest are not measured only by reference to the value will be attributed to the banking entity entitled to receive the underlying assets of the master fund. The banking entity’s if the banking entity, directly or of the covered fund after all other permitted investment in the master fund indirectly, extends financing for the interests have been redeemed or paid in shall include any investment by the purpose of enabling the director or full (excluding the rights of a creditor to banking entity in the master fund, as employee to acquire the restricted profit exercise remedies upon the occurrence well as the banking entity’s pro-rata interest in the fund and the financing is of an event of default or an acceleration share of any ownership interest in the used to acquire such ownership interest event). master fund that is held through the in the covered fund. * * * * * feeder fund; and * * * * * (11) Riskless principal transaction. (ii) Fund-of-funds investments. If a (d) Capital treatment for a permitted Riskless principal transaction means a banking entity organizes and offers a investment in a covered fund. For transaction in which a banking entity, covered fund pursuant to § 255.11 for purposes of calculating compliance with after receiving an order from a customer the purpose of investing in other the applicable regulatory capital to buy (or sell) a security, purchases (or covered funds (a ‘‘fund of funds’’) and requirements, a banking entity shall sells) the security in the secondary that fund of funds itself invests in deduct from the banking entity’s tier 1 market for its own account to offset a another covered fund that the banking capital (as determined under paragraph contemporaneous sale to (or purchase entity is permitted to own, then the (c)(2) of this section) the greater of: from) the customer. banking entity’s permitted investment (1)(i) The sum of all amounts paid or ■ 32. Amend § 255.12 by: in that other fund shall include any contributed by the banking entity in ■ a. Revising paragraph (b)(1)(ii); investment by the banking entity in that connection with acquiring or retaining ■ b. Revising paragraph (b)(4); other fund, as well as the banking an ownership interest (together with any ■ c. Adding paragraph (b)(5); entity’s pro-rata share of any ownership amounts paid by the entity in ■ d. Revising paragraph (c)(1); and interest in the fund that is held through connection with obtaining a restricted ■ e. Revising paragraphs (d) and (e). the fund of funds. The investment of the profit interest under § 255.10(d)(6)(ii) of The revisions and addition read as banking entity may not represent more subpart C of this part), on a historical follows: than 3 percent of the amount or value cost basis, plus any earnings received; of any single covered fund. and § 255.12 Permitted investment in a (5) Parallel Investments and Co- (ii) The fair market value of the covered fund. Investments. (i) A banking entity shall banking entity’s ownership interests in * * * * * not be required to include in the the covered fund as determined under (b) * * * calculation of the investment limits paragraph (b)(2)(ii) or (b)(3) of this (1) * * * under paragraph (a)(2) of this section section (together with any amounts paid (ii) Treatment of registered investment any investment the banking entity by the entity in connection with companies, SEC-regulated business makes alongside a covered fund as long obtaining a restricted profit interest development companies, and foreign as the investment is made in under § 255.10(d)(6)(ii) of subpart C of public funds. For purposes of paragraph compliance with applicable laws and this part), if the banking entity accounts (b)(1)(i) of this section, a registered regulations, including applicable safety for the profits (or losses) of the fund investment company, SEC-regulated and soundness standards. investment in its financial statements. business development companies, or (ii) A banking entity shall not be (2) Treatment of employee and foreign public fund as described in restricted under this section in the director restricted profit interests § 255.10(c)(1) will not be considered to amount of any investment the banking financed by the banking entity. For be an affiliate of the banking entity so entity makes alongside a covered fund purposes of paragraph (d)(1) of this long as: as long as the investment is made in section, an investment by a director or

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employee of a banking entity who investment would involve or result in a (A) The banking entity is not acquires a restricted profit interest in his material conflict of interest between the organized, or directly or indirectly or her personal capacity in a covered banking entity and unaffiliated parties, controlled by a banking entity that is fund sponsored by the banking entity including clients, customers, or organized, under the laws of the United will be attributed to the banking entity counterparties to which it owes a duty; States or of any State; and if the banking entity, directly or (vii) The banking entity’s prior efforts (B) The banking entity’s acquisition of indirectly, extends financing for the to reduce through redemption, sale, an ownership interest in or sponsorship purpose of enabling the director or dilution, or other methods its ownership of the fund by the foreign banking entity employee to