1

PART 75 —PROPRIETARY TRADING AND CERTAIN INTERESTS IN AND 

RELATIONSHIPS WITH COVERED FUNDS.

SUBPART A Authority and Definitions

Section 1 Authority, purpose, scope, and relationship to other authorities. 

Section 2 Definitions.

SUBPART B Proprietary Trading 

Section 3 Prohibition on proprietary trading.

Section 4 Permitted underwriting and market making-related activities. 

Section 5 Permitted risk-mitigating hedging activities.

Section 6 Other permitted proprietary trading activities. 

Section 7 Limitations on permitted proprietary trading activities.

Section 8 [Reserved]

Section 9 [Reserved]

SUBPART C Covered Fund Activities and Investments

Section 10 Prohibition on acquiring or retaining an ownership interest in and having 

certain relationships with a covered fund.

Section 11 Permitted organizing and offering of a covered fund.

Section 12 Permitted investment in a covered fund.

Section 13 Other permitted covered fund activities and investments.

Section 14 Limitations on relationships with a covered fund.

Section 15 Other limitations on permitted covered fund activities and investments.

Section 16 [Reserved]

Section 17 [Reserved]

Section 18 [Reserved]

Section 19 [Reserved]
2

SUBPART D Compliance Program Requirement; Violations

Section 20 Program for compliance; enforcement.

Section 21 Termination of activities or investments; penalties for violations.

APPENDIX A Reporting and Recordkeeping Requirements for Covered Trading 

Activities

APPENDIX B Enhanced Minimum Standards for Programmatic Compliance

*****

SUBPART A – Authority and Definitions

§ 75.1 Authority, purpose, scope, and relationship to other authorities. 

(a) Authority. This part is issued by the Commission under section 13 of the Bank 

Holding Company Act of 1956, as amended (12 U.S.C. 1851).

(b) Purpose. Section 13 of the Bank Holding Company Act establishes prohibitions 

and restrictions on proprietary trading by, and investments in or relationships with 

covered funds by, certain banking entities. This part implements section 13 of the 

Bank Holding Company Act by defining terms used in the statute and related 

terms, establishing prohibitions and restrictions on proprietary trading and 

investments in or relationships with covered funds, and further explaining the 

statute’s requirements.

(c) Scope. This part implements section 13 of the Bank Holding Company Act with 

respect to banking entities for which the CFTC is the primary financial regulatory 

agency, as defined in section 2(12) of the Dodd-Frank Act.

(d) Relationship to other authorities. Except as otherwise provided under section 13 

of the BHC Act, and notwithstanding any other provision of law, the prohibitions 

and restrictions under section 13 of the BHC Act shall apply to the activities of an 

applicable banking entity, even if such activities are authorized for the applicable 

banking entity under other applicable provisions of law.

§ 75.2 Definitions.

Unless otherwise specified, for purposes of this part:

(a) Affiliate has the same meaning as in section 2(k) of the Bank Holding Company 

Act of 1956 (12 U.S.C. 1841(k)).

(b) Bank holding company has the same meaning as in section 2 of the Bank Holding 

Company Act of 1956 (12 U.S.C. 1841).

(c) Banking entity.
3

(1) Except as provided in paragraph (c)(2) of this section, banking entity means:

(i) Any insured depository institution; 

(ii) Any company that controls an insured depository institution;

(iii)Any company that is treated as a bank holding company for purposes of section 8 

of the International Banking Act of 1978 (12 U.S.C. 3106); and

(iv)Any affiliate or subsidiary of any entity described in paragraphs (c)(1)(i), (ii), or 

(iii) of this section.

(2) Banking entity does not include:

(i) A covered fund that is not itself a banking entity under paragraphs (c)(1)(i), (ii), 

or (iii) of this section; 

(ii) A portfolio company held under the authority contained in section 4(k)(4)(H) or 

(I) of the BHC Act (12 U.S.C. 1843(k)(4)(H), (I)), or any portfolio concern, as 

defined under 13 CFR 107.50, that is controlled by a small business 

investment company, as defined in section 103(3) of the Small Business 

Investment Act of 1958 (15 U.S.C. 662), so long as the portfolio company or 

portfolio concern is not itself a banking entity under paragraphs (c)(1)(i), (ii), 

or (iii) of this section; or

(iii)The FDIC acting in its corporate capacity or as conservator or receiver under the 

Federal Deposit Insurance Act or Title II of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act.

(d) Board means the Board of Governors of the Federal Reserve System.

(e) CFTC or Commission means the Commodity Futures Trading Commission.

(f) Dealer has the same meaning as in section 3(a)(5) of the Exchange Act (15 U.S.C. 

78c(a)(5)).

(g) Depository institution has the same meaning as in section 3(c) of the Federal 

Deposit Insurance Act (12 U.S.C. 1813(c)).

(h) Derivative.

(1) Except as provided in paragraph (h)(2) of this section, derivative means:

(i) Any swap, as that term is defined in section 1a(47) of the Commodity 

Exchange Act (7 U.S.C. 1a(47)), or security-based swap, as that term is 

defined in section 3(a)(68) of the Exchange Act (15 U.S.C. 78c(a)(68));

(ii) Any purchase or sale of a commodity, that is not an excluded commodity, for 

deferred shipment or delivery that is intended to be physically settled;
4

(iii) Any foreign exchange forward (as that term is defined in section 1a(24) of the 

Commodity Exchange Act (7 U.S.C. 1a(24)) or foreign exchange swap (as 

that term is defined in section 1a(25) of the Commodity Exchange Act (7 

U.S.C. 1a(25)); 

(iv) Any agreement, contract, or transaction in foreign currency described in 

section 2(c)(2)(C)(i) of the Commodity Exchange Act (7 U.S.C. 

2(c)(2)(C)(i));

(v) Any agreement, contract, or transaction in a commodity other than foreign 

currency described in section 2(c)(2)(D)(i) of the Commodity Exchange Act 

(7 U.S.C. 2(c)(2)(D)(i)); and 

(vi) Any transaction authorized under section 19 of the Commodity Exchange Act 

(7 U.S.C. 23(a) or (b)); 

(2) A derivative does not include:

(i) Any consumer, commercial, or other agreement, contract, or transaction that 

the CFTC and SEC have further defined by joint regulation, interpretation, 

guidance, or other action as not within the definition of swap, as that term is 

defined in section 1a(47) of the Commodity Exchange Act (7 U.S.C. 1a(47)), 

or security-based swap, as that term is defined in section 3(a)(68) of the 

Exchange Act (15 U.S.C. 78c(a)(68)); or

(ii) Any identified banking product, as defined in section 402(b) of the Legal 

Certainty for Bank Products Act of 2000 (7 U.S.C. 27(b)), that is subject to 

section 403(a) of that Act (7 U.S.C. 27a(a)).

(i) Employee includes a member of the immediate family of the employee.

(j) Exchange Act means the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.).

(k) Excluded commodity has the same meaning as in section 1a(19) of the 

Commodity Exchange Act (7 U.S.C. 1a(19)).

(l) FDIC means the Federal Deposit Insurance Corporation

(m) Federal banking agencies means the Board, the Office of the Comptroller of the 

Currency, and the FDIC.

(n) Foreign banking organization has the same meaning as in section 211.21(o) of the 

Board’s Regulation K (12 CFR 211.21(o)), but does not include a foreign bank, as 

defined in section 1(b)(7) of the International Banking Act of 1978 (12 U.S.C. 

3101(7)), that is organized under the laws of the Commonwealth of Puerto Rico, 

Guam, American Samoa, the United States Virgin Islands, or the Commonwealth 

of the Northern Mariana Islands.
5

(o) Foreign insurance regulator means the insurance commissioner, or a similar 

official or agency, of any country other than the United States that is engaged in 

the supervision of insurance companies under foreign insurance law.

(p) General account means all of the assets of an insurance company except those

allocated to one or more separate accounts.

(q) Insurance company means a company that is organized as an insurance company, 

primarily and predominantly engaged in writing insurance or reinsuring risks 

underwritten by insurance companies, subject to supervision as such by a state 

insurance regulator or a foreign insurance regulator, and not operated for the 

purpose of evading the provisions of section 13 of the BHC Act (12 U.S.C. 1851).

(r) Insured depository institution has the same meaning as in section 3(c) of the 

Federal Deposit Insurance Act (12 U.S.C. 1813(c)), but does not include an

insured depository institution that is described in section 2(c)(2)(D) of the BHC 

Act (12 U.S.C. 1841(c)(2)(D)).

(s) Loan means any loan, lease, extension of credit, or secured or unsecured 

receivable that is not a security or derivative. 

(t) Primary financial regulatory agency has the same meaning as in section 2(12) of 

the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 

5301(12)).

(u) Purchase includes any contract to buy, purchase, or otherwise acquire. For 

security futures products, purchase includes any contract, agreement, or 

transaction for future delivery. With respect to a commodity future, purchase

includes any contract, agreement, or transaction for future delivery. With respect 

to a derivative, purchase includes the execution, termination (prior to its 

scheduled maturity date), assignment, exchange, or similar transfer or conveyance 

of, or extinguishing of rights or obligations under, a derivative, as the context may 

require.

(v) Qualifying foreign banking organization means a foreign banking organization 

that qualifies as such under section 211.23(a), (c) or (e) of the Board’s Regulation 

K (12 CFR 211.23(a), (c), or (e)).

(w) SEC means the Securities and Exchange Commission.

(x) Sale and sell each include any contract to sell or otherwise dispose of. For 

security futures products, such terms include any contract, agreement, or 

transaction for future delivery. With respect to a commodity future, such terms 

include any contract, agreement, or transaction for future delivery. With respect 

to a derivative, such terms include the execution, termination (prior to its 

scheduled maturity date), assignment, exchange, or similar transfer or conveyance 

of, or extinguishing of rights or obligations under, a derivative, as the context may 

require.
6

(y) Security has the meaning specified in section 3(a)(10) of the Exchange Act 

(15 U.S.C. 78c(a)(10)).

(z) Security-based swap dealer has the same meaning as in section 3(a)(71) of the 

Exchange Act (15 U.S.C. 78c(a)(71)).

(aa) Security future has the meaning specified in section 3(a)(55) of the Exchange Act

(15 U.S.C. 78c(a)(55)).

(bb) Separate account means an account established and maintained by an insurance 

company in connection with one or more insurance contracts to hold assets that 

are legally segregated from the insurance company’s other assets, under which 

income, gains, and losses, whether or not realized, from assets allocated to such 

account, are, in accordance with the applicable contract, credited to or charged 

against such account without regard to other income, gains, or losses of the 

insurance company.

(cc) State means any State, the District of Columbia, the Commonwealth of Puerto 

Rico, Guam, American Samoa, the United States Virgin Islands, and the 

Commonwealth of the Northern Mariana Islands.

(dd) Subsidiary has the same meaning as in section 2(d) of the Bank Holding 

Company Act of 1956 (12 U.S.C. 1841(d)).

(ee) State insurance regulator means the insurance commissioner, or a similar official 

or agency, of a State that is engaged in the supervision of insurance companies 

under State insurance law.

(ff) Swap dealer has the same meaning as in section 1(a)(49) of the Commodity

Exchange Act (7 U.S.C. 1a(49)).

*****

SUBPART B – Proprietary Trading 

§ 75.3 Prohibition on proprietary trading.

(a) Prohibition. Except as otherwise provided in this subpart, a banking entity may 

not engage in proprietary trading. Proprietary trading means engaging as 

principal for the trading account of the banking entity in any purchase or sale of 

one or more financial instruments.

(b) Definition of trading account.

(1) Trading account means any account that is used by a banking entity to:

(i) Purchase or sell one or more financial instruments principally for the purpose of:
7

(A) Short-term resale;

(B) Benefitting from actual or expected short-term price movements;

(C) Realizing short-term arbitrage profits; or

(D) Hedging one or more positions resulting from the purchases or sales of 

financial instruments described in paragraphs (b)(1)(i)(A), (B), or (C) of 

this section; 

(ii) Purchase or sell one or more financial instruments that are both market risk 

capital rule covered positions and trading positions (or hedges of other market 

risk capital rule covered positions), if the banking entity, or any affiliate of the 

banking entity, is an insured depository institution, bank holding company, or 

savings and loan holding company, and calculates risk-based capital ratios 

under the market risk capital rule; or

(iii)Purchase or sell one or more financial instruments for any purpose, if the banking 

entity:

(A) Is licensed or registered, or is required to be licensed or registered, to 

engage in the business of a dealer, swap dealer, or security-based swap 

dealer, to the extent the instrument is purchased or sold in connection with 

the activities that require the banking entity to be licensed or registered as 

such; or

(B) Is engaged in the business of a dealer, swap dealer, or security-based swap 

dealer outside of the United States, to the extent the instrument is 

purchased or sold in connection with the activities of such business.

(2) Rebuttable presumption for certain purchases and sales. The purchase (or sale) of 

a financial instrument by a banking entity shall be presumed to be for the trading 

account of the banking entity under paragraph (b)(1)(i) of this section if the 

banking entity holds the financial instrument for fewer than sixty days or 

substantially transfers the risk of the financial instrument within sixty days of the 

purchase (or sale), unless the banking entity can demonstrate, based on all 

relevant facts and circumstances, that the banking entity did not purchase (or sell) 

the financial instrument principally for any of the purposes described in paragraph 

(b)(1)(i) of this section.

(c) Financial instrument.

(1) Financial instrument means: 

(i) A security, including an option on a security;

(ii) A derivative, including an option on a derivative; or
8

(iii) A contract of sale of a commodity for future delivery, or option on a contract 

of sale of a commodity for future delivery.

(2) A financial instrument does not include:

(i) A loan;

(ii) A commodity that is not:

(A) An excluded commodity (other than foreign exchange or currency);

(B) A derivative;

(C) A contract of sale of a commodity for future delivery; or 

(D) An option on a contract of sale of a commodity for future delivery; or

(iii) Foreign exchange or currency.

(d) Proprietary trading does not include: 

(1) Any purchase or sale of one or more financial instruments by a banking entity that 

arises under a repurchase or reverse repurchase agreement pursuant to which the 

banking entity has simultaneously agreed, in writing, to both purchase and sell a 

stated asset, at stated prices, and on stated dates or on demand with the same 

counterparty; 

(2) Any purchase or sale of one or more financial instruments by a banking entity that 

arises under a transaction in which the banking entity lends or borrows a security 

temporarily to or from another party pursuant to a written securities lending 

agreement under which the lender retains the economic interests of an owner of 

such security, and has the right to terminate the transaction and to recall the 

loaned security on terms agreed by the parties;

(3) Any purchase or sale of a security by a banking entity for the purpose of liquidity 

management in accordance with a documented liquidity management plan of the 

banking entity that:

(i) Specifically contemplates and authorizes the particular securities to be used for 

liquidity management purposes, the amount, types, and risks of these 

securities that are consistent with liquidity management, and the liquidity 

circumstances in which the particular securities may or must be used; 

(ii) Requires that any purchase or sale of securities contemplated and authorized by 

the plan be principally for the purpose of managing the liquidity of the 

banking entity, and not for the purpose of short-term resale, benefitting from 

actual or expected short-term price movements, realizing short-term arbitrage 

profits, or hedging a position taken for such short-term purposes;
9

(iii)Requires that any securities purchased or sold for liquidity management purposes 

be highly liquid and limited to securities the market, credit, and other risks of 

which the banking entity does not reasonably expect to give rise to 

appreciable profits or losses as a result of short-term price movements; 

(iv)Limits any securities purchased or sold for liquidity management purposes, 

together with any other instruments purchased or sold for such purposes, to an 

amount that is consistent with the banking entity’s near-term funding needs, 

including deviations from normal operations of the banking entity or any 

affiliate thereof, as estimated and documented pursuant to methods specified 

in the plan; 

(v) Includes written policies and procedures, internal controls, analysis, and 

independent testing to ensure that the purchase and sale of securities that are 

not permitted under §§ 75.6(a) or (b) of this subpart are for the purpose of 

liquidity management and in accordance with the liquidity management plan 

described in paragraph (d)(3) of this section; and 

(vi)Is consistent with the Commission’s supervisory requirements, guidance, and 

expectations regarding liquidity management;

(4) Any purchase or sale of one or more financial instruments by a banking entity that 

is a derivatives clearing organization or a clearing agency in connection with 

clearing financial instruments; 

(5) Any excluded clearing activities by a banking entity that is a member of a clearing 

agency, a member of a derivatives clearing organization, or a member of a 

designated financial market utility;

(6) Any purchase or sale of one or more financial instruments by a banking entity, so 

long as:

(i) The purchase (or sale) satisfies an existing delivery obligation of the banking 

entity or its customers, including to prevent or close out a failure to deliver, in 

connection with delivery, clearing, or settlement activity; or

(ii) The purchase (or sale) satisfies an obligation of the banking entity in 

connection with a judicial, administrative, self-regulatory organization, or 

arbitration proceeding;

(7) Any purchase or sale of one or more financial instruments by a banking entity that 

is acting solely as agent, broker, or custodian;

(8) Any purchase or sale of one or more financial instruments by a banking entity

through a deferred compensation, stock-bonus, profit-sharing, or pension plan of 

the banking entity that is established and administered in accordance with the law 

of the United States or a foreign sovereign, if the purchase or sale is made directly 
10

or indirectly by the banking entity as trustee for the benefit of persons who are or 

were employees of the banking entity; or 

(9) Any purchase or sale of one or more financial instruments by a banking entity in 

the ordinary course of collecting a debt previously contracted in good faith, 

provided that the banking entity divests the financial instrument as soon as 

practicable, and in no event may the banking entity retain such instrument for 

longer than such period permitted by the Commission.

(e) Definition of other terms related to proprietary trading. For purposes of this 

subpart:

(1) Anonymous means that each party to a purchase or sale is unaware of the identity 

of the other party(ies) to the purchase or sale.

(2) Clearing agency has the same meaning as in section 3(a)(23) of the Exchange Act 

(15 U.S.C. 78c(a)(23)).

(3) Commodity has the same meaning as in section 1a(9) of the Commodity 

Exchange Act (7 U.S.C. 1a(9)), except that a commodity does not include any 

security;

(4) Contract of sale of a commodity for future delivery means a contract of sale (as 

that term is defined in section 1a(13) of the Commodity Exchange Act (7 U.S.C. 

