59–006 

114TH CONGRESS REPORT " ! HOUSE OF REPRESENTATIVES 2d Session 114–523 

INVESTOR CLARITY AND BANK PARITY ACT 

APRIL 26, 2016.—Committed to the Committee of the Whole House on the State of 

the Union and ordered to be printed 

Mr. HENSARLING, from the Committee on Financial Services, 

submitted the following 

R E P O R T 

[To accompany H.R. 4096] 

[Including cost estimate of the Congressional Budget Office] 

The Committee on Financial Services, to whom was referred the 

bill (H.R. 4096) to amend the Volcker Rule to permit certain investment advisers to share a similar name with a private equity fund, 

subject to certain restrictions, and for other purposes, having considered the same, report favorably thereon without amendment and 

recommend that the bill do pass. 

PURPOSE AND SUMMARY

Introduced by Representatives Capuano and Stivers on November 19, 2015, H.R. 4096, the Investor Clarity and Bank Parity Act, 

amends Section 619 of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act (Pub. L. 111–203), also known as the 

Volcker Rule, to correct a statutory error that the five federal regulators charged with implementing the Volcker Rule (the Federal 

Reserve, the Securities and Exchange Commission, the Commodity 

Futures Trading Commission, the Office of the Comptroller of the 

Currency, and the Federal Deposit Insurance Corporation) cannot 

fix with their regulatory authority. When these five federal regulators adopted the Volcker Rule in December 2013, the final rule 

limited the ability of bank holding companies and their affiliates, 

which would include investment advisers, to sponsor hedge funds 

and private equity funds (also known as covered funds). Consequently, a covered fund cannot use the name of a sponsor. H.R. 

4096 eliminates this prohibition and simply allows an investment 

adviser to share a similar name with a covered fund. 


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BACKGROUND AND NEED FOR LEGISLATION

The Volcker Rule prohibits bank holding companies and their affiliates from sharing the same name or variation of the name for 

corporate, marketing, or promotional purposes with a hedge fund 

or private equity fund. However, when the five federal regulators 

adopted the final rule to implement the Volcker Rule, they expanded upon the ‘‘name-sharing prohibition.’’ Specifically, the final 

rule provides that the covered fund may not share the same name 

with the banking entity (or an affiliate or subsidiary thereof), nor 

can the covered fund use the word ‘‘bank’’ in the name. For example, if XYZ Investment Adviser is an affiliate of XYZ Bank and 

sponsors a real estate fund, that real estate fund could not be 

named XYZ Real Estate Fund. 

On February 14, 2016, Jeffrey Plunkett, Executive Vice President 

and General Counsel of Natixis Global Asset Management, testified 

before the Subcommittee on Capital Markets and Government 

Sponsored Enterprises in support of H.R. 4096 and noted that the 

implementation of the Volcker Rule is ‘‘at odds with both industry 

practice and with the goal of providing clarity to investors about 

who is managing a covered fund.’’ 

H.R. 4096 makes a modest amendment to the Volcker Rule. As 

noted by Mr. Plunkett at the February 14, 2016 hearing, H.R. 4096 

is a ‘‘technical amendment that would seek to clarify, and narrow 

to its apparent original intent, the scope of the Volcker Rule’s overly broad name-sharing prohibition.’’ 

The Chamber of Commerce’s Center for Capital Markets Competitiveness also noted in a letter to the Financial Services Committee that H.R. 4096 would rectify this naming issue and ‘‘provide 

bank-affiliated investment managers the flexibility to name their 

funds freely without creating any additional risks to an investor or 

affiliated bank.’’ 

HEARINGS

The Committee on Financial Services’ Subcommittee on Capital 

Markets and Government Sponsored Enterprises held a hearing examining matters relating to H.R. 4096 on February 24, 2016. 

COMMITTEE CONSIDERATION

The Committee on Financial Services met in open session on 

March 2, 2016, and ordered H.R. 4096 to be reported favorably to 

the House without amendment by voice vote, a quorum being 

present. 

COMMITTEE VOTES

Clause 3(b) of rule XIII of the Rules of the House of Representatives requires the Committee to list the record votes on the motion 

to report legislation and amendments thereto. There were no 

record votes in Committee. A motion by Chairman Hensarling to 

report the bill favorably to the House without amendment was 

agreed to by a voice vote, a quorum being present. 


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COMMITTEE OVERSIGHT FINDINGS

Pursuant to clause 3(c)(1) of rule XIII of the Rules of the House 

of Representatives, the findings and recommendations of the Committee based on oversight activities under clause 2(b)(1) of rule X 

of the Rules of the House of Representatives, are incorporated in 

the descriptive portions of this report. 

PERFORMANCE GOALS AND OBJECTIVES

Pursuant to clause 3(c)(4) of rule XIII of the Rules of the House 

of Representatives, the Committee states that H.R. 4096 will clarify the Volcker Rule to permit a covered fund to have the same 

name or variation of the same name as an investment adviser affiliated with a bank holding company under certain conditions. 

NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX

EXPENDITURES

In compliance with clause 3(c)(2) of rule XIII of the Rules of the 

House of Representatives, the Committee adopts as its own the estimate of new budget authority, entitlement authority, or tax expenditures or revenues contained in the cost estimate prepared by 

the Director of the Congressional Budget Office pursuant to section 

402 of the Congressional Budget Act of 1974. 

COMMITTEE COST ESTIMATE

The Committee adopts as its own the cost estimate prepared by 

the Director of the Congressional Budget Office pursuant to section 

402 of the Congressional Budget Act of 1974. 

CONGRESSIONAL BUDGET OFFICE ESTIMATES

Pursuant to clause 3(c)(3) of rule XIII of the Rules of the House 

of Representatives, the following is the cost estimate provided by 

the Congressional Budget Office pursuant to section 402 of the 

Congressional Budget Act of 1974: 

U.S. CONGRESS, 

CONGRESSIONAL BUDGET OFFICE, 

Washington, DC, March 24, 2016. 

Hon. JEB HENSARLING, Chairman, Committee on Financial Services, 

House of Representatives, Washington, DC. 

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for H.R. 4096, the Investor Clarity 

and Bank Parity Act. 

If you wish further details on this estimate, we will be pleased 

to provide them. The CBO staff contact is Sarah Puro. 

Sincerely, 

KEITH HALL. 

Enclosure. 

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

H.R. 4096 would amend current law, known as the ‘‘Volker 

Rule,’’ to allow certain types of financial firms—hedge funds and 

private equity funds (known as ‘‘covered funds’’ under the rule)— 


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to have the same name as an insured depository institution or its 

affiliate. As a result, the federal banking regulators—the Federal 

Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Federal Reserve—along with 

the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC)—would be required to 

revise current regulations concerning allowable naming conventions. 

Direct spending and revenues 

Costs incurred by the FDIC and the OCC are recorded in the 

budget as an increase in direct spending. Those two agencies are 

authorized to collect premiums and fees from insured depository institutions to cover administrative expenses. CBO expects that they 

would do so to recover any costs associated with amending current 

regulations under the bill. Costs to the Federal Reserve System are 

reflected on the federal budget as a reduction in remittances to the 

Treasury (which are recorded in the budget as revenues). CBO estimates that any additional administrative costs to the Federal Reserve under the bill would be insignificant. 

Because enacting H.R. 4096 would affect direct spending and revenues, pay-as-you-go procedures apply. However, CBO estimates 

that the net effects would be insignificant for each year. 

CBO estimates that enacting H.R. 4096 would not increase net 

direct spending or on-budget deficits in any of the four consecutive 

10-year periods beginning in 2027. 

Discretionary costs 

Costs incurred by the SEC and the CFTC are recorded in the 

budget as discretionary and are subject to future appropriations action. Based on the cost of similar activities, CBO estimates that 

each agency would need one or two full-time staff people to complete the rule-making. CBO estimates that the costs to those agencies would not be significant and subject to the availability of appropriated funds. 

Intergovernmental and private-sector impact: H.R. 4096 contains 

no intergovernmental mandates as defined in the Unfunded Mandates Reform Act (UMRA) and would not affect the budgets of 

state, local, or tribal governments. 

If any of the financial regulators increase premiums or fees to 

offset the costs of implementing the bill, H.R. 4096 would increase 

the cost of an existing mandate on private entities required to pay 

those assessments. Based on information from the agencies, CBO 

estimates that the incremental cost of the mandate would be small 

and would fall well below the annual threshold for private-sector 

mandates established in UMRA ($154 million in 2016, adjusted annually for inflation). 

The CBO staff contacts for this estimate are Sarah Puro (for the 

FDIC), Nathaniel Frentz (for the Federal Reserve) and Logan 

Smith (for private-sector mandates). The estimate was approved by 

Theresa Gullo, Assistant Director for Budget Analysis. 


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FEDERAL MANDATES STATEMENT

The Committee adopts as its own the estimate of Federal mandates prepared by the Director of the Congressional Budget Office 

pursuant to section 423 of the Unfunded Mandates Reform Act. 

ADVISORY COMMITTEE STATEMENT

No advisory committees within the meaning of section 5(b) of the 

Federal Advisory Committee Act were created by this legislation. 

APPLICABILITY TO LEGISLATIVE BRANCH

The Committee finds that the legislation does not relate to the 

terms and conditions of employment or access to public services or 

accommodations within the meaning of the section 102(b)(3) of the 

Congressional Accountability Act. 

EARMARK IDENTIFICATION

H.R. 4096 does not contain any congressional earmarks, limited 

tax benefits, or limited tariff benefits as defined in clause 9 of rule 

XXI. 