acquire the restricted profit interests in the covered fund, including meets the requirements for permitted interest in the fund and the financing is activities related to the marketing of covered fund activities and investments used to acquire such ownership interest interests in such covered fund; solely outside the United States, as in the covered fund. (viii) Market conditions; and provided in § 255.13(b); (e) Extension of time to divest an (ix) Any other factor that the Board (iv) Is established and operated as part ownership interest. (1) Extension period. believes appropriate. of a bona fide asset management Upon application by a banking entity, (4) Authority to impose restrictions on business; and the Board may extend the period under activities or investment during any (v) Is not operated in a manner that paragraph (a)(2)(i) of this section for up extension period. The Board may enables the banking entity that sponsors to 2 additional years if the Board finds impose such conditions on any or controls the qualifying foreign that an extension would be consistent extension approved under paragraph excluded fund, or any of its affiliates, to with safety and soundness and not (e)(1) of this section as the Board evade the requirements of section 13 of detrimental to the public interest. determines are necessary or appropriate the BHC Act or this part. (2) Application requirements. An to protect the safety and soundness of ■ 34. Amend § 255.14 by: application for extension must: the banking entity or the financial ■ a. Revising paragraph (a)(2)(i); (i) Be submitted to the Board at least stability of the United States, address ■ b. Revising paragraph (a)(2)(ii)(C); 90 days prior to the expiration of the material conflicts of interest or other ■ c. Adding paragraphs (a)(2)(iii), (iv), applicable time period; unsound banking practices, or otherwise (v), and (3); and (ii) Provide the reasons for further the purposes of section 13 of the ■ d. Revising paragraph (c). application, including information that BHC Act and this part. The revisions and additions read as addresses the factors in paragraph (e)(3) (5) Consultation. In the case of a follows: of this section; and banking entity that is primarily (iii) Explain the banking entity’s plan regulated by another Federal banking § 255.14 Limitations on relationships with for reducing the permitted investment agency, the SEC, or the CFTC, the Board a covered fund. in a covered fund through redemption, will consult with such agency prior to (a) * * * sale, dilution or other methods as acting on an application by the banking (2) * * * required in paragraph (a)(2) of this entity for an extension under paragraph (i) Acquire and retain any ownership section. (e)(1) of this section. interest in a covered fund in accordance (3) Factors governing the Board ■ 33. Amend § 255.13 by adding with the requirements of §§ 255.11, determinations. In reviewing any paragraph (d) to read as follows: 255.12, or 255.13; application under paragraph (e)(1) of (ii) * * * this section, the Board may consider all § 255.13 Other permitted covered fund (C) The Board has not determined that the facts and circumstances related to activities and investments. such transaction is inconsistent with the the permitted investment in a covered * * * * * safe and sound operation and condition fund, including: (d) Permitted covered fund activities of the banking entity; and (i) Whether the investment would and investments of qualifying foreign (iii) Enter into a transaction with a result, directly or indirectly, in a excluded funds. (1) The prohibition covered fund that would be an exempt material exposure by the banking entity contained in § 255.10(a) does not apply covered transaction under 12 U.S.C. to high-risk assets or high-risk trading to a qualifying foreign excluded fund. 371c(d) or § 223.42 of the Board’s strategies; (2) For purposes of this paragraph (d), Regulation W (12 CFR 223.42) subject to (ii) The contractual terms governing a qualifying foreign excluded fund the limitations specified under 12 the banking entity’s interest in the means a banking entity that: U.S.C. 371c(d) or § 223.42 of the Board’s covered fund; (i) Is organized or established outside Regulation W (12 CFR 223.42), as (iii) The date on which the covered the United States, and the ownership applicable, fund is expected to have attracted interests of which are offered and sold (iv) Enter into a riskless principal sufficient investments from investors solely outside the United States; transaction with a covered fund; and unaffiliated with the banking entity to (ii)(A) Would be a covered fund if the (v) Extend credit to or purchase assets enable the banking entity to comply entity were organized or established in from a covered fund, provided: with the limitations in paragraph the United States, or (A) Each extension of credit or (a)(2)(i) of this section; (B) Is, or holds itself out as being, an purchase of assets is in the ordinary (iv) The total exposure of the covered entity or arrangement that raises money course of business in connection with banking entity to the investment and the from investors primarily for the purpose payment transactions; settlement risks that disposing of, or maintaining, of investing in financial instruments for services; or futures, derivatives, and the investment in the covered fund may resale or other disposition or otherwise securities clearing; pose to the banking entity and the trading in financial instruments; (B) Each extension of credit is repaid, financial stability of the United States; (iii) Would not otherwise be a banking sold, or terminated by the end of five (v) The cost to the banking entity of entity except by virtue of the acquisition business days; and divesting or disposing of the investment or retention of an ownership interest in, (C) The banking entity making each within the applicable period; sponsorship of, or relationship with the extension of credit meets the (vi) Whether the investment or the entity, by another banking entity that requirements of § 223.42(l)(1)(i) and (ii) divestiture or conformance of the meets the following: of the Board’s Regulation W (12 CFR

