Commodity Futures Trading Commission

Office of Public Affairs

Three Lafayette Centre

1155 21st Street, NW

Washington, DC 20581

www.cftc.gov

June 12, 2015

CFTC Division of Swap Dealer and Intermediary Oversight Responds to

Frequently Asked Questions Regarding Certain Requirements under Section 

13 of the Bank Holding Company Act of 1956 and Prohibitions and 

Restrictions on Proprietary Trading and Certain Interests in, and 

Relationships with, Hedge Funds and Private Equity Funds

Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act added a new section 13 to the 

Bank Holding Company Act of 1956 (“BHC Act”), commonly referred to as the Volcker rule, that generally 

prohibits insured depository institutions and any company affiliated with an insured depository institution from 

engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring, or having 

certain relationships with a hedge fund or private equity fund. These prohibitions are subject to a number of 

statutory exemptions, restrictions, and definitions.

The Commodity Futures Trading Commission (“CFTC”) is working closely with the other agencies charged with 

implementing the requirements of section 13, including the Federal Reserve Board, Office of the Comptroller of 

the Currency, the Federal Deposit Insurance Corporation, and the Securities and Exchange Commission (each 

an “Agency” and collectively with the CFTC “the Agencies”). While these frequently asked questions (“FAQs”) 

apply to banking entities for which the CFTC has jurisdiction under section 13 of the BHC Act, they have been 

developed by staffs of the Agencies and substantively identical versions will appear on the public websites of 

each Agency.

Joint Venture Exclusion for Covered Funds

1. May an issuer that would be a covered fund rely on the joint venture exclusion from 

the definition of covered fund under § 75.10(c)(3) of the final rule? 

Section 75.10(c)(3) of the final rule provides that a covered fund does not include a joint venture between a 

banking entity or any of its affiliates and one or more unaffiliated persons, provided that the joint venture:

 Is comprised of no more than 10 unaffiliated co-venturers;

 Is in the business of engaging in activities that are permissible for the banking entity or affiliate, other 

than investing in securities for resale or other disposition; and 

 Is not, and does not hold itself out as being, an entity or arrangement that raises money from investors 

primarily for the purpose of investing in securities for resale or other disposition or otherwise trading in 

securities.

As explained in the preamble to the final rule, one of the purposes of section 13 of the Bank Holding Company 

Act (“BHC Act”) is to limit investment and sponsorship activities of banking entities in hedge funds and private 

equity funds, which section 13 of the BHC Act generally defines as entities that rely on certain specified 

exclusions in the Investment Company Act of 1940.1 The final rule defines hedge funds and private equity 

 

1

 See, e.g., Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity 

Funds, 79 FR 5808 (Jan. 31, 2014) at 5943.
2

Commodity Futures Trading Commission ♦ Office of Public Affairs ♦ 202-418-5080

funds collectively as “covered funds.”2 The preamble to the final rule explains that the definition of covered 

fund focuses on the types of entities formed for the purpose of investing in securities or derivatives for resale 

or other trading activity that are not subject to all of the securities law protections applicable to funds that are 

registered with the SEC as investment companies. A joint venture that qualifies for the joint venture exclusion 

in the final rule, however, is excluded from the definition of covered fund. 

The conditions to the joint venture exclusion reflect that the exclusion is designed to be used by a banking 

entity to conduct businesses and operations in conjunction with a limited number of co-venturers and that the 

exclusion is not intended to include entities that invest in securities for resale or other disposition. Similarly, 

the exclusion would not apply to entities or arrangements that raise money from investors primarily for the 

purpose of investing in securities for the benefit of one or more investors and sharing the income, gain or 

losses on securities acquired by that entity. The limitations in the joint venture exclusion are meant to ensure 

that the joint venture is not an investment vehicle and that the joint venture exclusion is not used as a means 

to evade the limitations in the BHC Act on investing in covered funds. 3 

This exclusion is not met by an issuer that raises money from a small number of investors primarily for the 

purpose of investing in securities, whether the securities are intended to be traded frequently, held for a 

longer duration, held to maturity, or held until the dissolution of the entity. The exclusion also is not met by 

an entity that raises money from investors primarily for the purpose of investing in securities for resale or 

other disposition or otherwise trading in securities merely because one of the purposes for establishing the 

vehicle may be to provide financing to an entity to obtain and hold securities. As the preamble explains, the 

exclusion is designed to allow a banking entity to more efficiently manage the risks of its banking operations 

by, for example, seeking to obtain or share complementary business expertise. The conditions imposed on the 

exclusion are specifically intended to prevent the exclusion from being used as a vehicle to raise funds from 

investors primarily for the purpose of profiting from investment activity in securities for resale or other 

disposition or otherwise trading in securities.4 Thus, for example, a vehicle that raises funds from investors 

primarily for the purpose of sharing in the benefits, income, gains or losses from ownership of securities – as 

opposed to conducting a business or engaging in operations or other non-investment activities – would be 

raising money from investors primarily for the purpose of “investing in securities,” even if the vehicle may have 

other purposes.5

 

2 The final rule generally defines the term “covered fund” to include certain funds that rely on section 3(c)(1) or 3(c)(7) of the Investment Company Act 

of 1940; certain commodity pools as defined in section 1a(10) of the Commodity Exchange Act; and certain foreign funds. See section 75.10(b)(1) of 

the final rule.