DUPLICATION OF FEDERAL PROGRAMS

Pursuant to section 3(g) of H. Res. 5, 114th Cong. (2015), the 

Committee states that no provision of H.R. 4096 establishes or reauthorizes a program of the Federal Government known to be duplicative of another Federal program, a program that was included 

in any report from the Government Accountability Office to Congress pursuant to section 21 of Public Law 111–139, or a program 

related to a program identified in the most recent Catalog of Federal Domestic Assistance. 

DISCLOSURE OF DIRECTED RULEMAKING

Pursuant to section 3(i) of H. Res. 5, 114th Cong. (2015), the 

Committee states that H.R. 4096 contains no directed rulemaking. 

SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1: Short title 

This section cites H.R. 4096 as the ‘‘Investor Clarity and Bank 

Parity Act’’. 

Section 2: Naming restrictions 

This section amends Sections 13 of the Bank Holding Company 

Act of 1956 to permit a covered fund to have the same name as a 

bank-affiliated investment advisor if the investment advisor (1) is 

not, and does not control, an insured depository institution and is 

not treated as a bank holding company as defined by the International Banking Act of 1978; (2) does not share the same name 

as: an insured depository institution; a company that controls an 

insured depository institution; or a company that is treated as a 

bank holding company; and (3) does not have a name that contains 

the word ‘‘bank’’. 


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CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

In compliance with clause 3(e) of rule XIII of the Rules of the 

House of Representatives, changes in existing law made by the bill, 

as reported, are shown as follows (new matter is printed in italic 

and existing law in which no change is proposed is shown in 

roman): 

BANK HOLDING COMPANY ACT OF 1956 

* * * * * * * 

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

FUNDS. 

(a) IN GENERAL.— (1) PROHIBITION.—Unless otherwise provided in this section, 

a banking entity shall not— 

(A) engage in proprietary trading; or 

(B) acquire or retain any equity, partnership, or other 

ownership interest in or sponsor a hedge fund or a private 

equity fund. 

(2) NONBANK FINANCIAL COMPANIES SUPERVISED BY THE

BOARD.—Any nonbank financial company supervised by the 

Board that engages in proprietary trading or takes or retains 

any equity, partnership, or other ownership interest in or sponsors a hedge fund or a private equity fund shall be subject, by 

rule, as provided in subsection (b)(2), to additional capital requirements for and additional quantitative limits with regards 

to such proprietary trading and taking or retaining any equity, 

partnership, or other ownership interest in or sponsorship of a 

hedge fund or a private equity fund, except that permitted activities as described in subsection (d) shall not be subject to the 

additional capital and additional quantitative limits except as 

provided in subsection (d)(3), as if the nonbank financial company supervised by the Board were a banking entity. 

(b) STUDY AND RULEMAKING.— (1) STUDY.—Not later than 6 months after the date of enactment of this section, the Financial Stability Oversight Council 

shall study and make recommendations on implementing the 

provisions of this section so as to— 

(A) promote and enhance the safety and soundness of 

banking entities; 

(B) protect taxpayers and consumers and enhance financial stability by minimizing the risk that insured depository institutions and the affiliates of insured depository institutions will engage in unsafe and unsound activities; 

(C) limit the inappropriate transfer of Federal subsidies 

from institutions that benefit from deposit insurance and 

liquidity facilities of the Federal Government to unregulated entities; 

(D) reduce conflicts of interest between the self-interest 

of banking entities and nonbank financial companies supervised by the Board, and the interests of the customers 

of such entities and companies; 

(E) limit activities that have caused undue risk or loss 

in banking entities and nonbank financial companies suVerDate Sep 11 2014 05:47 Apr 29, 2016 Jkt 059006 PO 00000 Frm 00006 Fmt 6659 Sfmt 6601 E:\HR\OC\HR523.XXX HR523

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pervised by the Board, or that might reasonably be expected to create undue risk or loss in such banking entities 

and nonbank financial companies supervised by the Board; 

(F) appropriately accommodate the business of insurance 

within an insurance company, subject to regulation in accordance with the relevant insurance company investment 

laws, while protecting the safety and soundness of any 

banking entity with which such insurance company is affiliated and of the United States financial system; and 

(G) appropriately time the divestiture of illiquid assets 

that are affected by the implementation of the prohibitions 

under subsection (a). 

(2) RULEMAKING.— 

(A) IN GENERAL.—Unless otherwise provided in this section, not later than 9 months after the completion of the 

study under paragraph (1), the appropriate Federal banking agencies, the Securities and Exchange Commission, 

and the Commodity Futures Trading Commission, shall 

consider the findings of the study under paragraph (1) and 

adopt rules to carry out this section, as provided in subparagraph (B). 