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223.42(l)(1)(i) and(ii)), as if the 255.13(d)) shall maintain records that Specifically, the Volcker Rule will now no extension of credit was an intraday include: longer be applied to investments Congress extension of credit, regardless of the * * * * * never intended to be included in the first duration of the extension of credit. place, such as credit funds, venture capital Brian P. Brooks, funds, customer facilitation vehicles, and (3) Any transaction or activity Acting Comptroller of the Currency. family wealth management vehicles. The permitted under paragraphs (a)(2)(iii), final rule also contains important (iv) or (v) must comply with the By order of the Board of Governors of the modifications to several existing exclusions Federal Reserve System. limitations in § 255.15. from the prohibition on activities related to * * * * * Ann E. Misback, private equity and hedge funds (the ‘‘covered Secretary of the Board. (c) Restrictions on other permitted funds’’ provisions)—for foreign public funds, loan securitizations, and small business transactions. Any transaction permitted Federal Deposit Insurance Corporation. By order of the Board of Directors. investment companies. In these ways, the under paragraphs (a)(2)(ii), (iii), or (iv) final rule begins to address the over-breadth Dated at Washington, DC, on or about June of this section shall be subject to section of the covered funds definition and related 25, 2020. 23B of the Federal Reserve Act (12 requirements. U.S.C. 371c–1) as if the counterparty James P. Sheesley, I am therefore pleased to support adoption were an affiliate of the banking entity Acting Assistant Executive Secretary. of the proposed revisions to the Volcker under section 23B. Issued in Washington, DC, on June 25, Rule’s covered funds provisions. While only 2020 by the Commission. a modest step forward, these refinements will Subpart D—Compliance Program Christopher Kirkpatrick, nonetheless enhance the regulatory Requirements; Violations experience and provide clarity for market Secretary of the Commission. participants who have struggled to comply ■ 35. Amend § 255.20 by: By the Securities and Exchange with the Volcker Rule. Commission. ■ a. Revising paragraph (a); Appendix 3—Dissenting Statement of Vanessa A. Countryman, ■ b. Revising the heading of paragraph CFTC Commissioner Rostin Behnam Secretary. (d) and revising paragraph (d)(1); and I respectfully dissent as to the ■ c. Revising the introductory text of Note: The following appendices will not Commission’s decision to finalize additional paragraph (e). appear in the Code of Federal Regulations. revisions to the Volcker Rule. As we The revisions and addition read as approach the ten year anniversary of the Appendices to Prohibitions and Dodd-Frank Act,1 and cautiously begin follows: Restrictions on Proprietary Trading mapping a path out of the current pandemic, § 255.20 Program for compliance; and Certain Interests in, and I believe it is a good time to reflect on the reporting. Relationships With, Hedge Funds and lessons learned from the 2008 financial Private Equity Funds—CFTC Voting crisis, the efficacy of our responses, and (a) Program requirement. Each Summary and CFTC Commissioners’ whether our objectives have changed, or just banking entity (other than a banking Statements our perspective. One of the many critically entity with limited trading assets and important provisions of the Dodd-Frank Act liabilities or a qualifying foreign Appendix 1—CFTC Voting Summary is the Volcker Rule. The Volcker Rule, in excluded fund under section 255.6(f) or On this matter, CFTC Chairman Tarbert simple terms, contains two basic 255.13(d)) shall develop and provide for and Commissioners Quintenz and Stump prohibitions: (1) Banking entities may not the continued administration of a voted in the affirmative. CFTC engage in proprietary trading; and (2) compliance program reasonably Commissioners Behnam and Berkovitz voted banking entities cannot have an ownership interest in, sponsor, or have certain designed to ensure and monitor in the negative. The document submitted to the CFTC Commissioners for a vote did not relationships with a covered fund. compliance with the prohibitions and include Section V.F. SEC Economic Analysis. Last September, the Commission, along restrictions on proprietary trading and with other Federal agencies (the covered fund activities and investments Appendix 2—Supporting Statement of ‘‘Agencies’’),2 approved changes that set forth in section 13 of the BHC Act CFTC Chairman Heath P. Tarbert significantly weakened the prohibition on and this part. The terms, scope, and As I have previously remarked, the Volcker propriety trading by narrowing the scope of detail of the compliance program shall Rule is ‘‘among the most well-intentioned but financial instruments subject to the Volcker be appropriate for the types, size, scope, poorly designed regulations in the history of Rule.3 I did not support those changes.4 and complexity of activities and American finance.’’ 