3 The joint venture exclusion is subject to conditions, as noted above. As an initial matter, the entity seeking to rely on the exclusion must be a joint 

venture. While the term “joint venture” is not defined separately in the final rule, the Agencies’ staffs note that the basic elements of a joint venture are 

well recognized, including under state law. Although any determination of whether an arrangement is a joint venture will depend on the facts and 

circumstances, the Agencies’ staffs generally would not expect that a person that does not have some degree of control over the business of an entity 

would be considered to be participating in “a joint venture between a banking entity or any of its affiliates and one or more unaffiliated persons” as 

specified in § 75.10(c)(3) of the final rule. 

4

See 79 FR 5808 at 5952-54.

5

See, e.g., 79 FR 5808 at 5953 (stating that the limit on the number of co-venturers “allows flexibility in structuring larger business ventures without 

involving such a large number of partners as to suggest the venture is in reality a hedge fund or private equity fund established for investment 

purposes” and that “[t]he Agencies will monitor joint ventures—and other excluded entities—to ensure that they are not used by banking entities to 

evade the provisions of section 13”; also stating that “[t]he final rule’s requirement that a joint venture not be an entity or arrangement that raises

money from investors primarily for the purpose of investing in securities for resale or other disposition or otherwise trading in securities prevents a 

banking entity from relying on this exclusion to evade section 13 of the BHC Act by owning or sponsoring what is or will become a covered fund”).
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Commodity Futures Trading Commission ♦ Office of Public Affairs ♦ 202-418-5080

Foreign Public Funds Sponsored by Banking Entities

2. How does the final rule apply to a foreign public fund sponsored by a banking entity?

The final rule excludes foreign public funds from the definition of covered fund.6 To qualify for this exclusion, 

these funds must, among other conditions, be authorized to offer and sell ownership interests to retail 

investors in the foreign public fund’s home jurisdiction and must sell ownership interests predominantly in 

public offerings outside of the United States.7 The Agencies stated that this exclusion was “designed to 

prevent . . . the definition of covered fund from including foreign funds that are similar to U.S. registered 

investment companies, which are by statute not covered by section 13.”8 The Agencies also stated that the 

“foreign public fund exclusion is designed to treat foreign public funds consistently with similar U.S. funds and 

to limit the extraterritorial application of section 13 of the BHC Act, including by permitting U.S. banking 

entities and their foreign affiliates to carry on traditional asset management businesses outside of the United 

States.”9 

Staffs of the Agencies understand that, unlike in the case of U.S. registered investment companies,10 sponsors 

of foreign public funds in some foreign jurisdictions select the majority of the fund’s directors or trustees, or 

otherwise control the fund for purposes of the BHC Act by contract or through a controlled corporate director. 

These and other corporate governance structures abroad therefore have raised questions regarding whether 

foreign public funds that are sponsored and distributed outside the U.S. and in accordance with foreign laws 

are banking entities by virtue of their relationships with a banking entity. 

As noted by the Agencies in the preamble to the final rule, the definition of private equity fund and hedge fund 

in section 619 of the Dodd-Frank Act appears to reflect Congressional concerns regarding less regulated 

private funds as well as an intention not to disrupt registered investment companies, such as U.S. mutual 

funds.11 The final implementing regulations issued by the Agencies adopted the same approach toward 

foreign public funds in order to make clear that U.S. banking entities and their foreign affiliates, as well as 

foreign banking organizations, could continue to carry on their traditional asset management businesses 

involving foreign public funds outside of the United States.12 The final rule imposes conditions to ensure that

 

6

See § 75.10(c)(1). The final rule defines the term “covered fund” to include certain funds that rely on section 3(c)(1) or 3(c)(7) of the Investment 

Company Act; certain commodity pools as defined in section 1a(10) of the Commodity Exchange Act; and certain foreign funds. See § 75.10(b)(1).

7

See § 75.10(c)(1).

8

79 FR at 5945. The Agencies also noted more generally that the exclusions from the covered fund definition were designed, among other purposes, 

“to address the potential over-breadth of the covered fund definition and related requirements without such exclusions by permitting banking entities to 

invest in and have other relationships with entities that do not relate to the statutory purpose of section 13.” 79 FR at 5949.

9

79 FR at 5951. The Agencies explained in the preamble that they “tailored the final definition [of covered fund] to include entities of the type that the 

Agencies believe Congress intended to capture in its definition of private equity fund and hedge fund in section 13(h)(2) of the BHC Act by reference to 

section 3(c)(1) and 3(c)(7) of the Investment Company Act. Thus, the final definition focuses on the types of entities formed for the purpose of 

investing in securities or derivatives for resale or otherwise trading in securities or derivatives, and that are offered and sold in offerings that do not 

involve a public offering, but typically involve offerings to institutional investors and high-net worth individuals (rather than to retail investors).” See 

also e.g., 79 FR at 5938-39.