1a(13)) for future delivery (as that term is defined in section 1a(27) of the 

Commodity Exchange Act (7 U.S.C. 1a(27))).

(5) Derivatives clearing organization means:

(i) A derivatives clearing organization registered under section 5b of the Commodity 

Exchange Act (7 U.S.C. 7a-1);

(ii) A derivatives clearing organization that, pursuant to CFTC regulation, is exempt 

from the registration requirements under section 5b of the Commodity 

Exchange Act (7 U.S.C. 7a-1); or 

(iii)A foreign derivatives clearing organization that, pursuant to CFTC regulation, is 

permitted to clear for a foreign board of trade that is registered with the 

CFTC.

(6) Exchange, unless the context otherwise requires, means any designated contract 

market, swap execution facility, or foreign board of trade registered with the 

CFTC, or, for purposes of securities or security-based swaps, an exchange, as 

defined under section 3(a)(1) of the Exchange Act (15 U.S.C. 78c(a)(1)), or 

security-based swap execution facility, as defined under section 3(a)(77) of the 

Exchange Act (15 U.S.C. 78c(a)(77)).

(7) Excluded clearing activities means:
11

(i) With respect to customer transactions cleared on a derivatives clearing 

organization, a clearing agency, or a designated financial market utility, any 

purchase or sale necessary to correct trading errors made by or on behalf of a 

customer provided that such purchase or sale is conducted in accordance with, 

for transactions cleared on a derivatives clearing organization, the Commodity 

Exchange Act, CFTC regulations, and the rules or procedures of the 

derivatives clearing organization, or, for transactions cleared on a clearing 

agency, the rules or procedures of the clearing agency, or, for transactions 

cleared on a designated financial market utility that is neither a derivatives 

clearing organization nor a clearing agency, the rules or procedures of the 

designated financial market utility;

(ii) Any purchase or sale in connection with and related to the management of a 

default or threatened imminent default of a customer provided that such 

purchase or sale is conducted in accordance with, for transactions cleared on a 

derivatives clearing organization, the Commodity Exchange Act, CFTC

regulations, and the rules or procedures of the derivatives clearing 

organization, or, for transactions cleared on a clearing agency, the rules or 

procedures of the clearing agency, or, for transactions cleared on a designated 

financial market utility that is neither a derivatives clearing organization nor a 

clearing agency, the rules or procedures of the designated financial market

utility;

(iii)Any purchase or sale in connection with and related to the management of a 

default or threatened imminent default of a member of a clearing agency, a 

member of a derivatives clearing organization, or a member of a designated 

financial market utility;

(iv)Any purchase or sale in connection with and related to the management of the 

default or threatened default of a clearing agency, a derivatives clearing 

organization, or a designated financial market utility; and

(v) Any purchase or sale that is required by the rules or procedures of a clearing 

agency, a derivatives clearing organization, or a designated financial market 

utility to mitigate the risk to the clearing agency, derivatives clearing 

organization, or designated financial market utility that would result from the 

clearing by a member of security-based swaps that reference the member or an 

affiliate of the member.

(8) Designated financial market utility has the same meaning as in section 803(4) of 

the Dodd-Frank Act (12 U.S.C. 5462(4)).

(9) Issuer has the same meaning as in section 2(a)(4) of the Securities Act of 1933 

(15 U.S.C. 77b(a)(4)).
12

(10) Market risk capital rule covered position and trading position means a financial 

instrument that is both a covered position and a trading position, as those terms

are respectively defined:

(i) In the case of a banking entity that is a bank holding company, savings and loan 

holding company, or insured depository institution, under the market risk 

capital rule that is applicable to the banking entity; and

(ii) In the case of a banking entity that is affiliated with a bank holding company or 

savings and loan holding company, other than a banking entity to which a 

market risk capital rule is applicable, under the market risk capital rule that is 

applicable to the affiliated bank holding company or savings and loan holding 

company.

(11) Market risk capital rule means the market risk capital rule that is contained in 

subpart F of 12 CFR 3, 12 CFR 208 and 225, or 12 CFR 324, as applicable.

(12) Municipal security means a security that is a direct obligation of or issued by, or 

an obligation guaranteed as to principal or interest by, a State or any political 

subdivision thereof, or any agency or instrumentality of a State or any political 

subdivision thereof, or any municipal corporate instrumentality of one or more 

States or political subdivisions thereof.

(13) Trading desk means the smallest discrete unit of organization of a banking entity 

that purchases or sells financial instruments for the trading account of the banking 

entity or an affiliate thereof.

§ 75.4 Permitted underwriting and market making-related activities. 

(a) Underwriting activities.

(1) Permitted underwriting activities. The prohibition contained in § 75.3(a) does not 

apply to a banking entity’s underwriting activities conducted in accordance with 

paragraph (a) of this section.

(2) Requirements. The underwriting activities of a banking entity are permitted under 

paragraph (a)(1) of this section only if:

(i) The banking entity is acting as an underwriter for a distribution of securities 

and the trading desk’s underwriting position is related to such distribution; 

(ii) The amount and type of the securities in the trading desk’s underwriting 

position are designed not to exceed the reasonably expected near term 

demands of clients, customers, or counterparties, and reasonable efforts are 

made to sell or otherwise reduce the underwriting position within a reasonable 

period, taking into account the liquidity, maturity, and depth of the market for 

the relevant type of security; 
13

(iii) The banking entity has established and implements, maintains, and enforces 

an internal compliance program required by subpart D that is reasonably 

designed to ensure the banking entity’s compliance with the requirements of 

paragraph (a) of this section, including reasonably designed written policies 

and procedures, internal controls, analysis and independent testing identifying 

and addressing:

(A) The products, instruments or exposures each trading desk may purchase, 

sell, or manage as part of its underwriting activities;

(B) Limits for each trading desk, based on the nature and amount of the 

trading desk’s underwriting activities, including the reasonably expected 

near term demands of clients, customers, or counterparties, on the:

(1) Amount, types, and risk of its underwriting position; 

(2) Level of exposures to relevant risk factors arising from its 

underwriting position; and 

(3) Period of time a security may be held; 

(C) Internal controls and ongoing monitoring and analysis of each trading 

desk’s compliance with its limits; and

(D) Authorization procedures, including escalation procedures that require 

review and approval of any trade that would exceed a trading desk’s 

limit(s), demonstrable analysis of the basis for any temporary or 

permanent increase to a trading desk’s limit(s), and independent review of 

such demonstrable analysis and approval;

(iv) The compensation arrangements of persons performing the activities 

described in paragraph (a) of this section are designed not to reward or 

incentivize prohibited proprietary trading; and

(v) The banking entity is licensed or registered to engage in the activity described 

in paragraph (a) of this section in accordance with applicable law.

(3) Definition of distribution. For purposes of paragraph (a) of this section, a 

distribution of securities means:

(i) An offering of securities, whether or not subject to registration under the 

Securities Act of 1933, that is distinguished from ordinary trading transactions 

by the presence of special selling efforts and selling methods; or

(ii) An offering of securities made pursuant to an effective registration statement 

under the Securities Act of 1933.
14

(4) Definition of underwriter. For purposes of paragraph (a) of this section, 

underwriter means: 

(i) A person who has agreed with an issuer or selling security holder to:

(A) Purchase securities from the issuer or selling security holder for 

distribution; 

(B) Engage in a distribution of securities for or on behalf of the issuer or 

selling security holder; or

(C) Manage a distribution of securities for or on behalf of the issuer or selling 

security holder; or 

(ii) A person who has agreed to participate or is participating in a distribution of 

such securities for or on behalf of the issuer or selling security holder.

(5) Definition of selling security holder. For purposes of paragraph (a) of this 

section, selling security holder means any person, other than an issuer, on whose 

behalf a distribution is made.

(6) Definition of underwriting position. For purposes of paragraph (a) of this section, 

underwriting position means the long or short positions in one or more securities 

held by a banking entity or its affiliate, and managed by a particular trading desk, 

in connection with a particular distribution of securities for which such banking 

entity or affiliate is acting as an underwriter.

(7) Definition of client, customer, and counterparty. For purposes of paragraph (a) of 

this section, the terms client, customer, and counterparty, on a collective or 

individual basis, refer to market participants that may transact with the banking 

entity in connection with a particular distribution for which the banking entity is 

acting as underwriter.

(b) Market making-related activities.

(1) Permitted market making-related activities. The prohibition contained in § 

75.3(a) does not apply to a banking entity’s market making-related activities 

conducted in accordance with paragraph (b) of this section.

(2) Requirements. The market making-related activities of a banking entity are 

permitted under paragraph (b)(1) of this section only if:

(i) The trading desk that establishes and manages the financial exposure routinely 

stands ready to purchase and sell one or more types of financial instruments 

related to its financial exposure and is willing and available to quote, purchase

and sell, or otherwise enter into long and short positions in those types of 

financial instruments for its own account, in commercially reasonable 

amounts and throughout market cycles on a basis appropriate for the liquidity, 
15

maturity, and depth of the market for the relevant types of financial 

instruments; 

(ii) The amount, types, and risks of the financial instruments in the trading desk’s 

market-maker inventory are designed not to exceed, on an ongoing basis, the

reasonably expected near term demands of clients, customers, or 

counterparties, based on:

(A) The liquidity, maturity, and depth of the market for the relevant types of 

financial instrument(s); and

(B) Demonstrable analysis of historical customer demand, current inventory of 

financial instruments, and market and other factors regarding the amount, 

types, and risks, of or associated with financial instruments in which the 

trading desk makes a market, including through block trades; 

(iii) The banking entity has established and implements, maintains, and enforces 

an internal compliance program required by subpart D that is reasonably 

designed to ensure the banking entity’s compliance with the requirements of 

paragraph (b) of this section, including reasonably designed written policies 

and procedures, internal controls, analysis and independent testing identifying 

and addressing:

(A) The financial instruments each trading desk stands ready to purchase and 

sell in accordance with paragraph (b)(2)(i) of this section;

(B) The actions the trading desk will take to demonstrably reduce or otherwise 

significantly mitigate promptly the risks of its financial exposure

consistent with the limits required under paragraph (b)(2)(iii)(C) of this 

section; the products, instruments, and exposures each trading desk may 

use for risk management purposes; the techniques and strategies each 

trading desk may use to manage the risks of its market making-related 

activities and inventory; and the process, strategies, and personnel 

responsible for ensuring that the actions taken by the trading desk to 

mitigate these risks are and continue to be effective;

(C) Limits for each trading desk, based on the nature and amount of the 

trading desk’s market making-related activities, that address the factors 

prescribed by paragraph (b)(2)(ii) of this section, on:

(1) The amount, types, and risks of its market-maker inventory; 

(2) The amount, types, and risks of the products, instruments, and 

exposures the trading desk may use for risk management purposes;

(3) The level of exposures to relevant risk factors arising from its financial 

exposure; and 
16

(4) The period of time a financial instrument may be held; 

(D) Internal controls and ongoing monitoring and analysis of each trading 

desk’s compliance with its limits; and

(E) Authorization procedures, including escalation procedures that require 

review and approval of any trade that would exceed a trading desk’s 

limit(s), demonstrable analysis that the basis for any temporary or 

permanent increase to a trading desk’s limit(s) is consistent with the 

requirements of paragraph (b) of this section, and independent review of 

such demonstrable analysis and approval;

(iv) To the extent that any limit identified pursuant to paragraph (b)(2)(iii)(C) of 

this section is exceeded, the trading desk takes action to bring the trading desk 

into compliance with the limits as promptly as possible after the limit is 

exceeded;

(v) The compensation arrangements of persons performing the activities 

described in paragraph (b) of this section are designed not to reward or 

incentivize prohibited proprietary trading; and

(vi) The banking entity is licensed or registered to engage in activity described in 

paragraph (b) of this section in accordance with applicable law. 

(3) Definition of client, customer, and counterparty. For purposes of paragraph (b) of 

this section, the terms client, customer, and counterparty, on a collective or 

individual basis refer to market participants that make use of the banking entity’s 

market making-related services by obtaining such services, responding to 

quotations, or entering into a continuing relationship with respect to such services, 

provided that:

(i) A trading desk or other organizational unit of another banking entity is not a 

client, customer, or counterparty of the trading desk if that other entity has 

trading assets and liabilities of $50 billion or more as measured in accordance 

with § 75.20(d)(1) of subpart D, unless:

(A) The trading desk documents how and why a particular trading desk or 

other organizational unit of the entity should be treated as a client, 

customer, or counterparty of the trading desk for purposes of paragraph 

(b)(2) of this section; or

(B) The purchase or sale by the trading desk is conducted anonymously on an 

exchange or similar trading facility that permits trading on behalf of a 

broad range of market participants.

(4) Definition of financial exposure. For purposes of paragraph (b) of this section, 

financial exposure means the aggregate risks of one or more financial instruments 

and any associated loans, commodities, or foreign exchange or currency, held by 
17

a banking entity or its affiliate and managed by a particular trading desk as part of 

the trading desk’s market making-related activities.

(5) Definition of market-maker inventory. For the purposes of paragraph (b) of this 

section, market-maker inventory means all of the positions in the financial 

instruments for which the trading desk stands ready to make a market in 

accordance with paragraph (b)(2)(i) of this section that are managed by the 

trading desk, including the trading desk’s open positions or exposures arising 

from open transactions.

§ 75.5 Permitted risk-mitigating hedging activities. 

(a) Permitted risk-mitigating hedging activities. The prohibition contained in § 

75.3(a) does not apply to the risk-mitigating hedging activities of a banking entity 

in connection with and related to individual or aggregated positions, contracts, or 

other holdings of the banking entity and designed to reduce the specific risks to 

the banking entity in connection with and related to such positions, contracts, or 

other holdings.

(b) Requirements. The risk-mitigating hedging activities of a banking entity are

permitted under paragraph (a) of this section only if:

(1) The banking entity has established and implements, maintains and enforces an 

internal compliance program required by subpart D that is reasonably designed to 

ensure the banking entity’s compliance with the requirements of this section, 

including:

(i) Reasonably designed written policies and procedures regarding the positions, 

techniques and strategies that may be used for hedging, including 

documentation indicating what positions, contracts or other holdings a 

particular trading desk may use in its risk-mitigating hedging activities, as 

well as position and aging limits with respect to such positions, contracts or 

other holdings; 

(ii) Internal controls and ongoing monitoring, management, and authorization 

procedures, including relevant escalation procedures; and

(iii) The conduct of analysis, including correlation analysis, and independent 

testing designed to ensure that the positions, techniques and strategies that 

may be used for hedging may reasonably be expected to demonstrably reduce 

or otherwise significantly mitigate the specific, identifiable risk(s) being 

hedged, and such correlation analysis demonstrates that the hedging activity 

demonstrably reduces or otherwise significantly mitigates the specific, 

identifiable risk(s) being hedged;

(2) The risk-mitigating hedging activity:
18

(i) Is conducted in accordance with the written policies, procedures, and internal 

controls required under this section;

(ii) At the inception of the hedging activity, including, without limitation, any 

adjustments to the hedging activity, is designed to reduce or otherwise 

significantly mitigate and demonstrably reduces or otherwise significantly 

mitigates one or more specific, identifiable risks, including market risk, 

counterparty or other credit risk, currency or foreign exchange risk, interest 

rate risk, commodity price risk, basis risk, or similar risks, arising in 

connection with and related to identified positions, contracts, or other holdings 

of the banking entity, based upon the facts and circumstances of the identified 

underlying and hedging positions, contracts or other holdings and the risks 

and liquidity thereof;

(iii)Does not give rise, at the inception of the hedge, to any significant new or 

additional risk that is not itself hedged contemporaneously in accordance with 

this section; 

(iv)Is subject to continuing review, monitoring and management by the banking 

entity that:

(A) Is consistent with the written hedging policies and procedures required 

under paragraph (b)(1) of this section;

(B) Is designed to reduce or otherwise significantly mitigate and demonstrably 

reduces or otherwise significantly mitigates the specific, identifiable risks 

that develop over time from the risk-mitigating hedging activities 

undertaken under this section and the underlying positions, contracts, and 

other holdings of the banking entity, based upon the facts and 

circumstances of the underlying and hedging positions, contracts and other 

holdings of the banking entity and the risks and liquidity thereof; and

(C) Requires ongoing recalibration of the hedging activity by the banking 

entity to ensure that the hedging activity satisfies the requirements set out 

in paragraph (b)(2) of this section and is not prohibited proprietary 

trading; and

(3) The compensation arrangements of persons performing risk-mitigating hedging 

activities are designed not to reward or incentivize prohibited proprietary trading.

(c) Documentation requirement.

(1) A banking entity must comply with the requirements of paragraphs (c)(2) and 

(c)(3) of this section with respect to any purchase or sale of financial instruments

made in reliance on this section for risk-mitigating hedging purposes that is: 
19

(i) Not established by the specific trading desk establishing or responsible for the 

underlying positions, contracts, or other holdings the risks of which the 

hedging activity is designed to reduce;

(ii) Established by the specific trading desk establishing or responsible for the 

underlying positions, contracts, or other holdings the risks of which the 

purchases or sales are designed to reduce, but that is effected through a 

financial instrument, exposure, technique, or strategy that is not specifically 

identified in the trading desk’s written policies and procedures established 

under paragraph (b)(1) of this section or under § 75.4(b)(2)(iii)(B) of this 

subpart as a product, instrument, exposure, technique, or strategy such trading 

desk may use for hedging; or

(iii) Established to hedge aggregated positions across two or more trading desks.

(2) In connection with any purchase or sale identified in paragraph (c)(1) of this 

section, a banking entity must, at a minimum, and contemporaneously with the 

purchase or sale, document:

(i) The specific, identifiable risk(s) of the identified positions, contracts, or other 

holdings of the banking entity that the purchase or sale is designed to reduce;

(ii) The specific risk-mitigating strategy that the purchase or sale is designed to fulfill; 

and

(iii)The trading desk or other business unit that is establishing and responsible for the 

hedge.

(3) A banking entity must create and retain records sufficient to demonstrate 

compliance with the requirements of paragraph (c) of this section for a period that 

is no less than five years in a form that allows the banking entity to promptly 

produce such records to the Commission on request, or such longer period as 

required under other law or this part.