1 While today’s final rule Today, the Commission, again in tandem business structure of the banking entity. does not fix the fundamental flaws of the with the Agencies, completes the dismantling 2 that began in 2018,5 and votes to significantly * * * * * Volcker Rule —only congressional action can do that—it at least represents a more weaken the prohibition on ownership of (d) Reporting requirements under accurate reading of the law Congress actually appendix A to this part. (1) A banking passed and brings us a step closer to a 1 Dodd-Frank Reform and Consumer entity (other than a qualifying foreign reasonable implementation of the rule.3 Protection Act, Public Law 111–203, 124 Stat. 1376 excluded fund under section 255.6(f) or (2010). 255.13(d)) engaged in proprietary 1 See Statement of Chairman Heath P. Tarbert in 2 The Office of the Comptroller of the Currency, trading activity permitted under subpart Support of Revisions to the Volcker Rule (Sept. 16, Treasury; the Board of Governors of the Federal 2019), https://www.cftc.gov/PressRoom/ Reserve System; the Federal Deposit Insurance B shall comply with the reporting SpeechesTestimony/tarbertstatement091619. Corporation; and the Securities and Exchange requirements described in appendix A 2 See, e.g., Economic Growth, Regulatory Relief, Commission. to this part, if: and Consumer Protection Act, Public Law No: 115– 3 Prohibitions and Restrictions on Proprietary 174 (May 24, 2018) (amending section 13 of the Trading and Certain Interests in, and Relationships * * * * * Bank Holding Company Act by narrowing the With, Hedge Funds and Private Equity Funds, 84 (e) Additional documentation for definition of ‘‘banking entity’’ in the Volcker Rule FR 61974 (Nov. 14, 2019). covered funds. A banking entity with to exclude certain community banks). 4 Id. at 62275. 3 See Statement of Chairman Heath P. Tarbert in 5 See Prohibitions and Restrictions on Proprietary significant trading assets and liabilities Support of Further Revisions to the Volcker Rule Trading and Certain Interests in, and Relationships (other than a qualifying foreign (Jan. 30, 2020), https://www.cftc.gov/PressRoom/ With, Hedge Funds and Private Equity Funds, 83 excluded fund under section 255.6(f) or SpeechesTestimony/tarbertstatement013020b. FR 33432 (proposed July 17, 2018).

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covered funds. Again, I cannot support these have access to Federal Reserve Bank financial government-supported banks that Congress changes. support. This goal was to be achieved by intended the Volcker rule to curtail. I voted against the 2018 proposal, and preventing the government-supported banks In adopting the Covered Funds Rule, the earlier this year, voted against the proposal from undertaking risky proprietary trading agencies failed to analyze any data or other that strikes the final blow today.6 In voting activities and from owning hedge funds or information that lays out the risks of venture against the 2020 proposal, I quoted the late private equity funds. The new Covered capital investing. The agencies simply ’s letter to the Chairman of the Funds Rule, together with the rollbacks in exclude venture capital funds from Volcker Federal Reserve, which he penned last the Volcker proprietary trading regulations regulation. The Covered Funds Rule makes, September, when the Agencies approved the adopted in 2019,2 will undermine many of at best, a weak case that venture capital changes breaking down the proprietary the risk-reducing benefits of the original investments promote and protect the safety trading prohibition.7 Mr. Volcker warned that Volcker rule. the amended rule ‘‘amplifies risk in the The original Volcker covered funds and soundness of banking entities and the financial system, increases moral hazard and regulations were not perfect. The foreign United States financial system by allowing erodes protections against conflicts of public funds exception and the so called banks to diversify investments. The weakness interest that were so glaringly on display ‘‘super 23A’’ provisions governing activities of that assertion is clear when one considers during the last crisis.’’ 