(B) COORDINATED RULEMAKING.— (i) REGULATORY AUTHORITY.—The regulations issued 

under this paragraph shall be issued by— 

(I) the appropriate Federal banking agencies, 

jointly, with respect to insured depository institutions; 

(II) the Board, with respect to any company that 

controls an insured depository institution, or that 

is treated as a bank holding company for purposes 

of section 8 of the International Banking Act, any 

nonbank financial company supervised by the 

Board, and any subsidiary of any of the foregoing 

(other than a subsidiary for which an agency described in subclause (I), (III), or (IV) is the primary financial regulatory agency); 

(III) the Commodity Futures Trading Commission, with respect to any entity for which the 

Commodity Futures Trading Commission is the 

primary financial regulatory agency, as defined in 

section 2 of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act; and 

(IV) the Securities and Exchange Commission, 

with respect to any entity for which the Securities 

and Exchange Commission is the primary financial regulatory agency, as defined in section 2 of 

the Dodd-Frank Wall Street Reform and Consumer Protection Act. 

(ii) COORDINATION, CONSISTENCY, AND COM- PARABILITY.—In developing and issuing regulations 

pursuant to this section, the appropriate Federal 

banking agencies, the Securities and Exchange Commission, and the Commodity Futures Trading Commission shall consult and coordinate with each other, 

as appropriate, for the purposes of assuring, to the exVerDate Sep 11 2014 05:47 Apr 29, 2016 Jkt 059006 PO 00000 Frm 00007 Fmt 6659 Sfmt 6601 E:\HR\OC\HR523.XXX HR523

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tent possible, that such regulations are comparable 

and provide for consistent application and implementation of the applicable provisions of this section to 

avoid providing advantages or imposing disadvantages 

to the companies affected by this subsection and to 

protect the safety and soundness of banking entities 

and nonbank financial companies supervised by the 

Board. 

(iii) COUNCIL ROLE.—The Chairperson of the Financial Stability Oversight Council shall be responsible 

for coordination of the regulations issued under this 

section. 

(c) EFFECTIVE DATE.— 

(1) IN GENERAL.—Except as provided in paragraphs (2) and 

(3), this section shall take effect on the earlier of— 

(A) 12 months after the date of the issuance of final 

rules under subsection (b); or 

(B) 2 years after the date of enactment of this section. 

(2) CONFORMANCE PERIOD FOR DIVESTITURE.—A banking entity or nonbank financial company supervised by the Board shall 

bring its activities and investments into compliance with the 

requirements of this section not later than 2 years after the 

date on which the requirements become effective pursuant to 

this section or 2 years after the date on which the entity or 

company becomes a nonbank financial company supervised by 

the Board. The Board may, by rule or order, extend this twoyear period for not more than one year at a time, if, in the 

judgment of the Board, such an extension is consistent with 

the purposes of this section and would not be detrimental to 

the public interest. The extensions made by the Board under 

the preceding sentence may not exceed an aggregate of 3 years. 

(3) EXTENDED TRANSITION FOR ILLIQUID FUNDS.— 

(A) APPLICATION.—The Board may, upon the application 

of a banking entity, extend the period during which the 

banking entity, to the extent necessary to fulfill a contractual obligation that was in effect on May 1, 2010, may take 

or retain its equity, partnership, or other ownership interest in, or otherwise provide additional capital to, an illiquid fund. 

(B) TIME LIMIT ON APPROVAL.—The Board may grant 1 

extension under subparagraph (A), which may not exceed 

5 years. 

(4) DIVESTITURE REQUIRED.—Except as otherwise provided in 

subsection (d)(1)(G), a banking entity may not engage in any 

activity prohibited under subsection (a)(1)(B) after the earlier 

of— 

(A) the date on which the contractual obligation to invest 

in the illiquid fund terminates; and 

(B) the date on which any extensions granted by the 

Board under paragraph (3) expire. 

(5) ADDITIONAL CAPITAL DURING TRANSITION PERIOD.—Notwithstanding paragraph (2), on the date on which the rules are 

issued under subsection (b)(2), the appropriate Federal banking agencies, the Securities and Exchange Commission, and 

the Commodity Futures Trading Commission shall issue rules, 


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as provided in subsection (b)(2), to impose additional capital requirements, and any other restrictions, as appropriate, on any 

equity, partnership, or ownership interest in or sponsorship of 

a hedge fund or private equity fund by a banking entity. 

(6) SPECIAL RULEMAKING.—Not later than 6 months after the 

date of enactment of this section, the Board shall issues rules 

to implement paragraphs (2) and (3). 

(d) PERMITTED ACTIVITIES.— 

(1) IN GENERAL.—Notwithstanding the restrictions under 

subsection (a), to the extent permitted by any other provision 

of Federal or State law, and subject to the limitations under 

paragraph (2) and any restrictions or limitations that the appropriate Federal banking agencies, the Securities and Exchange Commission, and the Commodity Futures Trading 

Commission, may determine, the following activities (in this 

section referred to as ‘‘permitted activities’’) are permitted: 

(A) The purchase, sale, acquisition, or disposition of obligations of the United States or any agency thereof, obligations, participations, or other instruments of or issued by 

the Government National Mortgage Association, the Federal National Mortgage Association, the Federal Home 

Loan Mortgage Corporation, a Federal Home Loan Bank, 

the Federal Agricultural Mortgage Corporation, or a Farm 

Credit System institution chartered under and subject to 

the provisions of the Farm Credit Act of 1971 (12 U.S.C. 