§ 75.6 Other permitted proprietary trading activities. 

(a) Permitted trading in domestic government obligations. The prohibition contained 

in § 75.3(a) does not apply to the purchase or sale by a banking entity of a 

financial instrument that is:

(1) An obligation of, or issued or guaranteed by, the United States;

(2) An obligation, participation, or other instrument of, or issued or guaranteed by, an 

agency of the United States, 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.); 
20

(3) An obligation of any State or any political subdivision thereof, including any 

municipal security; or

(4) An obligation of the FDIC, or any entity formed by or on behalf of the FDIC for 

purpose of facilitating the disposal of assets acquired or held by the FDIC in its 

corporate capacity or as conservator or receiver under the Federal Deposit 

Insurance Act or Title II of the Dodd-Frank Wall Street Reform and Consumer 

Protection Act.

(b) Permitted trading in foreign government obligations.

(1) Affiliates of foreign banking entities in the United States. The prohibition 

contained in § 75.3(a) does not apply to the purchase or sale of a financial 

instrument that is an obligation of, or issued or guaranteed by, a foreign sovereign

(including any multinational central bank of which the foreign sovereign is a 

member), or any agency or political subdivision of such foreign sovereign, by a 

banking entity, so long as:

(i) The banking entity is organized under or is directly or indirectly controlled by a 

banking entity that is organized under the laws of a foreign sovereign and is 

not directly or indirectly controlled by a top-tier banking entity that is 

organized under the laws of the United States;

(ii) The financial instrument is an obligation of, or issued or guaranteed by, the 

foreign sovereign under the laws of which the foreign banking entity referred 

to in paragraph (b)(1)(i) of this section is organized (including any 

multinational central bank of which the foreign sovereign is a member), or 

any agency or political subdivision of that foreign sovereign; and

(iii)The purchase or sale as principal is not made by an insured depository institution. 

(2) Foreign affiliates of a U.S. banking entity. The prohibition contained in § 75.3(a) 

does not apply to the purchase or sale of a financial instrument that is an

obligation of, or issued or guaranteed by, a foreign sovereign (including any 

multinational central bank of which the foreign sovereign is a member), or any

agency or political subdivision of that foreign sovereign, by a foreign entity that is 

owned or controlled by a banking entity organized or established under the laws 

of the United States or any State, so long as:

(i) The foreign entity is a foreign bank, as defined in section 211.2(j) of the Board’s 

Regulation K (12 CFR 211.2(j)), or is regulated by the foreign sovereign as a 

securities dealer;

(ii) The financial instrument is an obligation of, or issued or guaranteed by, the 

foreign sovereign under the laws of which the foreign entity is organized

(including any multinational central bank of which the foreign sovereign is a 

member), or any agency or political subdivision of that foreign sovereign; and
21

(iii) The financial instrument is owned by the foreign entity and is not financed by 

an affiliate that is located in the United States or organized under the laws of 

the United States or of any State. 

(c) Permitted trading on behalf of customers. 

(1) Fiduciary transactions. The prohibition contained in § 75.3(a) does not apply to

the purchase or sale of financial instruments by a banking entity acting as trustee 

or in a similar fiduciary capacity, so long as: 

(i) The transaction is conducted for the account of, or on behalf of, a customer; and 

(ii) The banking entity does not have or retain beneficial ownership of the financial 

instruments.

(2) Riskless principal transactions. The prohibition contained in § 75.3(a) does not 

apply to the purchase or sale of financial instruments by a banking entity acting as 

riskless principal in a transaction in which the banking entity, after receiving an 

order to purchase (or sell) a financial instrument from a customer, purchases (or 

sells) the financial instrument for its own account to offset a contemporaneous 

sale to (or purchase from) the customer.

(d) Permitted trading by a regulated insurance company. The prohibition contained 

in § 75.3(a) does not apply to the purchase or sale of financial instruments by a 

banking entity that is an insurance company or an affiliate of an insurance 

company if:

(1) The insurance company or its affiliate purchases or sells the financial instruments

solely for:

(i) The general account of the insurance company; or 

(ii) A separate account established by the insurance company;

(2) The purchase or sale is conducted in compliance with, and subject to, the 

insurance company investment laws, regulations, and written guidance of the 

State or jurisdiction in which such insurance company is domiciled; and

(3) The appropriate Federal banking agencies, after consultation with the Financial 

Stability Oversight Council and the relevant insurance commissioners of the 

States and foreign jurisdictions, as appropriate, have not jointly determined, after 

notice and comment, that a particular law, regulation, or written guidance 

described in paragraph (d)(2) of this section is insufficient to protect the safety 

and soundness of the covered banking entity, or the financial stability of the 

United States.

(e) Permitted trading activities of foreign banking entities. 
22

(1) The prohibition contained in § 75.3(a) does not apply to the purchase or sale of

financial instruments by a banking entity if:

(i) The banking entity is not organized or directly or indirectly controlled by a

banking entity that is organized under the laws of the United States or of any

State;

(ii) The purchase or sale by the banking entity is made pursuant to paragraph (9) 

or (13) of section 4(c) of the BHC Act; and

(iii) The purchase or sale meets the requirements of paragraph (e)(3) of this 

section.

(2) A purchase or sale of financial instruments by a banking entity is made pursuant 

to paragraph (9) or (13) of section 4(c) of the BHC Act for purposes of paragraph 

(e)(1)(ii) of this section only if:

(i) The purchase or sale is conducted in accordance with the requirements of 

paragraph (e) of this section; and

(ii)

(A) With respect to a banking entity that is a foreign banking organization, the 

banking entity meets the qualifying foreign banking organization 

requirements of section 211.23(a), (c) or (e) of the Board’s Regulation K 

(12 CFR 211.23(a), (c) or (e)), as applicable; or

(B) With respect to a banking entity that is not a foreign banking organization, 

the banking entity is not organized under the laws of the United States or 

of any State and the banking entity, on a fully-consolidated basis, meets at 

least two of the following requirements:

(1) Total assets of the banking entity held outside of the United States 

exceed total assets of the banking entity held in the United States;

(2) Total revenues derived from the business of the banking entity outside 

of the United States exceed total revenues derived from the business of 

the banking entity in the United States; or

(3) Total net income derived from the business of the banking entity

outside of the United States exceeds total net income derived from the 

business of the banking entity in the United States.

(3) A purchase or sale by a banking entity is permitted for purposes of paragraph (e) 

of this section only if:

(i) The banking entity engaging as principal in the purchase or sale (including 

any personnel of the banking entity or its affiliate that arrange, negotiate or 
23

execute such purchase or sale) is not located in the United States or organized 

under the laws of the United States or of any State;

(ii) The banking entity (including relevant personnel) that makes the decision to 

purchase or sell as principal is not located in the United States or organized 

under the laws of the United States or of any State;

(iii) The purchase or sale, including any transaction arising from risk-mitigating 

hedging related to the instruments purchased or sold, is not accounted for as 

principal directly or on a consolidated basis by any branch or affiliate that is 

located in the United States or organized under the laws of the United States 

or of any State;

(iv) No financing for the banking entity’s purchases or sales is provided, directly 

or indirectly, by any branch or affiliate that is located in the United States or 

organized under the laws of the United States or of any State; and

(v) The purchase or sale is not conducted with or through any U.S. entity, other 

than:

(A) A purchase or sale with the foreign operations of a U.S. entity if no 

personnel of such U.S. entity that are located in the United States are 

involved in the arrangement, negotiation, or execution of such purchase or 

sale;

(B) A purchase or sale with an unaffiliated market intermediary acting as 

principal, provided the purchase or sale is promptly cleared and settled 

through a clearing agency or derivatives clearing organization acting as a 

central counterparty; or

(C) A purchase or sale through an unaffiliated market intermediary acting as 

agent, provided the purchase or sale is conducted anonymously on an

exchange or similar trading facility and is promptly cleared and settled 

through a clearing agency or derivatives clearing organization acting as a 

central counterparty,

(4) For purposes of paragraph (e) of this section, a U.S. entity is any entity that is, or 

is controlled by, or is acting on behalf of, or at the direction of, any other entity 

that is, located in the United States or organized under the laws of the United 

States or of any State.

(5) For purposes of paragraph (e) of this section, a U.S. branch, agency, or subsidiary 

of a foreign banking entity is considered to be located in the United States; 

however, the foreign bank that operates or controls that branch, agency, or 

subsidiary is not considered to be located in the United States solely by virtue of 

operating or controlling the U.S. branch, agency, or subsidiary.
24

(6) For purposes of paragraph (e) of this section, unaffiliated market intermediary

means an unaffiliated entity, acting as an intermediary, that is:

(i) A broker or dealer registered with the SEC under section 15 of the Exchange 

Act or exempt from registration or excluded from regulation as such; 

(ii) A swap dealer registered with the CFTC under section 4s of the Commodity 

Exchange Act or exempt from registration or excluded from regulation as 

such; 

(iii) A security-based swap dealer registered with the SEC under section 15F of the 

Exchange Act or exempt from registration or excluded from regulation as 

such; or 

(iv) A futures commission merchant registered with the CFTC under section 4f of 

the Commodity Exchange Act or exempt from registration or excluded from 

regulation as such.

§ 75.7 Limitations on permitted proprietary trading activities. 

(a) No transaction, class of transactions, or activity may be deemed permissible under 

§§ 75.4 through 75.6 if the transaction, class of transactions, or activity would:

(1) Involve or result in a material conflict of interest between the banking entity and 

its clients, customers, or counterparties;

(2) Result, directly or indirectly, in a material exposure by the banking entity to a 

high-risk asset or a high-risk trading strategy; or

(3) Pose a threat to the safety and soundness of the banking entity or to the financial 

stability of the United States.

(b) Definition of material conflict of interest. 

(1) For purposes of this section, a material conflict of interest between a banking 

entity and its clients, customers, or counterparties exists if the banking entity 

engages in any transaction, class of transactions, or activity that would involve or 

result in the banking entity’s interests being materially adverse to the interests of 

its client, customer, or counterparty with respect to such transaction, class of 

transactions, or activity, and the banking entity has not taken at least one of the 

actions in paragraph (b)(2) of this section.

(2) Prior to effecting the specific transaction or class or type of transactions, or 

engaging in the specific activity, the banking entity:

(i) Timely and effective disclosure.
25

(A) Has made clear, timely, and effective disclosure of the conflict of interest, 

together with other necessary information, in reasonable detail and in a 

manner sufficient to permit a reasonable client, customer, or counterparty 

to meaningfully understand the conflict of interest; and

(B) Such disclosure is made in a manner that provides the client, customer, or 

counterparty the opportunity to negate, or substantially mitigate, any 

materially adverse effect on the client, customer, or counterparty created

by the conflict of interest; or

(ii) Information barriers. Has established, maintained, and enforced information 

barriers that are memorialized in written policies and procedures, such as 

physical separation of personnel, or functions, or limitations on types of 

activity, that are reasonably designed, taking into consideration the nature of 

the banking entity’s business, to prevent the conflict of interest from involving 

or resulting in a materially adverse effect on a client, customer, or 

counterparty. A banking entity may not rely on such information barriers if, 

in the case of any specific transaction, class or type of transactions or activity, 

the banking entity knows or should reasonably know that, notwithstanding the 

banking entity’s establishment of information barriers, the conflict of interest 

may involve or result in a materially adverse effect on a client, customer, or 

counterparty.

(c) Definition of high-risk asset and high-risk trading strategy. For purposes of this 

section:

(1) High-risk asset means an asset or group of related assets that would, if held by a 

banking entity, significantly increase the likelihood that the banking entity would 

incur a substantial financial loss or would pose a threat to the financial stability of 

the United States.

(2) High-risk trading strategy means a trading strategy that would, if engaged in by a 

banking entity, significantly increase the likelihood that the banking entity would 

incur a substantial financial loss or would pose a threat to the financial stability of 

the United States.

§ 75.8 [Reserved]

§ 75.9 [Reserved]

*****
26

SUBPART C – Covered Funds Activities and Investments

§ 75.10 Prohibition on acquiring or retaining an ownership interest in and having 

certain relationships with a covered fund.

(a) Prohibition. (1) Except as otherwise provided in this subpart, a banking entity 

may not, as principal, directly or indirectly, acquire or retain any ownership 

interest in or sponsor a covered fund.

(2) Paragraph (a)(1) of this section does not include acquiring or retaining an 

ownership interest in a covered fund by a banking entity:

(i) Acting solely as agent, broker, or custodian, so long as;

(A) The activity is conducted for the account of, or on behalf of, a customer; 

and

(B) The banking entity and its affiliates do not have or retain beneficial 

ownership of such ownership interest;

(ii) Through a deferred compensation, stock-bonus, profit-sharing, or pension 

plan of the banking entity (or an affiliate thereof) that is established and 

administered in accordance with the law of the United States or a foreign 

sovereign, if the ownership interest is held or controlled directly or indirectly 

by the banking entity as trustee for the benefit of persons who are or were 

employees of the banking entity (or an affiliate thereof);

(iii) In the ordinary course of collecting a debt previously contracted in good faith, 

provided that the banking entity divests the ownership interest as soon as 

practicable, and in no event may the banking entity retain such ownership 

interest for longer than such period permitted by the Commission; or

(iv) On behalf of customers as trustee or in a similar fiduciary capacity for a 

customer that is not a covered fund, so long as:

(A) The activity is conducted for the account of, or on behalf of, the customer; 

and

(B) The banking entity and its affiliates do not have or retain beneficial 

ownership of such ownership interest.

(b) Definition of covered fund.

(1) Except as provided in paragraph (c) of this section, covered fund means:

(i) 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 (15 U.S.C. 80a-3(c)(1) or (7));
27

(ii) Any commodity pool under section 1a(10) of the Commodity Exchange Act 

(7 U.S.C. 1a(10)) for which:

(A) The commodity pool operator has claimed an exemption under 17 CFR 

4.7; or

(B)

(1) A commodity pool operator is registered with the CFTC as a 

commodity pool operator in connection with the operation of the 

commodity pool;

(2) Substantially all participation units of the commodity pool are owned 

by qualified eligible persons under 17 CFR 4.7(a)(2) and 4.7 (a)(3); 

and

(3) Participation units of the commodity pool have not been publicly 

offered to persons who are not qualified eligible persons under 17 CFR 

4.7(a)(2) and 4.7(a)(3); or

(iii) For any banking entity that is, or is controlled directly or indirectly by a 

banking entity that is, located in or organized under the laws of the United 

States or of any State, an entity that:

(A) Is organized or established outside the United States and the ownership 

interests of which are offered and sold solely outside the United States;

(B) Is, or holds itself out as being, an entity or arrangement that raises money 

from investors primarily for the purpose of investing in securities for 

resale or other disposition or otherwise trading in securities; and

(C)

(1) Has as its sponsor that banking entity (or an affiliate thereof); or

(2) Has issued an ownership interest that is owned directly or indirectly by 

that banking entity (or an affiliate thereof).

(2) An issuer shall not be deemed to be a covered fund under paragraph (b)(1)(iii) of 

this section if, were the issuer subject to U.S. securities laws, the issuer could rely 

on an exclusion or exemption from the definition of “investment company” under 

the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) other than the 

exclusions contained in section 3(c)(1) and 3(c)(7) of that Act.

(3) For purposes of paragraph (b)(1)(iii) of this section, a U.S. branch, agency, or 

subsidiary of a foreign banking entity is located in the United States; however, the 

foreign bank that operates or controls that branch, agency, or subsidiary is not 
28

considered to be located in the United States solely by virtue of operating or 

controlling the U.S. branch, agency, or subsidiary.

(c) Notwithstanding paragraph (b) of this section, unless the appropriate Federal 

banking agencies, the SEC, and the CFTC jointly determine otherwise, a covered 

fund does not include:

(1) Foreign public funds. (i) Subject to paragraphs (ii) and (iii) below, an issuer that: 

(A) Is organized or established outside of the United States; 

(B) Is authorized to offer and sell ownership interests to retail investors in the 

issuer’s home jurisdiction; and

(C) Sells ownership interests predominantly through one or more public 

offerings outside of the United States.

(ii) With respect to a banking entity that is, or is controlled directly or indirectly 

by a banking entity that is, located in or organized under the laws of the 

United States or of any State and any issuer for which such banking entity acts 

as sponsor, the sponsoring banking entity may not rely on the exemption in 

paragraph (c)(1)(i) of this section for such issuer unless ownership interests in 

the issuer are sold predominantly to persons other than:

(A) Such sponsoring banking entity;

(B) Such issuer;

(C) Affiliates of such sponsoring banking entity or such issuer; and

(D) Directors and employees of such entities.

(iii) For purposes of paragraph (c)(1)(i)(C) of this section, the term “public 

offering” means a distribution (as defined in § 75.4(a)(3) of subpart B) of 

securities in any jurisdiction outside the United States to investors, including 

retail investors, provided that:

(A) The distribution complies with all applicable requirements in the 

jurisdiction in which such distribution is being made;

(B) The distribution does not restrict availability to investors having a 

minimum level of net worth or net investment assets; and

(C) The issuer has filed or submitted, with the appropriate regulatory authority 

in such jurisdiction, offering disclosure documents that are publicly 

available.
29

(2) Wholly-owned subsidiaries. An entity, all of the outstanding ownership interests 

of which are owned directly or indirectly by the banking entity (or an affiliate 

thereof), except that:

(i) Up to five percent of the entity’s outstanding ownership interests, less any 

amounts outstanding under paragraph (c)(2)(ii) of this section, may be held by 

employees or directors of the banking entity or such affiliate (including 

former employees or directors if their ownership interest was acquired while 

employed by or in the service of the banking entity); and

(ii) Up to 0.5 percent of the entity’s outstanding ownership interests may be held 

by a third party if the ownership interest is acquired or retained by the third 

party for the purpose of establishing corporate separateness or addressing 

bankruptcy, insolvency, or similar concerns.

(3) Joint ventures. A joint venture between a banking entity or any of its affiliates 

and one or more unaffiliated persons, provided that the joint venture:

(i) Is comprised of no more than 10 unaffiliated co-venturers;

(ii) 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

(iii) 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. 