10 See 79 FR at 5948 (recognizing that the Federal Reserve Board’s regulations and orders have long recognized that a bank holding company may 

organize, sponsor, and manage a registered investment company, including by serving as investment adviser to the registered investment company, 

without controlling the registered investment company for purposes of the BHC Act). 

11 See, e.g., 79 FR at 5948 (“Section 13’s definition of private equity fund and hedge fund by reference to section 3(c)(1) and 3(c)(7) of the Investment 

Company Act appears to reflect Congress’ concerns about banking entities’ exposure to and relationships with investment funds that explicitly are 

excluded from SEC regulation as investment companies.”). (emphasis in original) See also e.g., 79 FR at 5938.

12 79 FR at 5951 (stating “the Agencies’ view that the foreign public fund exclusion is designed to treat foreign public funds consistently with similar U.S. 

funds and to limit the extraterritorial application of section 13 of the BHC Act, including by permitting U.S. banking entities and their foreign affiliates to 

carry on traditional asset management businesses outside of the United States”). 
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Commodity Futures Trading Commission ♦ Office of Public Affairs ♦ 202-418-5080

the foreign public fund is distributed predominantly through public offerings outside the United States, is 

offered to retail investors in the issuer’s home jurisdiction, is distributed in accordance with all applicable 

requirements for distributing public funds in the jurisdiction in which the distribution is being made, and 

includes publicly available offering disclosure documents. These requirements were designed to mirror the 

characteristics of U.S. mutual funds that are outside the applicability of section 619 of the Dodd-Frank Act.13 

By referring to characteristics common to publicly distributed foreign funds rather than requiring that foreign 

public funds organize themselves identically to U.S. mutual funds or other types of U.S. regulated investment 

companies, the final rule recognized that foreign jurisdictions have established their own frameworks 

governing the details for the operation and distribution of foreign public funds. 

Section 255.12 of the final rule further provides that, for purposes of complying with the covered fund 

investment limits, a U.S. registered investment company, SEC-regulated business development company, or 

foreign public fund will not be considered to be an affiliate of the banking entity so long as the banking entity: 

(i) does not own, control, or hold with the power to vote 25 percent or more of the voting shares of the fund; 

and (ii) provides investment advisory, commodity trading advisory, administrative, and other services to the 

fund in compliance with the limitations under applicable regulation, order, or other authority. The staffs of the 

Agencies note that these limitations would include those imposed by an authority in the relevant foreign 

jurisdiction.14 

Staffs of the Agencies would not advise that the activities and investments of a foreign public fund that meets 

the requirements in section 75.10(c)(1) and section 75.12(b)(1) of the final rule be attributed to the banking 

entity for purposes of section 619 of the Dodd-Frank Act or the final rule where, consistent with section 

75.12(b)(1) of the final rule, the banking entity does not own, control, or hold with the power to vote 25 

percent or more of the voting shares of the foreign public fund (after the seeding period),15 and provides 

investment advisory, commodity trading advisory, administrative, and other services to the fund in compliance 

with applicable limitations in the relevant foreign jurisdiction. Nor would the staffs advise that a foreign public 

fund be deemed a banking entity under the final rule solely by virtue of its relationship with the sponsoring 

banking entity where the foreign public fund meets the requirements of section 75.10(c)(1) of the final rule 

and the sponsoring banking entity’s relationship with the foreign public fund meets the requirements of section 

75.12(b)(1) of the final rule, including the requirement that the sponsoring banking entity’s relationship with 

the fund is in compliance with applicable limitations in the foreign jurisdiction in which the foreign public fund

operates. 

 

13 79 FR at 5951. 

14 See § 75.12(b)(1)(ii). See also 79 FR at 6004 (“[F]or purposes of section 13 of the BHC Act and the final rule, a registered investment company, 

SEC-regulated business development company, and a foreign public fund as described in §75.10(c)(1) of the final rule will not be considered to be an 

affiliate of the banking entity if the banking entity owns, controls, or holds with the power to vote less than 25 percent of the voting shares of the 

company or fund, and provides investment advisory, commodity trading advisory, administrative, and other services to the company or fund only in a 

manner that complies with other limitations under applicable regulation, order, or other authority.”) 

15 See §§ 75.10(c)(12) and 75.20(e). The preamble to the final rule makes clear that, consistent with the Board’s precedent regarding bank holding 

company control of and relationships with funds, a seeding vehicle that will become a registered investment company would not itself be viewed as 

violating the requirements of section 13 during the seeding period so long as the banking entity that establishes the seeding vehicle operates the vehicle 

pursuant to a written plan, developed in accordance with the banking entity’s compliance program, that reflects the banking entity’s determination that 

the vehicle will become a registered investment company within the time period provided for seeding a covered fund. See 79 FR at 5949. The staffs of 

the Agencies have explained that an issuer that will become a foreign public fund would be treated during its seeding period in the same manner as an 

issuer that will become an excluded registered investment company.