2001 et seq.), and obligations of any State or of any political subdivision thereof. 

(B) The purchase, sale, acquisition, or disposition of securities and other instruments described in subsection 

(h)(4) in connection with underwriting or market-makingrelated activities, to the extent that any such activities 

permitted by this subparagraph are designed not to exceed 

the reasonably expected near term demands of clients, customers, or counterparties. 

(C) Risk-mitigating hedging activities in connection with 

and related to individual or aggregated positions, contracts, or other holdings of a banking entity that are designed to reduce the specific risks to the banking entity in 

connection with and related to such positions, contracts, or 

other holdings. 

(D) The purchase, sale, acquisition, or disposition of securities and other instruments described in subsection 

(h)(4) on behalf of customers. 

(E) Investments in one or more small business investment companies, as defined in section 102 of the Small 

Business Investment Act of 1958 (15 U.S.C. 662), investments designed primarily to promote the public welfare, of 

the type permitted under paragraph (11) of section 5136 of 

the Revised Statutes of the United States (12 U.S.C. 24), 

or investments that are qualified rehabilitation expenditures with respect to a qualified rehabilitated building or 

certified historic structure, as such terms are defined in 

section 47 of the Internal Revenue Code of 1986 or a similar State historic tax credit program. 


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(F) The purchase, sale, acquisition, or disposition of securities and other instruments described in subsection 

(h)(4) by a regulated insurance company directly engaged 

in the business of insurance for the general account of the 

company and by any affiliate of such regulated insurance 

company, provided that such activities by any affiliate are 

solely for the general account of the regulated insurance 

company, if— 

(i) the purchase, sale, acquisition, or disposition is 

conducted in compliance with, and subject to, the insurance company investment laws, regulations, and 

written guidance of the State or jurisdiction in which 

each such insurance company is domiciled; and 

(ii) the appropriate Federal banking agencies, after 

consultation with the Financial Stability Oversight 

Council and the relevant insurance commissioners of 

the States and territories of the United States, have 

not jointly determined, after notice and comment, that 

a particular law, regulation, or written guidance described in clause (i) is insufficient to protect the safety 

and soundness of the banking entity, or of the financial stability of the United States. 

(G) Organizing and offering a private equity or hedge 

fund, including serving as a general partner, managing 

member, or trustee of the fund and in any manner selecting or controlling (or having employees, officers, directors, 

or agents who constitute) a majority of the directors, trustees, or management of the fund, including any necessary 

expenses for the foregoing, only if— 

(i) the banking entity provides bona fide trust, fiduciary, or investment advisory services; 

(ii) the fund is organized and offered only in connection with the provision of bona fide trust, fiduciary, or 

investment advisory services and only to persons that 

are customers of such services of the banking entity; 

(iii) the banking entity does not acquire or retain an 

equity interest, partnership interest, or other ownership interest in the funds except for a de minimis investment subject to and in compliance with paragraph 

(4); 

(iv) the banking entity complies with the restrictions 

under paragraphs (1) and (2) of subparagraph (f); 

(v) the banking entity does not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or performance of the hedge fund or private 

equity fund or of any hedge fund or private equity 

fund in which such hedge fund or private equity fund 

invests; 

(vi) the banking entity does not share with the 

hedge fund or private equity fund, for corporate, marketing, promotional, or other purposes, the same name 

or a variation of the same name, except that the hedge 

fund or private equity fund may share the same name 

or a variation of the same name as a banking entity 


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that is an investment adviser to the hedge fund or private equity find, if— 

(I) such investment adviser is not an insured depository institution, a company that controls an insured depository institution, or a company that is 

treated as a bank holding company for purposes of 

section 8 of the International Banking Act of 1978; 

(II) such investment adviser does not share the 

same name or a variation of the same name as an 

insured depository institution, any company that 

controls an insured depository institution, or any 

company that is treated as a bank holding company for purposes of section 8 of the International 

Banking Act of 1978; and 

(III) such name does not contain the word 

‘‘bank’’; 

(vii) no director or employee of the banking entity 

takes or retains an equity interest, partnership interest, or other ownership interest in the hedge fund or 

private equity fund, except for any director or employee of the banking entity who is directly engaged in 

providing investment advisory or other services to the 

hedge fund or private equity fund; and 

(viii) the banking entity discloses to prospective and 

actual investors in the fund, in writing, that any 

losses in such hedge fund or private equity fund are 

borne solely by investors in the fund and not by the 

banking entity, and otherwise complies with any additional rules of the appropriate Federal banking agencies, the Securities and Exchange Commission, or the 

Commodity Futures Trading Commission, as provided 

in subsection (b)(2), designed to ensure that losses in 

such hedge fund or private equity fund are borne solely by investors in the fund and not by the banking entity. 