(4) Acquisition vehicles. An issuer:

(i) Formed solely for the purpose of engaging in a bona fide merger or 

acquisition transaction; and

(ii) That exists only for such period as necessary to effectuate the transaction.

(5) Foreign pension or retirement funds. A plan, fund, or program providing pension, 

retirement, or similar benefits that is:

(i) Organized and administered outside the United States;

(ii) A broad-based plan for employees or citizens that is subject to regulation as a 

pension, retirement, or similar plan under the laws of the jurisdiction in which 

the plan, fund, or program is organized and administered; and

(iii) Established for the benefit of citizens or residents of one or more foreign 

sovereigns or any political subdivision thereof.
30

(6) Insurance company separate accounts. A separate account, provided that no 

banking entity other than the insurance company participates in the account’s 

profits and losses.

(7) Bank owned life insurance. A separate account that is used solely for the purpose 

of allowing one or more banking entities to purchase a life insurance policy for 

which the banking entity or entities is beneficiary, provided that no banking entity 

that purchases the policy:

(i) Controls the investment decisions regarding the underlying assets or holdings 

of the separate account; or

(ii) Participates in the profits and losses of the separate account other than in 

compliance with applicable supervisory guidance regarding bank owned life 

insurance.

(8) Loan securitizations. (i) Scope. An issuing entity for asset-backed securities that 

satisfies all the conditions of this paragraph (c)(8) of this section and the assets or 

holdings of which are comprised solely of:

(A) Loans as defined in § 75.2(s) of subpart A;

(B) Rights or other assets designed to assure the servicing or timely 

distribution of proceeds to holders of such securities and rights or other 

assets that are related or incidental to purchasing or otherwise acquiring 

and holding the loans, provided that each asset meets the requirements of 

paragraph (c)(8)(iii) of this section;

(C) Interest rate or foreign exchange derivatives that meet the requirements of 

paragraph (c)(8)(iv) of this section; and

(D) Special units of beneficial interest and collateral certificates that meet the 

requirements of paragraph (c)(8)(v) of this section.

(ii) Impermissible assets. For purposes of paragraph (c)(8) of this section, the assets 

or holdings of the issuing entity shall not include any of the following:

(A) A security, including an asset-backed security, or an interest in an equity 

or debt security other than as permitted in paragraph (c)(8)(iii) of this 

section;

(B) A derivative, other than a derivative that meets the requirements of 

paragraph (c)(8)(iv) of this section; or

(C) A commodity forward contract.

(iii)Permitted securities. Notwithstanding paragraph (c)(8)(ii)(A) of this section, the 

issuing entity may hold securities if those securities are:
31

(A) Cash equivalents for purposes of the rights and assets in paragraph 

(c)(8)(i)(B) of this section; or

(B) Securities received in lieu of debts previously contracted with respect to 

the loans supporting the asset-backed securities.

(iv)Derivatives. The holdings of derivatives by the issuing entity shall be limited to 

interest rate or foreign exchange derivatives that satisfy all of the following 

conditions:

(A) The written terms of the derivative directly relate to the loans, the assetbacked securities, or the contractual rights of other assets described in 

paragraph (c)(8)(i)(B) of this section; and

(B) The derivatives reduce the interest rate and/or foreign exchange risks 

related to the loans, the asset-backed securities, or the contractual rights or 

other assets described in paragraph (c)(8)(i)(B) of this section.

(v) Special units of beneficial interest and collateral certificates. The assets or 

holdings of the issuing entity may include collateral certificates and special 

units of beneficial interest issued by a special purpose vehicle, provided that:

(A) The special purpose vehicle that issues the special unit of beneficial 

interest or collateral certificate meets the requirements in paragraph (c)(8) 

of this section;

(B) The special unit of beneficial interest or collateral certificate is used for 

the sole purpose of transferring to the issuing entity for the loan 

securitization the economic risks and benefits of the assets that are 

permissible for loan securitizations under paragraph (c)(8) of this section 

and does not directly or indirectly transfer any interest in any other 

economic or financial exposure;

(C) The special unit of beneficial interest or collateral certificate is created 

solely to satisfy legal requirements or otherwise facilitate the structuring 

of the loan securitization; and

(D) The special purpose vehicle that issues the special unit of beneficial 

interest or collateral certificate and the issuing entity are established under 

the direction of the same entity that initiated the loan securitization.

(9) Qualifying asset-backed commercial paper conduits. (i) An issuing entity for 

asset-backed commercial paper that satisfies all of the following requirements:

(A)The asset-backed commercial paper conduit holds only:

(1) Loans and other assets permissible for a loan securitization under 

paragraph (c)(8)(i) of this section; and
32

(2) Asset-backed securities supported solely by assets that are permissible 

for loan securitizations under paragraph (c)(8)(i) of this section and 

acquired by the asset-backed commercial paper conduit as part of an 

initial issuance either directly from the issuing entity of the assetbacked securities or directly from an underwriter in the distribution of 

the asset-backed securities;

(B) The asset-backed commercial paper conduit issues only asset-backed 

securities, comprised of a residual interest and securities with a legal 

maturity of 397 days or less; and

(C) A regulated liquidity provider has entered into a legally binding 

commitment to provide full and unconditional liquidity coverage with 

respect to all of the outstanding asset-backed securities issued by the assetbacked commercial paper conduit (other than any residual interest) in the 

event that funds are required to redeem maturing asset-backed securities.

(ii) For purposes of this paragraph (c)(9) of this section, a regulated liquidity 

provider means:

(A) A depository institution, as defined in section 3(c) of the Federal Deposit 

Insurance Act (12 U.S.C. 1813(c));

(B) A bank holding company, as defined in section 2(a) of the Bank Holding 

Company Act of 1956 (12 U.S.C. 1841(a)), or a subsidiary thereof;

(C) A savings and loan holding company, as defined in section 10a of the 

Home Owners’ Loan Act (12 U.S.C. 1467a), provided all or substantially 

all of the holding company’s activities are permissible for a financial 

holding company under section 4(k) of the Bank Holding Company Act of 

1956 (12 U.S.C. 1843(k)), or a subsidiary thereof;

(D) A foreign bank whose home country supervisor, as defined in § 211.21(q) 

of the Board’s Regulation K (12 CFR 211.21(q)), has adopted capital 

standards consistent with the Capital Accord for the Basel Committee on 

banking Supervision, as amended, and that is subject to such standards, or 

a subsidiary thereof; or

(E) The United States or a foreign sovereign.

(10) Qualifying covered bonds. 

(i) Scope. An entity owning or holding a dynamic or fixed pool of loans or other 

assets as provided in paragraph (c)(8) of this section for the benefit of the 

holders of covered bonds, provided that the assets in the pool are comprised 

solely of assets that meet the conditions in paragraph (c)(8)(i) of this section.
33

(ii) Covered bond. For purposes of this paragraph (c)(10) of this section, a 

covered bond means:

(A) A debt obligation issued by an entity that meets the definition of foreign 

banking organization, the payment obligations of which are fully and 

unconditionally guaranteed by an entity that meets the conditions set forth 

in paragraph (c)(10)(i) of this section; or

(B) A debt obligation of an entity that meets the conditions set forth in 

paragraph (c)(10)(i) of this section, provided that the payment obligations 

are fully and unconditionally guaranteed by an entity that meets the 

definition of foreign banking organization and the entity is a whollyowned subsidiary, as defined in paragraph (c)(2) of this section, of such 

foreign banking organization.

(11) SBICs and public welfare investment funds. An issuer:

(i) That is a small business investment company, as defined in section 103(3) of 

the Small Business Investment Act of 1958 (15 U.S.C. 662), or that has 

received from the Small Business Administration notice to proceed to qualify 

for a license as a small business investment company, which notice or license 

has not been revoked; or

(ii) The business of which is to make investments that are:

(A) Designed primarily to promote the public welfare, of the type permitted 

under paragraph (11) of section 5136 of the Revised Statutes of the United 

States (12 U.S.C. 24), including the welfare of low- and moderate-income 

communities or families (such as providing housing, services, or jobs); or

(B) Qualified rehabilitation expenditures with respect to a qualified 

rehabilitated building or certified historic structure, as such terms are 

defined in section 47 of the Internal Revenue Code of 1986 or a similar 

State historic tax credit program.

(12) Registered investment companies and excluded entities. An issuer:

(i) That is registered as an investment company under section 8 of the Investment 

Company Act of 1940 (15 U.S.C. 80a-8), or that is formed and operated 

pursuant to a written plan to become a registered investment company as 

described in §75.20(e)(3) of subpart D and that complies with the 

requirements of section 18 of the Investment Company Act of 1940 (15 

U.S.C. 80a-18);

(ii) That may rely on an exclusion or exemption from the definition of 

“investment company” under the Investment Company Act of 1940 (15 
34

U.S.C. 80a-1 et seq.) other than the exclusions contained in section 3(c)(1) 

and 3(c)(7) of that Act; or

(iii) That has elected to be regulated as a business development company pursuant 

to section 54(a) of that Act (15 U.S.C. 80a-53) and has not withdrawn its 

election, or that is formed and operated pursuant to a written plan to become a 

business development company as described in §75.20(e)(3) of subpart D and 

that complies with the requirements of section 61 of the Investment Company 

Act of 1940 (15 U.S.C. 80a-60).

(13) Issuers in conjunction with the FDIC’s receivership or conservatorship 

operations. An issuer that is an entity formed by or on behalf of the FDIC for the 

purpose of facilitating the disposal of assets acquired in the FDIC’s capacity as 

conservator or receiver under the Federal Deposit Insurance Act or Title II of the 

Dodd-Frank Wall Street Reform and Consumer Protection Act.

(14) Other excluded issuers.

(i) Any issuer that the appropriate Federal banking agencies, the SEC, and the 

CFTC jointly determine the exclusion of which is consistent with the purposes 

of section 13 of the BHC Act.

(ii) A determination made under paragraph (c)(14)(i) of this section will be 

promptly made public.

(d) Definition of other terms related to covered funds. For purposes of this subpart:

(1) Applicable accounting standards means U.S. generally accepted accounting 

principles, or such other accounting standards applicable to a banking entity that 

the Commission determines are appropriate and that the banking entity uses in the 

ordinary course of its business in preparing its consolidated financial statements.

(2) Asset-backed security has the meaning specified in Section 3(a)(79) of the 

Exchange Act (15 U.S.C. 78c(a)(79).

(3) Director has the same meaning as provided in section 215.2(d)(1) of the Board’s 

Regulation O (12 CFR 215.2(d)(1)).

(4) Issuer has the same meaning as in section 2(a)(22) of the Investment Company 

Act of 1940 (15 U.S.C. 80a-2(a)(22)).

(5) Issuing entity means with respect to asset-backed securities the special purpose 

vehicle that owns or holds the pool assets underlying asset-backed securities and 

in whose name the asset-backed securities supported or serviced by the pool 

assets are issued.

(6) Ownership interest. 
35

(i) Ownership interest means any equity, partnership, or other similar interest. 

An “other similar interest” means an interest that:

(A) Has the right to participate in the selection or removal of a general partner, 

managing member, member of the board of directors or trustees, 

investment manager, investment adviser, or commodity trading advisor of 

the covered fund (excluding the rights of a creditor to exercise remedies 

upon the occurrence of an event of default or an acceleration event);

(B) Has the right under the terms of the interest to receive a share of the 

income, gains or profits of the covered fund;

(C) Has the right to receive the underlying assets of the covered fund after all 

other interests have been redeemed and/or paid in full (excluding the 

rights of a creditor to exercise remedies upon the occurrence of an event of 

default or an acceleration event);

(D) Has the right to receive all or a portion of excess spread (the positive 

difference, if any, between the aggregate interest payments received from 

the underlying assets of the covered fund and the aggregate interest paid to 

the holders of other outstanding interests);

(E) Provides under the terms of the interest that the amounts payable by the 

covered fund with respect to the interest could be reduced based on losses 

arising from the underlying assets of the covered fund, such as allocation 

of losses, write-downs or charge-offs of the outstanding principal balance, 

or reductions in the amount of interest due and payable on the interest;

(F) Receives income on a pass-through basis from the covered fund, or has a 

rate of return that is determined by reference to the performance of the 

underlying assets of the covered fund; or

(G) Any synthetic right to have, receive, or be allocated any of the rights in 

paragraphs (d)(6)(i)(A) through (d)(6)(i)(F) of this section. 

(ii) Ownership interest does not include:

Restricted profit interest. An interest held by an entity (or an employee or former 

employee thereof) in a covered fund for which the entity (or employee thereof) 

serves as investment manager, investment adviser, commodity trading advisor, or 

other service provider so long as: 

(A) The sole purpose and effect of the interest is to allow the entity (or 

employee or former employee thereof) to share in the profits of the 

covered fund as performance compensation for the investment 

management, investment advisory, commodity trading advisory, or other 

services provided to the covered fund by the entity (or employee or former 

employee thereof), provided that the entity (or employee or former 
36

employee thereof) may be obligated under the terms of such interest to 

return profits previously received; 

(B) All such profit, once allocated, is distributed to the entity (or employee or 

former employee thereof) promptly after being earned or, if not so 

distributed, is retained by the covered fund for the sole purpose of 

establishing a reserve amount to satisfy contractual obligations with 

respect to subsequent losses of the covered fund and such undistributed 

profit of the entity (or employee or former employee thereof) does not 

share in the subsequent investment gains of the covered fund; 

(C) Any amounts invested in the covered fund, including any amounts paid by 

the entity (or employee or former employee thereof) in connection with 

obtaining the restricted profit interest, are within the limits of §75.12 of 

this subpart; and 

(D) The interest is not transferable by the entity (or employee or former 

employee thereof) except to an affiliate thereof (or an employee of the 

banking entity or affiliate), to immediate family members, or through the 

intestacy, of the employee or former employee, or in connection with a 

sale of the business that gave rise to the restricted profit interest by the 

entity (or employee or former employee thereof) to an unaffiliated party 

that provides investment management, investment advisory, commodity 

trading advisory, or other services to the fund.

(7) Prime brokerage transaction means any transaction that would be a covered 

transaction, as defined in section 23A(b)(7) of the Federal Reserve Act (12 U.S.C. 

371c(b)(7)), that is provided in connection with custody, clearance and settlement, 

securities borrowing or lending services, trade execution, financing, or data, 

operational, and administrative support.

(8) Resident of the United States means a person that is a “U.S. person” as defined in 

rule 902(k) of the SEC’s Regulation S (17 CFR 230.902(k)).

(9) Sponsor means, with respect to a covered fund:

(i) To serve as a general partner, managing member, or trustee of a covered fund, 

or to serve as a commodity pool operator with respect to a covered fund as 

defined in (b)(1)(ii) of this section;

(ii) 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 covered fund; or

(iii) To share with a covered fund, for corporate, marketing, promotional, or other 

purposes, the same name or a variation of the same name.

(10) Trustee.
37

(i) For purposes of paragraph (d)(9) of this section and § 75.11 of subpart C, a 

trustee does not include:

(A) A trustee that does not exercise investment discretion with respect to a 

covered fund, including a trustee that is subject to the direction of an 

unaffiliated named fiduciary who is not a trustee pursuant to section 

403(a)(1) of the Employee’s Retirement Income Security Act (29 U.S.C. 

1103(a)(1)); or

(B) A trustee that is subject to fiduciary standards imposed under foreign law 

that are substantially equivalent to those described in paragraph 

(d)(10)(i)(A) of this section;

(ii) Any entity that directs a person described in paragraph (d)(10)(i) of this 

section, or that possesses authority and discretion to manage and control the 

investment decisions of a covered fund for which such person serves as 

trustee, shall be considered to be a trustee of such covered fund.

§ 75.11 Permitted organizing and offering, underwriting, and market making with 

respect to a covered fund.

(a) Organizing and offering a covered fund in general. Notwithstanding § 75.10(a) of 

this subpart, a banking entity is not prohibited from acquiring or retaining an 

ownership interest in, or acting as sponsor to, a covered fund in connection with, 

directly or indirectly, organizing and offering a covered fund, including serving as 

a general partner, managing member, trustee, or commodity pool operator of the 

covered 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 covered fund, including any necessary expenses for the 

foregoing, only if:

(1) The banking entity (or an affiliate thereof) provides bona fide trust, fiduciary, 

investment advisory, or commodity trading advisory services;

(2) The covered fund is organized and offered only in connection with the provision 

of bona fide trust, fiduciary, investment advisory, or commodity trading advisory 

services and only to persons that are customers of such services of the banking 

entity (or an affiliate thereof), pursuant to a written plan or similar documentation 

outlining how the banking entity or such affiliate intends to provide advisory or 

similar services to its customers through organizing and offering such fund;

(3) The banking entity and its affiliates do not acquire or retain an ownership interest 

in the covered fund except as permitted under § 75.12 of this subpart;

(4) The banking entity and its affiliates comply with the requirements of § 75.14 of 

this subpart;
38

(5) The banking entity and its affiliates do not, directly or indirectly, guarantee, 

assume, or otherwise insure the obligations or performance of the covered fund or 

of any covered fund in which such covered fund invests;

(6) The covered fund, for corporate, marketing, promotional, or other purposes:

(i) Does not share the same name or a variation of the same name with the 

banking entity (or an affiliate thereof); and

(ii) Does not use the word “bank” in its name;

(7) No director or employee of the banking entity (or an affiliate thereof) takes or 

retains an ownership interest in the covered fund, except for any director or 

employee of the banking entity or such affiliate who is directly engaged in 

providing investment advisory, commodity trading advisory, or other services to 

the covered fund at the time the director or employee takes the ownership interest; 

and

(8) The banking entity: 

(i) Clearly and conspicuously discloses, in writing, to any prospective and actual 

investor in the covered fund (such as through disclosure in the covered fund’s 

offering documents):

(A) That “any losses in [such covered fund] will be borne solely by investors 

in [the covered fund] and not by [the banking entity] or its affiliates;

therefore, [the banking entity’s] losses in [such covered fund] will be 

limited to losses attributable to the ownership interests in the covered fund 

held by [the banking entity] and any affiliate in its capacity as investor in 

the [covered fund] or as beneficiary of a restricted profit interest held by 

[the banking entity] or any affiliate”;

(B) That such investor should read the fund offering documents before 

investing in the covered fund;

(C) That the “ownership interests in the covered fund are not insured by the 

FDIC, and are not deposits, obligations of, or endorsed or guaranteed in 

any way, by any banking entity” (unless that happens to be the case); and

(D) The role of the banking entity and its affiliates and employees in 

sponsoring or providing any services to the covered fund; and

(ii) Complies with any additional rules of the appropriate Federal banking 

agencies, the SEC, or the CFTC, as provided in section 13(b)(2) of the BHC 

Act, designed to ensure that losses in such covered fund are borne solely by 

investors in the covered fund and not by the covered banking entity and its 

affiliates.
39

(b) Organizing and offering an issuing entity of asset-backed securities. 