8 Mr. Volcker’s words banks can undertake with covered funds that allowing any investments in hedge funds apply equally well to the changes that the needed careful adjustments. However, the and private equity funds would do the same, Commission finalizes today regarding Covered Funds Rule goes much, much and yet that risk taking activity is precisely covered funds—particularly the erosion of further. It creates broad new exclusions from what Congress prohibited. the existing protections regarding conflicts of the covered funds definition with inadequate The banking industry does not need to take interest. analysis as to whether these activities were on the additional risks permitted by the As the tenth anniversary of the Dodd-Frank intended to be permitted under the statute or Covered Funds Rule to be successful. U.S. Act sadly coincides with a different kind of pose serious risk to the banks and the United banks have performed well in recent years. crisis, I think it is critical to take a hard look States financial system. Recent Global League Tables ranking global at how far we have come in ten years, and I addressed some of these new exclusions banks by amount of banking business activity how well markets have adapted to carefully in more detail in my dissenting statement on shows that three or four U.S. banks are 3 crafted policy intended to create a more the Proposal. Of these, the new ‘‘venture ranked among the top five banks in the world resilient financial system. Chipping away, capital funds’’ exclusion perhaps best in almost every table, including the tables for particularly at a time of great uncertainty, illustrates the extent to which the Covered foreign markets banking.7 While many factors risks a reversion to the past, when in fact, we Funds Rule undermines the very purpose of should only be looking forward. the Volcker rule. Venture capital serves an impact banking success, the relative strength important function in our financial markets of U.S. banks internationally belies Appendix 4—Dissenting Statement of by providing needed capital to startup suggestions that the new laws and CFTC Commissioner Dan M. Berkovitz companies. But venture capital investing is regulations adopted in the wake of the 2008 very risky. One study found that about 75% financial crisis are hurting the The Volcker covered funds final release competitiveness of U.S. banks. We should (‘‘Covered Funds Rule’’) adopts with only of venture capital-backed firms in the United 4 recognize, rather than undermine, the minor changes the rule amendments as States did not return capital to investors. success of U.S. banks since the 2008 financial proposed by the agencies in January of this Another article on venture capital noted that ‘‘VC funds haven’t significantly year (‘‘the Proposal’’). I voted against 1 the crisis and adoption of the Dodd-Frank Act in outperformed the public markets since the Proposal because the agencies had only 2010. late 1990s, and since 1997 less cash has been superficially considered the additional risks To date, U.S. banks also have performed returned to VC investors than they have that banks would incur under the loosened well during the Covid-19 pandemic. But our invested.’’ 5 This is exactly the type of risky financial system continues to face many regulations. Nothing in the Covered Funds 6 Rule final release dispels this concern. private equity fund investing by extraordinary risks from the effects of the Therefore I dissent from the final release. pandemic. In the middle of this latest shock Congress enacted the original Volcker rule 2 Prohibitions and Restrictions on Proprietary to our financial system, we should not be after the 2008 financial crisis to protect Trading and Certain Interests in, and Relationships rushing out a final rule that permits greater with, Hedge Funds and Private Equity Funds, 84 FR risk taking by banks. Rather, we should take American taxpayers from again having to 61974 (Nov. 14, 2019). bailout banks that are insured by the FDIC or 3 Supra footnote 1. stock of the data available to us, and make 4 Deborah Gage, The Venture Capital Secret: 3 out carefully reasoned, incremental changes that 6 Prohibitions and Restrictions on Proprietary of 4 Start-Ups Fail, Wall Street Journal (Sept. 20, are consistent with the Congressional intent Trading and Certain Interests in, and Relationships 2012) (citing research by Shikhar Ghosh, a senior for the Volcker rule. With, Hedge Funds and Private Equity Funds, 85 lecturer at Harvard Business School), available at [FR Doc. 2020–15525 Filed 7–30–20; 8:45 am] FR 12120, 12204 (proposed Feb. 28, 2020). https://www.wsj.com/articles/SB100008723963904 7 Id. 43720204578004980476429190. BILLING CODE 4810–33–P 8 Jesse Hamilton and Yalman Onaran, ‘‘Volcker 5 Diane Mulcahy, Six Myths About Venture the Man Blasts Volcker the Rule in Letter to Fed Capitalists, Harvard Business Review (May 2013), despite no real evidence to that effect. To the Chair,’’ Bloomberg (Sep. 10, 2019), https:// available at https://hbr.org/2013/05/six-myths- contrary, three of the four statements from members www.bloomberg.com/news/articles/2019-09-10/ about-venture-capitalists. of Congress in the legislative record cited in the volcker-the-man-blasts-volcker-the-rule-in-letter-to- 6 Interestingly, while the Proposal acknowledged Covered Funds Rule clearly show that they fed-chair. that venture capital funds are a subset of private assumed that venture capital funds are private 1 Dissenting Statement of Commissioner Dan M. equity funds for purposes of Volcker, in the equity funds under the Volcker rule. See Covered Berkovitz Regarding Volcker Covered Funds preamble to the Covered Funds Rule, the agencies Funds Rule, section IV.C.2.i. Proposal (Jan. 30, 2020), available at: https:// provide a tortured, speculative analysis of statutory 7 www.cftc.gov/PressRoom/SpeechesTestimony/ construction trying to explain that Congress ‘‘may’’ See GlobalCapital.com, Global League Tables, berkovitzstatement013020. have meant to exclude venture capital funds, available at https://www.globalcapital.com/data/all- league-tables.

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