(H) Proprietary trading conducted by a banking entity 

pursuant to paragraph (9) or (13) of section 4(c), provided 

that the trading occurs solely outside of the United States 

and that the banking entity is not directly or indirectly 

controlled by a banking entity that is organized under the 

laws of the United States or of one or more States. 

(I) The acquisition or retention of any equity, partnership, or other ownership interest in, or the sponsorship of, 

a hedge fund or a private equity fund by a banking entity 

pursuant to paragraph (9) or (13) of section 4(c) solely outside of the United States, provided that no ownership interest in such hedge fund or private equity fund is offered 

for sale or sold to a resident of the United States and that 

the banking entity is not directly or indirectly controlled 

by a banking entity that is organized under the laws of the 

United States or of one or more States. 

(J) Such other activity as the appropriate Federal banking agencies, the Securities and Exchange Commission, 

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mote and protect the safety and soundness of the banking 

entity and the financial stability of the United States. 

(2) LIMITATION ON PERMITTED ACTIVITIES.— (A) IN GENERAL.—No transaction, class of transactions, 

or activity may be deemed a permitted activity under paragraph (1) if the transaction, class of transactions, or activity— 

(i) would involve or result in a material conflict of 

interest (as such term shall be defined by rule as provided in subsection (b)(2)) between the banking entity 

and its clients, customers, or counterparties; 

(ii) would result, directly or indirectly, in a material 

exposure by the banking entity to high-risk assets or 

high-risk trading strategies (as such terms shall be defined by rule as provided in subsection (b)(2)); 

(iii) would pose a threat to the safety and soundness 

of such banking entity; or 

(iv) would pose a threat to the financial stability of 

the United States. 

(B) RULEMAKING.—The appropriate Federal banking 

agencies, the Securities and Exchange Commission, and 

the Commodity Futures Trading Commission shall issue 

regulations to implement subparagraph (A), as part of the 

regulations issued under subsection (b)(2). 

(3) CAPITAL AND QUANTITATIVE LIMITATIONS.—The appropriate Federal banking agencies, the Securities and Exchange 

Commission, and the Commodity Futures Trading Commission 

shall, as provided in subsection (b)(2), adopt rules imposing additional capital requirements and quantitative limitations, including diversification requirements, regarding the activities 

permitted under this section if the appropriate Federal banking agencies, the Securities and Exchange Commission, and 

the Commodity Futures Trading Commission determine that 

additional capital and quantitative limitations are appropriate 

to protect the safety and soundness of banking entities engaged in such activities. 

(4) DE MINIMIS INVESTMENT.— (A) IN GENERAL.—A banking entity may make and retain 

an investment in a hedge fund or private equity fund that 

the banking entity organizes and offers, subject to the limitations and restrictions in subparagraph (B) for the purposes of— 

(i) establishing the fund and providing the fund with 

sufficient initial equity for investment to permit the 

fund to attract unaffiliated investors; or 

(ii) making a de minimis investment. 

(B) LIMITATIONS AND RESTRICTIONS ON INVESTMENTS.— 

(i) REQUIREMENT TO SEEK OTHER INVESTORS.—A 

banking entity shall actively seek unaffiliated investors to reduce or dilute the investment of the banking 

entity to the amount permitted under clause (ii). 

(ii) LIMITATIONS ON SIZE OF INVESTMENTS.—Notwithstanding any other provision of law, investments by a 

banking entity in a hedge fund or private equity fund 

shall— 


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(I) not later than 1 year after the date of establishment of the fund, be reduced through redemption, sale, or dilution to an amount that is not 

more than 3 percent of the total ownership interests of the fund; 

(II) be immaterial to the banking entity, as defined, by rule, pursuant to subsection (b)(2), but in 

no case may the aggregate of all of the interests 

of the banking entity in all such funds exceed 3 

percent of the Tier 1 capital of the banking entity. 

(iii) CAPITAL.—For purposes of determining compliance with applicable capital standards under paragraph (3), the aggregate amount of the outstanding investments by a banking entity under this paragraph, 

including retained earnings, shall be deducted from 

the assets and tangible equity of the banking entity, 

and the amount of the deduction shall increase commensurate with the leverage of the hedge fund or private equity fund. 

(C) EXTENSION.—Upon an application by a banking entity, the Board may extend the period of time to meet the 

requirements under subparagraph (B)(ii)(I) for 2 additional 

years, if the Board finds that an extension would be consistent with safety and soundness and in the public interest. 

(e) ANTI-EVASION.— (1) RULEMAKING.—The appropriate Federal banking agencies, the Securities and Exchange Commission, and the Commodity Futures Trading Commission shall issue regulations, as 

part of the rulemaking provided for in subsection (b)(2), regarding internal controls and recordkeeping, in order to insure 

compliance with this section. 