(1) Notwithstanding § 75.10(a) of this subpart, a banking entity is not prohibited from 

acquiring or retaining an ownership interest in, or acting as sponsor to, a covered 

fund that is an issuing entity of asset-backed securities in connection with, 

directly or indirectly, organizing and offering that issuing entity, so long as the 

banking entity and its affiliates comply with all of the requirements of paragraph 

(a)(3) through (a)(8) of this section.

(2) For purposes of this paragraph (b) of this section, organizing and offering a 

covered fund that is an issuing entity of asset-backed securities means acting as 

the securitizer, as that term is used in section 15G(a)(3) of the Exchange Act (15 

U.S.C. 78o-11(a)(3)) of the issuing entity, or acquiring or retaining an ownership 

interest in the issuing entity as required by section 15G of that Act (15 U.S.C.78o11) and the implementing regulations issued thereunder.

(c) Underwriting and market making in ownership interests of a covered fund. The 

prohibition contained in § 75.10(a) of this subpart does not apply to a banking 

entity’s underwriting activities or market making-related activities involving a 

covered fund so long as:

(1) Those activities are conducted in accordance with the requirements of § 75.4(a) or 

§ 75.4(b) of subpart B, respectively;

(2) With respect to any banking entity (or any affiliate thereof) that acts as a sponsor,

investment adviser or commodity trading advisor to a particular covered fund or 

otherwise acquires and retains an ownership interest in such covered fund in 

reliance on paragraph (a) of this section; acquires and retains an ownership 

interest in such covered fund and is either a securitizer, as that term is used in 

section 15G(a)(3) of the Exchange Act (15 U.S.C. 78o-11(a)(3)), or is acquiring 

and retaining an ownership interest in such covered fund in compliance with 

section 15G of that Act (15 U.S.C.78o-11) and the implementing regulations 

issued thereunder each as permitted by paragraph (b) of this section; or, directly 

or indirectly, guarantees, assumes, or otherwise insures the obligations or 

performance of the covered fund or of any covered fund in which such fund 

invests, then in each such case any ownership interests acquired or retained by the 

banking entity and its affiliates in connection with underwriting and market 

making related activities for that particular covered fund are included in the 

calculation of ownership interests permitted to be held by the banking entity and 

its affiliates under the limitations of § 75.12(a)(2)(ii) and § 75.12(d) of this 

subpart; and

(3) With respect to any banking entity, the aggregate value of all ownership interests 

of the banking entity and its affiliates in all covered funds acquired and retained 

under § 75.11 of this subpart, including all covered funds in which the banking 

entity holds an ownership interest in connection with underwriting and market 

making related activities permitted under paragraph (c) of this section, are 
40

included in the calculation of all ownership interests under § 75.12(a)(2)(iii) and § 

75.12(d) of this subpart.

§ 75.12 Permitted investment in a covered fund.

(a) Authority and limitations on permitted investments in covered funds. 

(1) Notwithstanding the prohibition contained in § 75.10(a) of this subpart, a banking 

entity may acquire and retain an ownership interest in a covered fund that the 

banking entity or an affiliate thereof organizes and offers pursuant to § 75.11, for 

the purposes of:

(i) Establishment. Establishing the fund and providing the fund with sufficient 

initial equity for investment to permit the fund to attract unaffiliated investors, 

subject to the limits contained in paragraphs (a)(2)(i) and (a)(2)(iii) of this 

section; or

(ii) De minimis investment. Making and retaining an investment in the covered 

fund subject to the limits contained in paragraphs (a)(2)(ii) and (a)(2)(iii) of 

this section. 

(2) Investment limits.

(i) Seeding period. With respect to an investment in any covered fund made or 

held pursuant to paragraph (a)(1)(i) of this section, the banking entity and its 

affiliates:

(A) Must actively seek unaffiliated investors to reduce, through redemption, 

sale, dilution, or other methods, the aggregate amount of all ownership 

interests of the banking entity in the covered fund to the amount permitted 

in paragraph (a)(2)(i)(B) of this section; and

(B) Must, no later than 1 year after the date of establishment of the fund (or 

such longer period as may be provided by the Board pursuant to paragraph 

(e) of this section), conform its ownership interest in the covered fund to 

the limits in paragraph (a)(2)(ii) of this section;

(ii) Per-fund limits.

(A) Except as provided in paragraph (a)(2)(ii)(B) of this section, an investment 

by a banking entity and its affiliates in any covered fund made or held 

pursuant to paragraph (a)(1)(ii) of this section may not exceed 3 percent of 

the total number or value of the outstanding ownership interests of the 

fund.

(B) An investment by a banking entity and its affiliates in a covered fund that 

is an issuing entity of asset-backed securities may not exceed 3 percent of 

the total fair market value of the ownership interests of the fund measured 
41

in accordance with paragraph (b)(3), unless a greater percentage is 

retained by the banking entity and its affiliates in compliance with the 

requirements of section 15G of the Exchange Act (15 U.S.C. 78o-11) and 

the implementing regulations issued thereunder, in which case the 

investment by the banking entity and its affiliates in the covered fund may 

not exceed the amount, number, or value of ownership interests of the 

fund required under section 15G of the Exchange Act and the 

implementing regulations issued thereunder.

(iii) Aggregate limit. The aggregate value of all ownership interests of the 

banking entity and its affiliates in all covered funds acquired or retained under 

this section may not exceed 3 percent of the tier 1 capital of the banking 

entity, as provided under paragraph (c) of this section, and shall be calculated 

as of the last day of each calendar quarter.

(iv) Date of establishment. For purposes of this section, the date of establishment 

of a covered fund shall be:

(A) In general. The date on which the investment adviser or similar entity to 

the covered fund begins making investments pursuant to the written 

investment strategy for the fund;

(B) Issuing entities of asset-backed securities. In the case of an issuing entity

of asset-backed securities, the date on which the assets are initially 

transferred into the issuing entity of asset-backed securities.

(b) Rules of construction.

(1) Attribution of ownership interests to a covered banking entity.

(i) For purposes of paragraph (a)(2) of this section, the amount and value of a 

banking entity’s permitted investment in any single covered fund shall include

any ownership interest held under § 75.12 directly by the banking entity, 

including any affiliate of the banking entity.

(ii) Treatment of registered investment companies, SEC-regulated business 

development companies and foreign public funds. For purposes of paragraph 

(b)(1)(i) of this section, a registered investment company, SEC-regulated 

business development companies or foreign public fund as described in § 

75.10(c)(1) of this subpart will not be considered to be an affiliate of the 

banking entity so long as the banking entity:

(A) Does not own, control, or hold with the power to vote 25 percent or more 

of the voting shares of the company or fund; and 

(B) Provides investment advisory, commodity trading advisory, 

administrative, and other services to the company or fund in compliance 

with the limitations under applicable regulation, order, or other authority.
42

(iii) Covered funds. For purposes of paragraph (b)(1)(i) of this section, a covered 

fund will not be considered to be an affiliate of a banking entity so long as the 

covered fund is held in compliance with the requirements of this subpart.

(iv) Treatment of employee and director investments financed by the banking 

entity. For purposes of paragraph (b)(1)(i) of this section, an investment by a 

director or employee of a banking entity who acquires an ownership interest in 

his or her personal capacity in a covered fund sponsored by the banking entity 

will be attributed to the banking entity if the banking entity, directly or 

indirectly, extends financing for the purpose of enabling the director or 

employee to acquire the ownership interest in the fund and the financing is 

used to acquire such ownership interest in the covered fund.

(2) Calculation of permitted ownership interests in a single covered fund. Except as 

provided in paragraph (b)(3) or (4), for purposes of determining whether an 

investment in a single covered fund complies with the restrictions on ownership 

interests under paragraph (a)(2)(i)(B) and (a)(2)(ii)(A) of this section: 

(i) The aggregate number of the outstanding ownership interests held by the 

banking entity shall be the total number of ownership interests held under this 

section by the banking entity in a covered fund divided by the total number of 

ownership interests held by all entities in that covered fund, as of the last day 

of each calendar quarter (both measured without regard to committed funds 

not yet called for investment);

(ii) The aggregate value of the outstanding ownership interests held by the 

banking entity shall be the aggregate fair market value of all investments in 

and capital contributions made to the covered fund by the banking entity, 

divided by the value of all investments in and capital contributions made to 

that covered fund by all entities, as of the last day of each calendar quarter (all 

measured without regard to committed funds not yet called for investment). If 

fair market value cannot be determined, then the value shall be the historical 

cost basis of all investments in and contributions made by the banking entity 

to the covered fund; 

(iii) For purposes of the calculation under paragraph (b)(2)(ii), once a valuation 

methodology is chosen, the banking entity must calculate the value of its 

investment and the investments of all others in the covered fund in the same 

manner and according to the same standards.

(3) Issuing entities of asset-backed securities. In the case of an ownership interest in 

an issuing entity of asset-backed securities, for purposes of determining whether 

an investment in a single covered fund complies with the restrictions on 

ownership interests under paragraphs (a)(2)(i)(B) and (a)(2)(ii)(B) of this section:

(i) For securitizations subject to the requirements of section 15G of the Exchange 

Act (15 U.S.C. 78o-11), the calculations shall be made as of the date and 
43

according to the valuation methodology applicable pursuant to the 

requirements of section 15G of the Exchange Act (15 U.S.C. 78o-11) and the 

implementing regulations issued thereunder; or 

(ii) For securitization transactions completed prior to the compliance date of such 

implementing regulations (or as to which such implementing regulations do 

not apply), the calculations shall be made as of the date of establishment as 

defined in paragraph (a)(2)(iv)(B) of this section or such earlier date on which 

the transferred assets have been valued for purposes of transfer to the covered 

fund, and thereafter only upon the date on which additional securities of the 

issuing entity of asset-backed securities are priced for purposes of the sales of 

ownership interests to unaffiliated investors. 

(iii) For securitization transactions completed prior to the compliance date of such 

implementing regulations (or as to which such implementing regulations do 

not apply), the aggregate value of the outstanding ownership interests in the 

covered fund shall be the fair market value of the assets transferred to the 

issuing entity of the securitization and any other assets otherwise held by the 

issuing entity at such time, determined in a manner that is consistent with its 

determination of the fair market value of those assets for financial statement 

purposes.

(iv) For purposes of the calculation under paragraph (b)(3)(iii) of this section, the 

valuation methodology used to calculate the fair market value of the 

ownership interests must be the same for both the ownership interests held by 

a banking entity and the ownership interests held by all others in the covered 

fund in the same manner and according to the same standards.

(4) Multi-tier fund investments.

(i) Master-feeder fund investments. If the principal investment strategy of a 

covered fund (the “feeder fund”) is to invest substantially all of its assets in 

another single covered fund (the “master fund”), then for purposes of the 

investment limitations in paragraphs (a)(2)(i)(B) and (a)(2)(ii) of this section, 

the banking entity’s permitted investment in such funds shall be measured 

only by reference to the value of the master fund. The banking entity’s 

permitted investment in the master fund shall include any investment by the 

banking entity in the master fund, as well as the banking entity’s pro-rata 

share of any ownership interest of the master fund that is held through the 

feeder fund; and

(ii) Fund-of-funds investments. If a banking entity organizes and offers a covered 

fund pursuant to § 75.11 of this subpart for the purpose of investing in other 

covered funds (a “fund of funds”) and that fund of funds itself invests in 

another covered fund that the banking entity is permitted to own, then the 

banking entity’s permitted investment in that other fund shall include any 

investment by the banking entity in that other fund, as well as the banking 
44

entity’s pro-rata share of any ownership interest of the fund that is held 

through the fund of funds. The investment of the banking entity may not 

represent more than 3 percent of the amount or value of any single covered 

fund. 

(c) Aggregate permitted investments in all covered funds.

(1) For purposes of paragraph (a)(2)(iii) of this section, the aggregate value of all 

ownership interests held by a banking entity shall be the sum of all amounts paid 

or contributed by the banking entity in connection with acquiring or retaining an 

ownership interest in covered funds (together with any amounts paid by the entity 

(or employee thereof) in connection with obtaining a restricted profit interest 

under § 75.10(d)(6)(ii) of this subpart), on a historical cost basis.

(2) Calculation of tier 1 capital. For purposes of paragraph (a)(2)(iii) of this section: 

(i) Entities that are required to hold and report tier 1 capital. If a banking entity 

is required to calculate and report tier 1 capital, the banking entity’s tier 1 

capital shall be equal to the amount of tier 1 capital of the banking entity as of 

the last day of the most recent calendar quarter, as reported to its primary 

financial regulatory agency; and

(ii) If a banking entity is not required to calculate and report tier 1 capital, the 

banking entity’s tier 1 capital shall be determined to be equal to: 

(A) In the case of a banking entity that is controlled, directly or indirectly, by a 

depository institution that calculates and reports tier 1 capital, be equal to 

the amount of tier 1 capital reported by such controlling depository 

institution in the manner described in paragraph (c)(2)(i) of this section; 

(B) In the case of a banking entity that is not controlled, directly or indirectly, 

by a depository institution that calculates and reports tier 1 capital: 

(1) Bank holding company subsidiaries. If the banking entity is a 

subsidiary of a bank holding company or company that is treated as a 

bank holding company, be equal to the amount of tier 1 capital 

reported by the top-tier affiliate of such covered banking entity that 

calculates and reports tier 1 capital in the manner described in 

paragraph (c)(2)(i) of this section; and

(2) Other holding companies and any subsidiary or affiliate thereof. If the 

banking entity is not a subsidiary of a bank holding company or a 

company that is treated as a bank holding company, be equal to the 

total amount of shareholders’ equity of the top-tier affiliate within such 

organization as of the last day of the most recent calendar quarter that 

has ended, as determined under applicable accounting standards.

(iii) Treatment of foreign banking entities. 
45

(A) Foreign banking entities. Except as provided in paragraph (c)(2)(iii)(B) of 

this section, with respect to a banking entity that is not itself, and is not 

controlled directly or indirectly by, a banking entity that is located or 

organized under the laws of the United States or of any State, the tier 1 

capital of the banking entity shall be the consolidated tier 1 capital of the 

entity as calculated under applicable home country standards.

(B) U.S. affiliates of foreign banking entities. With respect to a banking entity 

that is located or organized under the laws of the United States or of any 

State and is controlled by a foreign banking entity identified under 

paragraph (c)(2)(iii)(A) of this section, the banking entity’s tier 1 capital 

shall be as calculated under paragraphs (c)(2)(i) or (c)(2)(ii) of this 

section. 

(d) Capital treatment for a permitted investment in a covered fund. For purposes of 

calculating compliance with the applicable regulatory capital requirements, a 

banking entity shall deduct from the banking entity’s tier 1 capital (as determined 

under paragraph (c)(2) of this section) the greater of:

(1) The sum of all amounts paid or contributed by the banking entity in connection 

with acquiring or retaining an ownership interest (together with any amounts paid 

by the entity (or employee thereof) in connection with obtaining a restricted profit 

interest under § 75.10(d)(6)(ii) of subpart C), on a historical cost basis, plus any 

earnings received; and

(2) The fair market value of the banking entity’s ownership interests in the covered 

fund as determined under paragraph (b)(2)(ii) or (b)(3) of this section (together 

with any amounts paid by the entity (or employee thereof) in connection with 

obtaining a restricted profit interest under § 75.10(d)(6)(ii) of subpart C), if the 

banking entity accounts for the profits (or losses) of the fund investment in its 

financial statements. 

(e) Extension of time to divest an ownership interest. 

(1) Upon application by a banking entity, the Board may extend the period under 

paragraph (a)(2)(i) of this section for up to 2 additional years if the Board finds 

that an extension would be consistent with safety and soundness and not 

detrimental to the public interest. An application for extension must:

(i) Be submitted to the Board at least 90 days prior to the expiration of the 

applicable time period;

(ii) Provide the reasons for application, including information that addresses the 

factors in paragraph (e)(2) of this section; and

(iii) Explain the banking entity’s plan for reducing the permitted investment in a 

covered fund through redemption, sale, dilution or other methods as required 

in paragraph (a)(2) of this section.
46

(2) Factors governing Board determinations. In reviewing any application under 

paragraph (e)(1) of this section, the Board may consider all the facts and 

circumstances related to the permitted investment in a covered fund, including:

(i) Whether the investment would result, directly or indirectly, in a material 

exposure by the banking entity to high-risk assets or high-risk trading 

strategies;

(ii) The contractual terms governing the banking entity’s interest in the covered 

fund;

(iii) The date on which the covered fund is expected to have attracted sufficient 

investments from investors unaffiliated with the banking entity to enable the 

banking entity to comply with the limitations in paragraph (a)(2)(i) of this 

section;

(iv) The total exposure of the covered banking entity to the investment and the 

risks that disposing of, or maintaining, the investment in the covered fund may 

pose to the banking entity and the financial stability of the United States;

(v) The cost to the banking entity of divesting or disposing of the investment 

within the applicable period;

(vi) Whether the investment or the divestiture or conformance of the investment 

would involve or result in a material conflict of interest between the banking 

entity and unaffiliated parties, including clients, customers or counterparties to 

which it owes a duty; 

(vii) The banking entity’s prior efforts to reduce through redemption, sale, dilution, 

or other methods its ownership interests in the covered fund, including 

activities related to the marketing of interests in such covered fund; 

(viii) Market conditions; and

(ix) Any other factor that the Board believes appropriate. 

(3) Authority to impose restrictions on activities or investment during any extension 

period. The Board may impose such conditions on any extension approved under 

paragraph (e)(1) of this section as the Board determines are necessary or 

appropriate to protect the safety and soundness of the banking entity or the 

financial stability of the United States, address material conflicts of interest or 

other unsound banking practices, or otherwise further the purposes of section 13 

of the BHC Act and this part.

(4) Consultation. In the case of a banking entity that is primarily regulated by 

another Federal banking agency, the SEC, or the CFTC, the Board will consult 

with such agency prior to acting on an application by the banking entity for an 

extension under paragraph (e)(1) of this section.
47

§ 75.13 Other permitted covered fund activities and investments.

(a) Permitted Risk-Mitigating Hedging Activities. 

(1) The prohibition contained in § 75.10(a) of this subpart does not apply with respect 

to an ownership interest in a covered fund acquired or retained by a banking entity 

that is designed to demonstrably reduce or otherwise significantly mitigate the 

specific, identifiable risks to the banking entity in connection with a compensation 

arrangement with an employee of the banking entity or an affiliate thereof that 

directly provides investment advisory, commodity trading advisory or other 

services to the covered fund.

(2) Requirements. The risk-mitigating hedging activities of a banking entity are 

permitted under paragraph (a) of this section only if:

(i) The banking entity has established and implements, maintains and enforces an 

internal compliance program required by subpart D that is reasonably 

designed to ensure the banking entity’s compliance with the requirements of 

this section, including:

(A) Reasonably designed written policies and procedures; and 

(B) Internal controls and ongoing monitoring, management, and authorization 

procedures, including relevant escalation procedures; and

(ii) The acquisition or retention of the ownership interest:

(A) Is made in accordance with the written policies, procedures and internal 

controls required under this section;

(B) At the inception of the hedge, is designed to reduce or otherwise 

significantly mitigate and demonstrably reduces or otherwise significantly 

mitigates one or more specific, identifiable risks arising in connection with 

the compensation arrangement with the employee that directly provides 

investment advisory, commodity trading advisory, or other services to the 

covered fund;

(C) Does not give rise, at the inception of the hedge, to any significant new or 

additional risk that is not itself hedged contemporaneously in accordance 

with this section; and

(D) Is subject to continuing review, monitoring and management by the 

banking entity.

(iii) The compensation arrangement relates solely to the covered fund in which the 

banking entity or any affiliate has acquired an ownership interest pursuant to 

this paragraph and such compensation arrangement provides that any losses 

incurred by the banking entity on such ownership interest will be offset by 
48

corresponding decreases in amounts payable under such compensation 

arrangement.

(b) Certain permitted covered fund activities and investments outside of the United 

States.

(1) The prohibition contained in § 75.10(a) of this subpart does not apply to the 

acquisition or retention of any ownership interest in, or the sponsorship of, a 

covered fund by a banking entity only if: 

(i) The banking entity is not organized or directly or indirectly controlled by a 

banking entity that is organized under the laws of the United States or of one 

or more States;

(ii) The activity or investment by the banking entity is pursuant to paragraph (9) 

or (13) of section 4(c) of the BHC Act;

(iii) No ownership interest in the covered fund is offered for sale or sold to a 

resident of the United States; and

(iv) The activity or investment occurs solely outside of the United States.

(2) An activity or investment by the banking entity is pursuant to paragraph (9) or 

(13) of section 4(c) of the BHC Act for purposes of paragraph (b)(1)(ii) of this 

section only if:

(i) The activity or investment is conducted in accordance with the requirements 

of this section; and

(ii)

(A) With respect to a banking entity that is a foreign banking organization, the 

banking entity meets the qualifying foreign banking organization 

requirements of section 211.23(a), (c) or (e) of the Board’s Regulation K 

(12 CFR 211.23(a), (c) or (e)), as applicable; or

(B) With respect to a banking entity that is not a foreign banking organization, 

the banking entity is not organized under the laws of the United States or 

of one or more States and the banking entity, on a fully-consolidated basis, 

meets at least two of the following requirements:

(1) Total assets of the banking entity held outside of the United States 

exceed total assets of the banking entity held in the United States;

(2) Total revenues derived from the business of the banking entity outside 

of the United States exceed total revenues derived from the business of 

the banking entity in the United States; or
49

(3) Total net income derived from the business of the banking entity 

outside of the United States exceeds total net income derived from the 

business of the banking entity in the United States.

(3) An ownership interest in a covered fund is not offered for sale or sold to a resident 

of the United States for purposes of paragraph (b)(1)(iii) of this section only if it 

is sold or has been sold pursuant to an offering that does not target residents of the 

United States. 

(4) An activity or investment occurs solely outside of the United States for purposes 

of paragraph (b)(1)(iv) of this section only if:

(i) The banking entity acting as sponsor, or engaging as principal in the 

acquisition or retention of an ownership interest in the covered fund, is not 

itself, and is not controlled directly or indirectly by, a banking entity that is 

located in the United States or organized under the laws of the United States 

or of any State;

(ii) The banking entity (including relevant personnel) that makes the decision to 

acquire or retain the ownership interest or act as sponsor to the covered fund is 

not located in the United States or organized under the laws of the United 

States or of any State;

(iii) The investment or sponsorship, including any transaction arising from riskmitigating hedging related to an ownership interest, is not accounted for as 

principal directly or indirectly on a consolidated basis by any branch or

affiliate that is located in the United States or organized under the laws of the 

United States or of any State; and

(iv) No financing for the banking entity’s ownership or sponsorship is provided, 

directly or indirectly, by any branch or affiliate that is located in the United 

States or organized under the laws of the United States or of any State.

(5) For purposes of this section, a U.S. branch, agency, or subsidiary of a foreign 

bank, or any subsidiary thereof, is located in the United States; however, a foreign 

bank of which that branch, agency, or subsidiary is a part is not considered to be 

located in the United States solely by virtue of operation of the U.S. branch, 

agency, or subsidiary.

(c) Permitted covered fund interests and activities by a regulated insurance company. 

The prohibition contained in § 75.10(a) of this subpart does not apply to the 

acquisition or retention by an insurance company, or an affiliate thereof, of any 

ownership interest in, or the sponsorship of, a covered fund only if:

(1) The insurance company or its affiliate acquires and retains the ownership interest 

solely for the general account of the insurance company or for one or more 

separate accounts established by the insurance company;
50

(2) The acquisition and retention of the ownership interest is conducted in 

compliance with, and subject to, the insurance company investment laws, 

regulations, and written guidance of the State or jurisdiction in which such 

insurance company is domiciled; and

(3) The appropriate Federal banking agencies, after consultation with the Financial 

Stability Oversight Council and the relevant insurance commissioners of the 

States and foreign jurisdictions, as appropriate, have not jointly determined, after 

notice and comment, that a particular law, regulation, or written guidance 

described in paragraph (c)(2) of this section is insufficient to protect the safety 

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

§ 75.14 Limitations on relationships with a covered fund.

(a) Relationships with a covered fund.

(1) Except as provided for in paragraph (a)(2) of this section, no banking entity that 

serves, directly or indirectly, as the investment manager, investment adviser, 

commodity trading advisor, or sponsor to a covered fund, that organizes and 

offers a covered fund pursuant to § 75.11 of this subpart, or that continues to hold 

an ownership interest in accordance with § 75.11(b) of this subpart, and no 

affiliate of such entity, may enter into a transaction with the covered fund, or with 

any other covered fund that is controlled by such covered fund, that would be a 

covered transaction as defined in section 23A of the Federal Reserve Act (12 

U.S.C. 371c(b)(7)), as if such banking entity and the affiliate thereof were a 

member bank and the covered fund were an affiliate thereof.

(2) Notwithstanding paragraph (a)(1) of this section, a banking entity may:

(i) Acquire and retain any ownership interest in a covered fund in accordance 

with the requirements of § 75.11, § 75.12, or § 75.13 of this subpart; and

(ii) Enter into any prime brokerage transaction with any covered fund in which a 

covered fund managed, sponsored, or advised by such banking entity (or an 

affiliate thereof) has taken an ownership interest, if:

(A) The banking entity is in compliance with each of the limitations set forth 

in § 75.11 of this subpart with respect to a covered fund organized and 

offered by such banking entity (or an affiliate thereof);

(B) The chief executive officer (or equivalent officer) of the banking entity 

certifies in writing annually to the Commission (with a duty to update the 

certification if the information in the certification materially changes) that 

the banking entity does not, directly or indirectly, guarantee, assume, or 

otherwise insure the obligations or performance of the covered fund or of 

any covered fund in which such covered fund invests; and
51

(C) The Board has not determined that such transaction is inconsistent with 

the safe and sound operation and condition of the banking entity.

(b) Restrictions on transactions with covered funds. A banking entity that serves, 

directly or indirectly, as the investment manager, investment adviser, commodity 

trading advisor, or sponsor to a covered fund, or that organizes and offers a 

covered fund pursuant to § 75.11 of this subpart, or that continues to hold an 

ownership interest in accordance with § 75.11(b) of this subpart, 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 covered fund were an affiliate thereof.

(c) Restrictions on prime brokerage transactions. A prime brokerage transaction 

permitted under paragraph (a)(2)(ii) of this section shall be subject to section 23B 

of the Federal Reserve Act (12 U.S.C. 371c-1) as if the counterparty were an 

affiliate of the banking entity.

§ 75.15 Other limitations on permitted covered fund activities.

(a) No transaction, class of transactions, or activity may be deemed permissible under 

§§ 75.11 through 75.13 of this subpart if the transaction, class of transactions, or 

activity would:

(1) Involve or result in a material conflict of interest between the banking entity and 

its clients, customers, or counterparties;

(2) Result, directly or indirectly, in a material exposure by the banking entity to a 

high-risk asset or a high-risk trading strategy; or

(3) Pose a threat to the safety and soundness of the banking entity or to the financial 

stability of the United States.

(b) Definition of material conflict of interest. 

(1) For purposes of this section, a material conflict of interest between a banking 

entity and its clients, customers, or counterparties exists if the banking entity 

engages in any transaction, class of transactions, or activity that would involve or 

result in the banking entity’s interests being materially adverse to the interests of 

its client, customer, or counterparty with respect to such transaction, class of 

transactions, or activity, and the banking entity has not taken at least one of the 

actions in paragraph (b)(2) of this section.

(2) Prior to effecting the specific transaction or class or type of transactions, or 

engaging in the specific activity, the banking entity:

(i) Timely and effective disclosure.

(A) Has made clear, timely, and effective disclosure of the conflict of interest, 

together with other necessary information, in reasonable detail and in a 
52

manner sufficient to permit a reasonable client, customer, or counterparty 

to meaningfully understand the conflict of interest; and

(B) Such disclosure is made in a manner that provides the client, customer, or 

counterparty the opportunity to negate, or substantially mitigate, any

materially adverse effect on the client, customer, or counterparty created 

by the conflict of interest; or

(ii) Information barriers. Has established, maintained, and enforced information 

barriers that are memorialized in written policies and procedures, such as 

physical separation of personnel, or functions, or limitations on types of 

activity, that are reasonably designed, taking into consideration the nature of 

the banking entity’s business, to prevent the conflict of interest from involving 

or resulting in a materially adverse effect on a client, customer, or 

counterparty. A banking entity may not rely on such information barriers if, 

in the case of any specific transaction, class or type of transactions or activity, 

the banking entity knows or should reasonably know that, notwithstanding the 

banking entity’s establishment of information barriers, the conflict of interest 

may involve or result in a materially adverse effect on a client, customer, or 

counterparty.

(c) Definition of high-risk asset and high-risk trading strategy. For purposes of this 

section:

(1) High-risk asset means an asset or group of related assets that would, if held by a 

banking entity, significantly increase the likelihood that the banking entity would 

incur a substantial financial loss or would pose a threat to the financial stability of 

the United States.

(2) High-risk trading strategy means a trading strategy that would, if engaged in by a 

banking entity, significantly increase the likelihood that the banking entity would 

incur a substantial financial loss or would pose a threat to the financial stability of 

the United States.

§ 75.16 [Reserved]

§ 75.17 [Reserved]

§ 75.18 [Reserved]

§ 75.19 [Reserved]

*****
53

SUBPART D – Compliance Program Requirement; Violations

§ 75.20 Program for compliance; reporting

(a) Program requirement. Each banking entity shall develop and provide for the 

continued administration of a compliance program reasonably designed to ensure 

and monitor compliance with the prohibitions and restrictions on proprietary 

trading and covered fund activities and investments set forth in section 13 of the 

BHC Act and this part. The terms, scope and detail of the compliance program 

shall be appropriate for the types, size, scope and complexity of activities and 

business structure of the banking entity. 

(b) Contents of compliance program. Except as provided in paragraph (f) of this 

section, the compliance program required by paragraph (a) of this section, at a 

minimum, shall include:

(1) Written policies and procedures reasonably designed to document, describe, 

monitor and limit trading activities subject to subpart B (including those permitted 

under §§ 75.3 to 75.6 of subpart B), including setting, monitoring and managing 

required limits set out in § 75.4 and § 75.5, and activities and investments with 

respect to a covered fund subject to subpart C (including those permitted under §§ 

75.11 through 75.14 of subpart C) conducted by the banking entity to ensure that 

all activities and investments conducted by the banking entity that are subject to 

section 13 of the BHC Act and this part comply with section 13 of the BHC Act 

and this part;

(2) A system of internal controls reasonably designed to monitor compliance with 

section 13 of the BHC Act and this part and to prevent the occurrence of activities 

or investments that are prohibited by section 13 of the BHC Act and this part;

(3) A management framework that clearly delineates responsibility and accountability 

for compliance with section 13 of the BHC Act and this part and includes 

appropriate management review of trading limits, strategies, hedging activities, 

investments, incentive compensation and other matters identified in this part or by 

management as requiring attention;

(4) Independent testing and audit of the effectiveness of the compliance program 

conducted periodically by qualified personnel of the banking entity or by a 

qualified outside party; 

(5) Training for trading personnel and managers, as well as other appropriate 

personnel, to effectively implement and enforce the compliance program; and

(6) Records sufficient to demonstrate compliance with section 13 of the BHC Act and 

this part, which a banking entity must promptly provide to the Commission upon 

request and retain for a period of no less than 5 years or such longer period as 

required by the Commission. 
54

(c) Additional Standards. In addition to the requirements in paragraph (b) of this 

section, the compliance program of a banking entity must satisfy the requirements 

and other standards contained in Appendix B, if:

(1) The banking entity engages in proprietary trading permitted under subpart B and 

is required to comply with the reporting requirements of paragraph (d) of this 

section;

(2) The banking entity has reported total consolidated assets as of the previous 

calendar year end of $50 billion or more or, in the case of a foreign banking 

entity, has total U.S. assets as of the previous calendar year end of $50 billion or 

more (including all subsidiaries, affiliates, branches and agencies of the foreign 

banking entity operating, located or organized in the United States); or

(3) The Commission notifies the banking entity in writing that it must satisfy the 

requirements and other standards contained in Appendix B.

(d) Reporting requirements under Appendix A.

(1) A banking entity engaged in proprietary trading activity permitted under subpart 

B shall comply with the reporting requirements described in Appendix A, if:

(i) The banking entity (other than a foreign banking entity as provided in paragraph 

(d)(1)(ii) of this section) has, together with its affiliates and subsidiaries, 

trading assets and liabilities (excluding trading assets and liabilities involving 

obligations of or guaranteed by the United States or any agency of the United 

States) the average gross sum of which (on a worldwide consolidated basis) 

over the previous consecutive four quarters, as measured as of the last day of 

each of the four prior calendar quarters, equals or exceeds the threshold 

established in paragraph (d)(2) of this section;

(ii) In the case of a foreign banking entity, the average gross sum of the trading assets 

and liabilities of the combined U.S. operations of the foreign banking entity 

(including all subsidiaries, affiliates, branches and agencies of the foreign 

banking entity operating, located or organized in the United States and 

excluding trading assets and liabilities involving obligations of or guaranteed 

by the United States or any agency of the United States) over the previous 

consecutive four quarters, as measured as of the last day of each of the four 

prior calendar quarters, equals or exceeds the threshold established in 

paragraph (d)(2) of this section; or

(iii)The Commission notifies the banking entity in writing that it must satisfy the 

reporting requirements contained in Appendix A.

(2) The threshold for reporting under paragraph (d)(1) of this section shall be $50 

billion beginning on June 30, 2014; $25 billion beginning on April 30, 2016; and 

$10 billion beginning on December 31, 2016.
55

(3) Frequency of reporting: Unless the Commission notifies the banking entity in 

writing that it must report on a different basis, a banking entity with $50 billion 

or more in trading assets and liabilities (as calculated in accordance with 

paragraph (d)(1) of this section) shall report the information required by 

Appendix A for each calendar month within 30 days of the end of the relevant 

calendar month; beginning with information for the month of January 2015, such 

information shall be reported within 10 days of the end of each calendar month. 

Any other banking entity subject to Appendix A shall report the information 

required by Appendix A for each calendar quarter within 30 days of the end of 

that calendar quarter unless the Commission notifies the banking entity in 

writing that it must report on a different basis.