(2) TERMINATION OF ACTIVITIES OR INVESTMENT.—Notwithstanding any other provision of law, whenever an appropriate 

Federal banking agency, the Securities and Exchange Commission, or the Commodity Futures Trading Commission, as appropriate, has reasonable cause to believe that a banking entity or nonbank financial company supervised by the Board 

under the respective agency’s jurisdiction has made an investment or engaged in an activity in a manner that functions as 

an evasion of the requirements of this section (including 

through an abuse of any permitted activity) or otherwise violates the restrictions under this section, the appropriate Federal banking agency, the Securities and Exchange Commission, 

or the Commodity Futures Trading Commission, as appropriate, shall order, after due notice and opportunity for hearing, the banking entity or nonbank financial company supervised by the Board to terminate the activity and, as relevant, 

dispose of the investment. Nothing in this paragraph shall be 

construed to limit the inherent authority of any Federal agency 

or State regulatory authority to further restrict any investments or activities under otherwise applicable provisions of 

law. 

(f) LIMITATIONS ON RELATIONSHIPS WITH HEDGE FUNDS AND PRIVATE EQUITY FUNDS.— 


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14 

(1) IN GENERAL.—No banking entity that serves, directly or 

indirectly, as the investment manager, investment adviser, or 

sponsor to a hedge fund or private equity fund, or that organizes and offers a hedge fund or private equity fund pursuant 

to paragraph (d)(1)(G), and no affiliate of such entity, may 

enter into a transaction with the fund, or with any other hedge 

fund or private equity fund that is controlled by such fund, 

that would be a covered transaction, as defined in section 23A 

of the Federal Reserve Act (12 U.S.C. 371c), with the hedge 

fund or private equity fund, as if such banking entity and the 

affiliate thereof were a member bank and the hedge fund or 

private equity fund were an affiliate thereof. 

(2) TREATMENT AS MEMBER BANK.—A banking entity that 

serves, directly or indirectly, as the investment manager, investment adviser, or sponsor to a hedge fund or private equity 

fund, or that organizes and offers a hedge fund or private equity fund pursuant to paragraph (d)(1)(G), shall be subject to 

section 23B of the Federal Reserve Act (12 U.S.C. 371c–1), as 

if such banking entity were a member bank and such hedge 

fund or private equity fund were an affiliate thereof. 

(3) PERMITTED SERVICES.— 

(A) IN GENERAL.—Notwithstanding paragraph (1), the 

Board may permit a banking entity to enter into any 

prime brokerage transaction with any hedge fund or private equity fund in which a hedge fund or private equity 

fund managed, sponsored, or advised by such banking entity has taken an equity, partnership, or other ownership interest, if— 

(i) the banking entity is in compliance with each of 

the limitations set forth in subsection (d)(1)(G) with 

regard to a hedge fund or private equity fund organized and offered by such banking entity; 

(ii) the chief executive officer (or equivalent officer) 

of the banking entity certifies in writing annually 

(with a duty to update the certification if the information in the certification materially changes) that the 

conditions specified in subsection (d)(1)(g)(v) are satisfied; and 

(iii) the Board has determined that such transaction 

is consistent with the safe and sound operation and 

condition of the banking entity. 

(B) TREATMENT OF PRIME BROKERAGE TRANSACTIONS.— 

For purposes of subparagraph (A), a prime brokerage 

transaction described in subparagraph (A) shall be subject 

to section 23B of the Federal Reserve Act (12 U.S.C. 371c1) as if the counterparty were an affiliate of the banking 

entity. 

(4) APPLICATION TO NONBANK FINANCIAL COMPANIES SUPERVISED BY THE BOARD.—The appropriate Federal banking agencies, the Securities and Exchange Commission, and the Commodity Futures Trading Commission shall adopt rules, as provided in subsection (b)(2), imposing additional capital charges 

or other restrictions for nonbank financial companies supervised by the Board to address the risks to and conflicts of inVerDate Sep 11 2014 05:47 Apr 29, 2016 Jkt 059006 PO 00000 Frm 00014 Fmt 6659 Sfmt 6601 E:\HR\OC\HR523.XXX HR523

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terest of banking entities described in paragraphs (1), (2), and 

(3) of this subsection. 

(g) RULES OF CONSTRUCTION.— (1) LIMITATION ON CONTRARY AUTHORITY.—Except as provided in this section, notwithstanding any other provision of 

law, the prohibitions and restrictions under this section shall 

apply to activities of a banking entity or nonbank financial 

company supervised by the Board, even if such activities are 

authorized for a banking entity or nonbank financial company 

supervised by the Board. 

(2) SALE OR SECURITIZATION OF LOANS.—Nothing in this section shall be construed to limit or restrict the ability of a banking entity or nonbank financial company supervised by the 

Board to sell or securitize loans in a manner otherwise permitted by law. 

(3) AUTHORITY OF FEDERAL AGENCIES AND STATE REGULATORY

AUTHORITIES.—Nothing in this section shall be construed to 

limit the inherent authority of any Federal agency or State 

regulatory authority under otherwise applicable provisions of 

law. 