(e) Additional documentation for covered funds: Any banking entity that has more 

than $10 billion in total consolidated assets as reported on December 31 of the 

previous two calendar years shall maintain records that include:

(1) Documentation of the exclusions or exemptions other than sections 3(c)(1) and 

3(c)(7) of the Investment Company Act of 1940 relied on by each fund sponsored 

by the banking entity (including all subsidiaries and affiliates) in determining that 

such fund is not a covered fund;

(2) For each fund sponsored by the banking entity (including all subsidiaries and 

affiliates) for which the banking entity relies on one or more of the exclusions 

from the definition of covered fund provided by §§ 75.10(c)(1), 75.10(c)(5), 

75.10(c)(8), 75.10(c)(9), or 75.10(c)(10) of subpart C, documentation supporting 

the banking entity’s determination that the fund is not a covered fund pursuant to 

one or more of those exclusions;

(3) For each seeding vehicle described in §§ 75.10(c)(12)(i) or 75.10(c)(12)(iii) of 

subpart C that will become a registered investment company or SEC-regulated 

business development company, a written plan documenting the banking entity’s 

determination that the seeding vehicle will become a registered investment 

company or SEC-regulated business development company; the period of time 

during which the vehicle will operate as a seeding vehicle; and the banking 

entity’s plan to market the vehicle to third-party investors and convert it into a 

registered investment company or SEC-regulated business development company 

within the time period specified in § 75.12(a)(2)(i)(B) of subpart C;

(4) For any banking entity that is, or is controlled directly or indirectly by a banking 

entity that is, located in or organized under the laws of the United States or of any 

State, if the aggregate amount of ownership interests in foreign public funds that 

are described in §75.10(c)(1) of subpart C owned by such banking entity 

(including ownership interests owned by any affiliate that is controlled directly or 

indirectly by a banking entity that is located in or organized under the laws of the 

United States or of any State) exceeds $50 million at the end of two or more 

consecutive calendar quarters, beginning with the next succeeding calendar 

quarter, documentation of the value of the ownership interests owned by the 
56

banking entity (and such affiliates) in each foreign public fund and each 

jurisdiction in which any such foreign public fund is organized, calculated as of 

the end of each calendar quarter, which documentation must continue until the 

banking entity’s aggregate amount of ownership interests in foreign public funds 

is below $50 million for two consecutive calendar quarters; and

(5) For purposes of paragraph (e)(4) of this section, a U.S. branch, agency, or 

subsidiary of a foreign banking entity is located in the United States; however, the 

foreign bank that operates or controls that branch, agency, or subsidiary is not 

considered to be located in the United States solely by virtue of operating or 

controlling the U.S. branch, agency, or subsidiary.

(f) Simplified programs for less active banking entities.

(1) Banking entities with no covered activities. A banking entity that does not engage 

in activities or investments pursuant to subpart B or subpart C (other than trading 

activities permitted pursuant to § 75.6(a) of subpart B) may satisfy the 

requirements of this section by establishing the required compliance program 

prior to becoming engaged in such activities or making such investments (other 

than trading activities permitted pursuant to § 75.6(a) of subpart B). 

(2) Banking entities with modest activities. A banking entity with total consolidated 

assets of $10 billion or less as reported on December 31 of the previous two 

calendar years that engages in activities or investments pursuant to subpart B or 

subpart C(other than trading activities permitted under § 75.6(a) of subpart B) 

may satisfy the requirements of this section by including in its existing 

compliance policies and procedures appropriate references to the requirements of 

section 13 of the BHC Act and this part and adjustments as appropriate given the 

activities, size, scope and complexity of the banking entity.

§ 75.21 Termination of activities or investments; penalties for violations.

(a) Any banking entity that engages in an activity or makes an investment in violation 

of section 13 of the BHC Act or this part, or acts in a manner that functions as an 

evasion of the requirements of section 13 of the BHC Act or this part, including 

through an abuse of any activity or investment permitted under subparts B or C, 

or otherwise violates the restrictions and requirements of section 13 of the BHC 

Act or this part, shall, upon discovery, promptly terminate the activity and, as 

relevant, dispose of the investment.

(b) Whenever the Commission finds reasonable cause to believe any banking entity 

has engaged in an activity or made an investment in violation of section 13 of the 

BHC Act or this part, or engaged in any activity or made any investment that 

functions as an evasion of the requirements of section 13 of the BHC Act or this 

part, the Commission may take any action permitted by law to enforce 

compliance with section 13 of the BHC Act and this part, including directing the 
57

banking entity to restrict, limit, or terminate any or all activities under this part 

and dispose of any investment.

*****

Appendix A: Reporting and Recordkeeping Requirements for Covered Trading Activities

I. Purpose

This appendix sets forth reporting and recordkeeping requirements that certain banking 

entities must satisfy in connection with the restrictions on proprietary trading set forth in subpart 

B (“proprietary trading restrictions”). Pursuant to § 75.20(d), this appendix generally applies to 

a banking entity that, together with its affiliates and subsidiaries, has significant trading assets 

and liabilities. These entities are required to (i) furnish periodic reports to the Commission

regarding a variety of quantitative measurements of their covered trading activities, which vary 

depending on the scope and size of covered trading activities, and (ii) create and maintain 

records documenting the preparation and content of these reports. The requirements of this 

appendix must be incorporated into the banking entity’s internal compliance program under §

75.20 and Appendix B.

The purpose of this appendix is to assist banking entities and the Commission in:

(i) Better understanding and evaluating the scope, type, and profile of the banking 

entity’s covered trading activities;

(ii) Monitoring the banking entity’s covered trading activities; 

(iii) Identifying covered trading activities that warrant further review or examination 

by the banking entity to verify compliance with the proprietary trading restrictions;

(iv) Evaluating whether the covered trading activities of trading desks engaged in 

market making-related activities subject to § 75.4(b) are consistent with the requirements 

governing permitted market making-related activities;

(v) Evaluating whether the covered trading activities of trading desks that are 

engaged in permitted trading activity subject to §§ 75.4, 75.5, or 75.6(a)-(b) (i.e., underwriting 

and market making-related related activity, risk-mitigating hedging, or trading in certain 

government obligations) are consistent with the requirement that such activity not result, directly 

or indirectly, in a material exposure to high-risk assets or high-risk trading strategies;

(vi) Identifying the profile of particular covered trading activities of the banking 

entity, and the individual trading desks of the banking entity, to help establish the appropriate 

frequency and scope of examination by the Commission of such activities; and

(vii) Assessing and addressing the risks associated with the banking entity’s covered 

trading activities. 
58

The quantitative measurements that must be furnished pursuant to this appendix are not

intended to serve as a dispositive tool for the identification of permissible or impermissible 

activities.

In order to allow banking entities and the Agencies to evaluate the effectiveness of these 

metrics, banking entities must collect and report these metrics for all trading desks beginning on 

the dates established in § 75.20 of the final rule. The Agencies will review the data collected 

and revise this collection requirement as appropriate based on a review of the data collected prior 

to September 30, 2015. 

In addition to the quantitative measurements required in this appendix, a banking entity 

may need to develop and implement other quantitative measurements in order to effectively 

monitor its covered trading activities for compliance with section 13 of the BHC Act and this 

part and to have an effective compliance program, as required by § 75.20 and Appendix B. The 

effectiveness of particular quantitative measurements may differ based on the profile of the 

banking entity’s businesses in general and, more specifically, of the particular trading desk, 

including types of instruments traded, trading activities and strategies, and history and 

experience (e.g., whether the trading desk is an established, successful market maker or a new 

entrant to a competitive market). In all cases, banking entities must ensure that they have robust 

measures in place to identify and monitor the risks taken in their trading activities, to ensure that 

the activities are within risk tolerances established by the banking entity, and to monitor and 

examine for compliance with the proprietary trading restrictions in this part. 

On an ongoing basis, banking entities must carefully monitor, review, and evaluate all 

furnished quantitative measurements, as well as any others that they choose to utilize in order to 

maintain compliance with section 13 of the BHC Act and this part. All measurement results that 

indicate a heightened risk of impermissible proprietary trading, including with respect to 

otherwise-permitted activities under §§ 75.4 through 75.6(a)-(b), or that result in a material 

exposure to high-risk assets or high-risk trading strategies, must be escalated within the banking 

entity for review, further analysis, explanation to the Commission, and remediation, where 

appropriate. The quantitative measurements discussed in this appendix should be helpful to 

banking entities in identifying and managing the risks related to their covered trading activities. 

II. Definitions

The terms used in this appendix have the same meanings as set forth in §§ 75.2 and 75.3. 

In addition, for purposes of this appendix, the following definitions apply:

Covered trading activity means trading conducted by a trading desk under §§ 75.4, 75.5, 

75.6(a), or 75.6(b). A banking entity may include trading under §§ 75.3(d), 75.6(c), 75.6(d) or 

75.6(e).

Trading desk means the smallest discrete unit of organization of a banking entity that 

purchases or sells financial instruments for the trading account of the banking entity or an 

affiliate thereof.

Calculation period means the period of time for which a particular quantitative 

measurement must be calculated.
59

Measurement frequency means the frequency with which a particular quantitative metric 

must be calculated and recorded.

Comprehensive profit and loss means the net profit or loss of a trading desk’s material 

sources of trading revenue over a specific period of time, including, for example, any increase or 

decrease in the market value of a trading desk’s holdings, dividend income, and interest income 

and expense.

III. Reporting and Recordkeeping of Quantitative Measurements

A. Scope of Required Reporting

General scope. Each banking entity made subject to this part by § 75.20 must furnish the 

following quantitative measurements for each trading desk of the banking entity, calculated in 

accordance with this appendix:

 Risk and Position Limits and Usage;

 Risk Factor Sensitivities;

 Value-at-Risk and Stress VaR;

 Comprehensive Profit and Loss Attribution; 

 Inventory Turnover; 

 Inventory Aging; and

 Customer Facing Trade Ratio 

B. Frequency of Required Calculation and Reporting

A banking entity must calculate any applicable quantitative measurement for each trading 

day. A banking entity must report each applicable quantitative measurement to the Commission

on the reporting schedule established in § 75.20 unless otherwise requested by the Commission. 

All quantitative measurements for any calendar month must be reported within the time period

required by § 75.20.

C. Recordkeeping

A banking entity must, for any quantitative measurement furnished to the Commission

pursuant to this appendix and § 75.20(d), create and maintain records documenting the 

preparation and content of these reports, as well as such information as is necessary to permit the 

Commission to verify the accuracy of such reports, for a period of 5 years from the end of the 

calendar year for which the measurement was taken.
60

IV. Quantitative Measurements

A. Risk-Management Measurements

1. Risk and Position Limits and Usage

Description: For purposes of this appendix, Risk and Position Limits are the constraints 

that define the amount of risk that a trading desk is permitted to take at a point in time, as defined 

by the banking entity for a specific trading desk. Usage represents the portion of the trading 

desk’s limits that are accounted for by the current activity of the desk. Risk and position limits 

and their usage are key risk management tools used to control and monitor risk taking and 

include, but are not limited, to the limits set out in § 75.4 and § 75.5. A number of the metrics 

that are described below, including “Risk Factor Sensitivities” and “Value-at-Risk and Stress 

Value-at-Risk,” relate to a trading desk’s risk and position limits and are useful in evaluating 

and setting these limits in the broader context of the trading desk’s overall activities, particularly 

for the market making activities under § 75.4(b) and hedging activity under § 75.5. Accordingly, 

the limits required under § 75.4(b)(2)(iii) and § 75.5(b)(1)(i) must meet the applicable 

requirements under § 75.4(b)(2)(iii) and § 75.5(b)(1)(i) and also must include appropriate metrics 

for the trading desk limits including, at a minimum, the “Risk Factor Sensitivities” and “Valueat-Risk and Stress Value-at-Risk” metrics except to the extent any of the “Risk Factor 

Sensitivities” or “Value-at-Risk and Stress Value-at-Risk” metrics are demonstrably ineffective 

for measuring and monitoring the risks of a trading desk based on the types of positions traded 

by, and risk exposures of, that desk. 

General Calculation Guidance: Risk and Position Limits must be reported in the format 

used by the banking entity for the purposes of risk management of each trading desk. Risk and 

Position Limits are often expressed in terms of risk measures, such as VaR and Risk Factor 

Sensitivities, but may also be expressed in terms of other observable criteria, such as net open 

positions. When criteria other than VaR or Risk Factor Sensitivities are used to define the Risk 

and Position Limits, both the value of the Risk and Position Limits and the value of the variables

used to assess whether these limits have been reached must be reported. 

Calculation Period: One trading day.

Measurement Frequency: Daily.

2. Risk Factor Sensitivities

Description: For purposes of this appendix, Risk Factor Sensitivities are changes in a 

trading desk’s Comprehensive Profit and Loss that are expected to occur in the event of a change 

in one or more underlying variables that are significant sources of the trading desk’s profitability 

and risk. 

General Calculation Guidance: A banking entity must report the Risk Factor Sensitivities

that are monitored and managed as part of the trading desk’s overall risk management policy. 

The underlying data and methods used to compute a trading desk’s Risk Factor Sensitivities will

depend on the specific function of the trading desk and the internal risk management models 

employed. The number and type of Risk Factor Sensitivities that are monitored and managed by 
61

a trading desk, and furnished to the Commission, will depend on the explicit risks assumed by 

the trading desk. In general, however, reported Risk Factor Sensitivities must be sufficiently 

granular to account for a preponderance of the expected price variation in the trading desk’s 

holdings.

Trading desks must take into account any relevant factors in calculating Risk Factor 

Sensitivities, including, for example, the following with respect to particular asset classes:

 Commodity derivative positions: risk factors with respect to the related 

commodities set out in 17 CFR §20.2, the maturity of the positions, volatility and/or correlation 

sensitivities (expressed in a manner that demonstrates any significant non-linearities), and the 

maturity profile of the positions;

 Credit positions: risk factors with respect to credit spreads that are sufficiently 

granular to account for specific credit sectors and market segments, the maturity profile of the 

positions, and risk factors with respect to interest rates of all relevant maturities;

 Credit-related derivative positions: risk factor sensitivities, for example credit 

spreads, shifts (parallel and non-parallel) in credit spreads -- volatility, and/or correlation 

sensitivities (expressed in a manner that demonstrates any significant non-linearities), and the 

maturity profile of the positions;

 Equity positions: risk factors for equity prices and risk factors that differentiate 

between important equity market sectors and segments, such as a small capitalization equities 

and international equities;

 Equity derivative positions: risk factor sensitivities such as equity positions, 

volatility, and/or correlation sensitivities (expressed in a manner that demonstrates any 

significant non-linearities), and the maturity profile of the positions;

 Foreign exchange derivative positions: risk factors with respect to major currency 

pairs and maturities, exposure to interest rates at relevant maturities, volatility, and/or 

correlation sensitivities (expressed in a manner that demonstrates any significant non-linearities), 

as well as the maturity profile of the positions; and

 Interest rate positions, including interest rate derivative positions: risk factors with 

respect to major interest rate categories and maturities and volatility and/or correlation 

sensitivities (expressed in a manner that demonstrates any significant non-linearities), and shifts 

(parallel and non-parallel) in the interest rate curve, as well as the maturity profile of the 

positions. 

The methods used by a banking entity to calculate sensitivities to a common factor shared 

by multiple trading desks, such as an equity price factor, must be applied consistently across its 

trading desks so that the sensitivities can be compared from one trading desk to another. 

Calculation Period: One trading day.
62

Measurement Frequency: Daily.

3. Value-at-Risk and Stress Value-at-Risk 

Description: For purposes of this appendix, Value-at-Risk (“VaR”) is the commonly 

used percentile measurement of the risk of future financial loss in the value of a given set of 

aggregated positions over a specified period of time, based on current market conditions. For 

purposes of this appendix, Stress Value-at-Risk (“Stress VaR”) is the percentile measurement of 

the risk of future financial loss in the value of a given set of aggregated positions over a specified 

period of time, based on market conditions during a period of significant financial stress. 

General Calculation Guidance: Banking entities must compute and report VaR and 

Stress VaR by employing generally accepted standards and methods of calculation. VaR should 

reflect a loss in a trading desk that is expected to be exceeded less than one percent of the time 

over a one-day period. For those banking entities that are subject to regulatory capital 

requirements imposed by a Federal banking agency, VaR and Stress VaR must be computed and 

reported in a manner that is consistent with such regulatory capital requirements. In cases where 

a trading desk does not have a standalone VaR or Stress VaR calculation but is part of a larger 

aggregation of positions for which a VaR or Stress VaR calculation is performed, a VaR or 

Stress VaR calculation that includes only the trading desk’s holdings must be performed 

consistent with the VaR or Stress VaR model and methodology used for the larger aggregation of 

positions.

Calculation Period: One trading day.

Measurement Frequency: Daily.

B. Source-of-Revenue Measurements

4. Comprehensive Profit and Loss Attribution

Description: For purposes of this appendix, Comprehensive Profit and Loss Attribution 

is an analysis that attributes the daily fluctuation in the value of a trading desk’s positions to 

various sources. First, the daily profit and loss of the aggregated positions is divided into three 

categories: (i) profit and loss attributable to a trading desk’s existing positions that were also 

positions held by the trading desk as of the end of the prior day (“existing positions”); (ii) profit 

and loss attributable to new positions resulting from the current day’s trading activity (“new 

positions”); and (iii) residual profit and loss that cannot be specifically attributed to existing 

positions or new positions. The sum of (i), (ii), and (iii) must equal the trading desk’s 

comprehensive profit and loss at each point in time. In addition, profit and loss measurements 

must calculate volatility of comprehensive profit and loss (i.e., the standard deviation of the 

trading desk’s one-day profit and loss, in dollar terms) for the reporting period for at least a 30-, 

60- and 90-day lag period, from the end of the reporting period, and any other period that the 

banking entity deems necessary to meet the requirements of the rule.

The comprehensive profit and loss associated with existing positions must reflect changes 

in the value of these positions on the applicable day. The comprehensive profit and loss from 

existing positions must be further attributed, as applicable, to changes in (i) the specific Risk 
63

Factors and other factors that are monitored and managed as part of the trading desk’s overall 

risk management policies and procedures; and (ii) any other applicable elements, such as cash 

flows, carry, changes in reserves, and the correction, cancellation, or exercise of a trade.

The comprehensive profit and loss attributed to new positions must reflect commissions 

and fee income or expense and market gains or losses associated with transactions executed on 

the applicable day. New positions include purchases and sales of financial instruments and other 

assets/liabilities and negotiated amendments to existing positions. The comprehensive profit and 

loss from new positions may be reported in the aggregate and does not need to be further 

attributed to specific sources.

The portion of comprehensive profit and loss that cannot be specifically attributed to 

known sources must be allocated to a residual category identified as an unexplained portion of 

the comprehensive profit and loss. Significant unexplained profit and loss must be escalated for 

further investigation and analysis.

General Calculation Guidance: The specific categories used by a trading desk in the 

attribution analysis and amount of detail for the analysis should be tailored to the type and 

amount of trading activities undertaken by the trading desk. The new position attribution must 

be computed by calculating the difference between the prices at which instruments were bought 

and/or sold and the prices at which those instruments are marked to market at the close of 

business on that day multiplied by the notional or principal amount of each purchase or sale. 

Any fees, commissions, or other payments received (paid) that are associated with transactions 

executed on that day must be added (subtracted) from such difference. These factors must be 

measured consistently over time to facilitate historical comparisons. 