(h) DEFINITIONS.—In this section, the following definitions shall 

apply: 

(1) BANKING ENTITY.—The term ‘‘banking entity’’ means any 

insured depository institution (as defined in section 3 of the 

Federal Deposit Insurance Act (12 U.S.C. 1813)), any company 

that controls an insured depository institution, or that is treated as a bank holding company for purposes of section 8 of the 

International Banking Act of 1978, and any affiliate or subsidiary of any such entity. For purposes of this paragraph, the 

term ‘‘insured depository institution’’ does not include an institution that functions solely in a trust or fiduciary capacity, if— 

(A) all or substantially all of the deposits of such institution are in trust funds and are received in a bona fide fiduciary capacity; 

(B) no deposits of such institution which are insured by 

the Federal Deposit Insurance Corporation are offered or 

marketed by or through an affiliate of such institution; 

(C) such institution does not accept demand deposits or 

deposits that the depositor may withdraw by check or 

similar means for payment to third parties or others or 

make commercial loans; and 

(D) such institution does not— 

(i) obtain payment or payment related services from 

any Federal Reserve bank, including any service referred to in section 11A of the Federal Reserve Act (12 

U.S.C. 248a); or 

(ii) exercise discount or borrowing privileges pursuant to section 19(b)(7) of the Federal Reserve Act (12 

U.S.C. 461(b)(7)). 

(2) HEDGE FUND; PRIVATE EQUITY FUND.—The terms ‘‘hedge 

fund’’ and ‘‘private equity fund’’ mean an issuer that would be 

an investment company, as defined in the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.), but for section 

3(c)(1) or 3(c)(7) of that Act, or such similar funds as the appropriate Federal banking agencies, the Securities and Exchange 


emcdonald on DSK67QTVN1PROD with HEARING
16 

Commission, and the Commodity Futures Trading Commission 

may, by rule, as provided in subsection (b)(2), determine. 

(3) NONBANK FINANCIAL COMPANY SUPERVISED BY THE

BOARD.—The term ‘‘nonbank financial company supervised by 

the Board’’ means a nonbank financial company supervised by 

the Board of Governors, as defined in section 102 of the Financial Stability Act of 2010. 

(4) PROPRIETARY TRADING.—The term ‘‘proprietary trading’’, 

when used with respect to a banking entity or nonbank financial company supervised by the Board, means engaging as a 

principal for the trading account of the banking entity or 

nonbank financial company supervised by the Board in any 

transaction to purchase or sell, or otherwise acquire or dispose 

of, any security, any derivative, any contract of sale of a commodity for future delivery, any option on any such security, derivative, or contract, or any other security or financial instrument that the appropriate Federal banking agencies, the Securities and Exchange Commission, and the Commodity Futures 

Trading Commission may, by rule as provided in subsection 

(b)(2), determine. 

(5) SPONSOR.—The term to ‘‘sponsor’’ a fund means— 

(A) to serve as a general partner, managing member, or 

trustee of a fund; 

(B) in any manner to select or to control (or to have employees, officers, or directors, or agents who constitute) a 

majority of the directors, trustees, or management of a 

fund; or 

(C) to share with a fund, for corporate, marketing, promotional, or other purposes, the same name or a variation 

of the same name, except as permitted under subsection 

(d)(1)(G)(vi). (6) TRADING ACCOUNT.—The term ‘‘trading account’’ means 

any account used for acquiring or taking positions in the securities and instruments described in paragraph (4) principally 

for the purpose of selling in the near term (or otherwise with 

the intent to resell in order to profit from short-term price 

movements), and any such other accounts as the appropriate 

Federal banking agencies, the Securities and Exchange Commission, and the Commodity Futures Trading Commission 

may, by rule as provided in subsection (b)(2), determine. 

(7) ILLIQUID FUND.— 

(A) IN GENERAL.—The term ‘‘illiquid fund’’ means a 

hedge fund or private equity fund that— 

(i) as of May 1, 2010, was principally invested in, or 

was invested and contractually committed to principally invest in, illiquid assets, such as portfolio companies, real estate investments, and venture capital 

investments; and 

(ii) makes all investments pursuant to, and consistent with, an investment strategy to principally invest in illiquid assets. In issuing rules regarding this 

subparagraph, the Board shall take into consideration 

the terms of investment for the hedge fund or private 

equity fund, including contractual obligations, the ability of the fund to divest of assets held by the fund, and 


emcdonald on DSK67QTVN1PROD with HEARING
17 

any other factors that the Board determines are appropriate. 

(B) HEDGE FUND.—For the purposes of this paragraph, 

the term ‘‘hedge fund’’ means any fund identified under 

subsection (h)(2), and does not include a private equity 

fund, as such term is used in section 203(m) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-3(m)). 

* * * * * * * 

Æ 


emcdonald on DSK67QTVN1PROD with HEARING