Calculation Period: One trading day.

Measurement Frequency: Daily.

C. Customer-Facing Activity Measurements

5. Inventory Turnover

Description: For purposes of this appendix, Inventory Turnover is a ratio that measures 

the turnover of a trading desk’s inventory. The numerator of the ratio is the absolute value of all 

transactions over the reporting period. The denominator of the ratio is the value of the trading 

desk’s inventory at the beginning of the reporting period. 

General Calculation Guidance: For purposes of this appendix, for derivatives, other than 

options and interest rate derivatives, value means gross notional value, for options, value means 

delta adjusted notional value, and for interest rate derivatives, value means 10-year bond 

equivalent value. 

Calculation Period: 30 days, 60 days, and 90 days.

Measurement Frequency: Daily.
64

6. Inventory Aging

Description: For purposes of this appendix, Inventory Aging generally describes a 

schedule of the trading desk’s aggregate assets and liabilities and the amount of time that those 

assets and liabilities have been held. Inventory Aging should measure the age profile of the 

trading desk’s assets and liabilities.

General Calculation Guidance: In general, Inventory Aging must be computed using a 

trading desk’s trading activity data and must identify the value of a trading desk’s aggregate 

assets and liabilities. Inventory Aging must include two schedules, an asset-aging schedule and a 

liability-aging schedule. Each schedule must record the value of assets or liabilities held over all 

holding periods. For derivatives, other than options, and interest rate derivatives, value means 

gross notional value, for options, value means delta adjusted notional value and, for interest rate 

derivatives, value means 10-year bond equivalent value.

Calculation Period: One trading day.

Measurement Frequency: Daily.

7. Customer-Facing Trade Ratio – Trade Count Based and Value Based

Description: For purposes of this appendix, the Customer-Facing Trade Ratio is a ratio 

comparing (i) the transactions involving a counterparty that is a customer of the trading desk to 

(ii) the transactions involving a counterparty that is not a customer of the trading desk. A trade 

count based ratio must be computed that records the number of transactions involving a 

counterparty that is a customer of the trading desk and the number of transactions involving a 

counterparty that is not a customer of the trading desk. A value based ratio must be computed 

that records the value of transactions involving a counterparty that is a customer of the trading 

desk and the value of transactions involving a counterparty that is not a customer of the trading 

desk.

General Calculation Guidance: For purposes of calculating the Customer-Facing Trade 

Ratio, a counterparty is considered to be a customer of the trading desk if the counterparty is a 

market participant that makes use of the banking entity’s market making-related services by 

obtaining such services, responding to quotations, or entering into a continuing relationship with 

respect to such services. However, a trading desk or other organizational unit of another banking 

entity would not be a client, customer, or counterparty of the trading desk if the other entity has 

trading assets and liabilities of $50 billion or more as measured in accordance with § 75.20(d)(1) 

unless the trading desk documents how and why a particular trading desk or other organizational 

unit of the entity should be treated as a client, customer, or counterparty of the trading desk. 

Transactions conducted anonymously on an exchange or similar trading facility that permits 

trading on behalf of a broad range of market participants would be considered transactions with 

customers of the trading desk. For derivatives, other than options, and interest rate derivatives, 

value means gross notional value, for options, value means delta adjusted notional value, and for 

interest rate derivatives, value means 10-year bond equivalent value.

Calculation Period: 30 days, 60 days, and 90 days.
65

Measurement Frequency: Daily.

Appendix B: Enhanced Minimum Standards for Compliance Programs

I. Overview 

Section 75.20(c) requires certain banking entities to establish, maintain, and enforce an 

enhanced compliance program that includes the requirements and standards in this Appendix as 

well as the minimum written policies and procedures, internal controls, management framework, 

independent testing, training, and recordkeeping provisions outlined in § 75.20. This Appendix 

sets forth additional minimum standards with respect to the establishment, oversight, 

maintenance, and enforcement by these banking entities of an enhanced internal compliance 

program for ensuring and monitoring compliance with the prohibitions and restrictions on 

proprietary trading and covered fund activities and investments set forth in section 13 of the 

BHC Act and this part. 

This compliance program must:

 Be reasonably designed to identify, document, monitor, and report the permitted trading 

and covered fund activities and investments of the banking entity; identify, monitor and 

promptly address the risks of these covered activities and investments and potential areas 

of noncompliance; and prevent activities or investments prohibited by, or that do not 

comply with, section 13 of the BHC Act and this part; 

 Establish and enforce appropriate limits on the covered activities and investments of the 

banking entity, including limits on the size, scope, complexity, and risks of the individual 

activities or investments consistent with the requirements of section 13 of the BHC Act 

and this part; 

 Subject the effectiveness of the compliance program to periodic independent review and 

testing, and ensure that the entity’s internal audit, corporate compliance and internal 

control functions involved in review and testing are effective and independent;

 Make senior management, and others as appropriate, accountable for the effective 

implementation of the compliance program, and ensure that the board of directors and 

chief executive officer (or equivalent) of the banking entity review the effectiveness of 

the compliance program; and

 Facilitate supervision and examination by the Agencies of the banking entity’s permitted

trading and covered fund activities and investments.

II. Enhanced Compliance Program

A. Proprietary Trading Activities

A banking entity must establish, maintain and enforce a compliance program that 

includes written policies and procedures that are appropriate for the types, size, and complexity 

of, and risks associated with, its permitted trading activities. The compliance program may be 
66

tailored to the types of trading activities conducted by the banking entity, and must include a 

detailed description of controls established by the banking entity to reasonably ensure that its 

trading activities are conducted in accordance with the requirements and limitations applicable to 

those trading activities under section 13 of the BHC Act and this part, and provide for 

appropriate revision of the compliance program before expansion of the trading activities of the 

banking entity. A banking entity must devote adequate resources and use knowledgeable 

personnel in conducting, supervising and managing its trading activities, and promote 

consistency, independence and rigor in implementing its risk controls and compliance efforts. 

The compliance program must be updated with a frequency sufficient to account for changes in 

the activities of the banking entity, results of independent testing of the program, identification of 

weaknesses in the program, and changes in legal, regulatory or other requirements.

Trading Desks: The banking entity must have written policies and procedures governing 

each trading desk that include a description of:

 The process for identifying, authorizing and documenting financial instruments each 

trading desk may purchase or sell, with separate documentation for market makingrelated activities conducted in reliance on § 75.4(b) and for hedging activity conducted in 

reliance on § 75.5;

 A mapping for each trading desk to the division, business line, or other organizational 

structure that is responsible for managing and overseeing the trading desk’s activities;

 The mission (i.e., the type of trading activity, such as market-making, trading in 

sovereign debt, etc.) and strategy (i.e., methods for conducting authorized trading 

activities) of each trading desk;

 The activities that the trading desk is authorized to conduct, including (i) authorized 

instruments and products, and (ii) authorized hedging strategies, techniques and 

instruments;

 The types and amount of risks allocated by the banking entity to each trading desk to 

implement the mission and strategy of the trading desk, including an enumeration of 

material risks resulting from the activities in which the trading desk is authorized to 

engage (including but not limited to price risks, such as basis, volatility and correlation 

risks, as well as counterparty credit risk). Risk assessments must take into account both 

the risks inherent in the trading activity and the strength and effectiveness of controls 

designed to mitigate those risks;

 How the risks allocated to each trading desk will be measured; 

 Why the allocated risks levels are appropriate to the activities authorized for the trading 

desk; 

 The limits on the holding period of, and the risk associated with, financial instruments 

under the responsibility of the trading desk;
67

 The process for setting new or revised limits, as well as escalation procedures for 

granting exceptions to any limits or to any policies or procedures governing the desk, the 

analysis that will be required to support revising limits or granting exceptions, and the 

process for independently reviewing and documenting those exceptions and the 

underlying analysis;

 The process for identifying, documenting and approving new products, trading strategies, 

and hedging strategies;

 The types of clients, customers, and counterparties with whom the trading desk may 

trade; and

 The compensation arrangements, including incentive arrangements, for employees 

associated with the trading desk, which may not be designed to reward or incentivize

prohibited proprietary trading or excessive or imprudent risk-taking.

Description of risks and risk management processes: The compliance program for the 

banking entity must include a comprehensive description of the risk management program for 

the trading activity of the banking entity. The compliance program must also include a 

description of the governance, approval, reporting, escalation, review and other processes the 

banking entity will use to reasonably ensure that trading activity is conducted in compliance with 

section 13 of the BHC Act and this part. Trading activity in similar financial instruments should 

be subject to similar governance, limits, testing, controls, and review, unless the banking entity 

specifically determines to establish different limits or processes and documents those differences. 

Descriptions must include, at a minimum, the following elements:

 A description of the supervisory and risk management structure governing all trading 

activity, including a description of processes for initial and senior-level review of new 

products and new strategies;

 A description of the process for developing, documenting, testing, approving and 

reviewing all models used for valuing, identifying and monitoring the risks of trading 

activity and related positions, including the process for periodic independent testing of 

the reliability and accuracy of those models;

 A description of the process for developing, documenting, testing, approving and 

reviewing the limits established for each trading desk; 

 A description of the process by which a security may be purchased or sold pursuant to the 

liquidity management plan, including the process for authorizing and monitoring such 

activity to ensure compliance with the banking entity’s liquidity management plan and 

the restrictions on liquidity management activities in this part;

 A description of the management review process, including escalation procedures, for 

approving any temporary exceptions or permanent adjustments to limits on the activities, 

positions, strategies, or risks associated with each trading desk; and
68

 The role of the audit, compliance, risk management and other relevant units for 

conducting independent testing of trading and hedging activities, techniques and 

strategies.

Authorized risks, instruments, and products. The banking entity must implement and 

enforce limits and internal controls for each trading desk that are reasonably designed to ensure 

that trading activity is conducted in conformance with section 13 of the BHC Act and this part 

and with the banking entity’s written policies and procedures. The banking entity must establish 

and enforce risk limits appropriate for the activity of each trading desk. These limits should be 

based on probabilistic and non-probabilistic measures of potential loss (e.g., Value-at-Risk and 

notional exposure, respectively), and measured under normal and stress market conditions. At a 

minimum, these internal controls must monitor, establish and enforce limits on:

• The financial instruments (including, at a minimum, by type and exposure) that the 

trading desk may trade; 

• The types and levels of risks that may be taken by each trading desk; and

• The types of hedging instruments used, hedging strategies employed, and the amount 

of risk effectively hedged.

Hedging policies and procedures. The banking entity must establish, maintain, and 

enforce written policies and procedures regarding the use of risk-mitigating hedging instruments 

and strategies that, at a minimum, describe:

 The positions, techniques and strategies that each trading desk may use to hedge the risk 

of its positions;

 The manner in which the banking entity will identify the risks arising in connection with 

and related to the individual or aggregated positions, contracts or other holdings of the 

banking entity that are to be hedged and determine that those risks have been properly 

and effectively hedged;

 The level of the organization at which hedging activity and management will occur;

 The manner in which hedging strategies will be monitored and the personnel responsible 

for such monitoring;

 The risk management processes used to control unhedged or residual risks; and

 The process for developing, documenting, testing, approving and reviewing all hedging 

positions, techniques and strategies permitted for each trading desk and for the banking 

entity in reliance on § 75.5.

Analysis and quantitative measurements. The banking entity must perform robust 

analysis and quantitative measurement of its trading activities that is reasonably designed to 

ensure that the trading activity of each trading desk is consistent with the banking entity’s 

compliance program; monitor and assist in the identification of potential and actual prohibited 
69

proprietary trading activity; and prevent the occurrence of prohibited proprietary trading. 

Analysis and models used to determine, measure and limit risk must be rigorously tested and be 

reviewed by management responsible for trading activity to ensure that trading activities, limits, 

strategies, and hedging activities do not understate the risk and exposure to the banking entity or 

allow prohibited proprietary trading. This review should include periodic and independent backtesting and revision of activities, limits, strategies and hedging as appropriate to contain risk and 

ensure compliance. In addition to the quantitative measurements reported by any banking entity 

subject to Appendix A to this part, each banking entity must develop and implement, to the 

extent appropriate to facilitate compliance with this part, additional quantitative measurements 

specifically tailored to the particular risks, practices, and strategies of its trading desks. The

banking entity’s analysis and quantitative measurements must incorporate the quantitative 

measurements reported by the banking entity pursuant to Appendix A (if applicable) and include, 

at a minimum, the following:

• Internal controls and written policies and procedures reasonably designed to ensure 

the accuracy and integrity of quantitative measurements;

• Ongoing, timely monitoring and review of calculated quantitative measurements;

• The establishment of numerical thresholds and appropriate trading measures for each 

trading desk and heightened review of trading activity not consistent with those 

thresholds to ensure compliance with section 13 of the BHC Act and this part, 

including analysis of the measurement results or other information, appropriate 

escalation procedures, and documentation related to the review; and

• Immediate review and compliance investigation of the trading desk’s activities, 

escalation to senior management with oversight responsibilities for the applicable 

trading desk, timely notification to the Commission, appropriate remedial action (e.g., 

divesting of impermissible positions, cessation of impermissible activity, disciplinary 

actions), and documentation of the investigation findings and remedial action taken 

when quantitative measurements or other information, considered together with the 

facts and circumstances, or findings of internal audit, independent testing or other 

review suggest a reasonable likelihood that the trading desk has violated any part of 

section 13 of the BHC Act or this part.

Other Compliance Matters. In addition to the requirements specified above, the banking 

entity’s compliance program must:

 Identify activities of each trading desk that will be conducted in reliance on exemptions 

contained in §§ 75.4 through 75.6, including an explanation of:

o How and where in the organization the activity occurs; and

o Which exemption is being relied on and how the activity meets the specific 

requirements for reliance on the applicable exemption;
70

 Include an explanation of the process for documenting, approving and reviewing actions 

taken pursuant to the liquidity management plan, where in the organization this activity 

occurs, the securities permissible for liquidity management, the process for ensuring that 

liquidity management activities are not conducted for the purpose of prohibited 

proprietary trading, and the process for ensuring that securities purchased as part of the 

liquidity management plan are highly liquid and conform to the requirements of this part;

 Describe how the banking entity monitors for and prohibits potential or actual material 

exposure to high-risk assets or high-risk trading strategies presented by each trading desk 

that relies on the exemptions contained in §§ 75.3(d)(3), and 75.4 through 75.6 , which 

must take into account potential or actual exposure to:

o Assets whose values cannot be externally priced or, where valuation is reliant on 

pricing models, whose model inputs cannot be externally validated;

o Assets whose changes in value cannot be adequately mitigated by effective 

hedging;

o New products with rapid growth, including those that do not have a market 

history;

o Assets or strategies that include significant embedded leverage;

o Assets or strategies that have demonstrated significant historical volatility;

o Assets or strategies for which the application of capital and liquidity standards 

would not adequately account for the risk; and

o Assets or strategies that result in large and significant concentrations to sectors, 

risk factors, or counterparties; 

 Establish responsibility for compliance with the reporting and recordkeeping 

requirements of subpart B and § 75.20; and

 Establish policies for monitoring and prohibiting potential or actual material conflicts of 

interest between the banking entity and its clients, customers, or counterparties. 

Remediation of violations. The banking entity’s compliance program must be reasonably 

designed and established to effectively monitor and identify for further analysis any trading 

activity that may indicate potential violations of section 13 of the BHC Act and this part and to 

prevent actual violations of section 13 of the BHC Act and this part. The compliance program

must describe procedures for identifying and remedying violations of section 13 of the BHC Act 

and this part, and must include, at a minimum, a requirement to promptly document, address and 

remedy any violation of section 13 of the BHC Act or this part, and document all proposed and 

actual remediation efforts. The compliance program must include specific written policies and 

procedures that are reasonably designed to assess the extent to which any activity indicates that 

modification to the banking entity’s compliance program is warranted and to ensure that 

appropriate modifications are implemented. The written policies and procedures must provide 
71

for prompt notification to appropriate management, including senior management and the board 

of directors, of any material weakness or significant deficiencies in the design or implementation 

of the compliance program of the banking entity.

B. Covered Fund Activities or Investments

A banking entity must establish, maintain and enforce a compliance program that 

includes written policies and procedures that are appropriate for the types, size, complexity and 

risks of the covered fund and related activities conducted and investments made, by the banking 

entity.

Identification of covered funds. The banking entity’s compliance program must provide a 

process, which must include appropriate management review and independent testing, for 

identifying and documenting covered funds that each unit within the banking entity’s 

organization sponsors or organizes and offers, and covered funds in which each such unit invests. 

In addition to the documentation requirements for covered funds, as specified under § 75.20(e), 

the documentation must include information that identifies all pools that the banking entity 

sponsors or has an interest in and the type of exemption from the Commodity Exchange Act

(whether or not the pool relies on section 4.7 of the regulations under the Commodity Exchange 

Act), and the amount of ownership interest the banking entity has in those pools.

Identification of covered fund activities and investments. The banking entity’s 

compliance program must identify, document and map each unit within the organization that is 

permitted to acquire or hold an interest in any covered fund or sponsor any covered fund and 

map each unit to the division, business line, or other organizational structure that will be 

responsible for managing and overseeing that unit’s activities and investments.

Explanation of compliance. The banking entity’s compliance program must explain how:

 The banking entity monitors for and prohibits potential or actual material conflicts 

of interest between the banking entity and its clients, customers, or counterparties 

related to its covered fund activities and investments;

 The banking entity monitors for and prohibits potential or actual transactions or 

activities that may threaten the safety and soundness of the banking entity related 

to its covered fund activities and investments; and

 The banking entity monitors for and prohibits potential or actual material 

exposure to high-risk assets or high-risk trading strategies presented by its 

covered fund activities and investments, taking into account potential or actual 

exposure to:

o Assets whose values cannot be externally priced or, where valuation is 

reliant on pricing models, whose model inputs cannot be externally 

validated; 

o Assets whose changes in values cannot be adequately mitigated by 

effective hedging;
72

o New products with rapid growth, including those that do not have a 

market history;

o Assets or strategies that include significant embedded leverage;

o Assets or strategies that have demonstrated significant historical volatility;

o Assets or strategies for which the application of capital and liquidity 

standards would not adequately account for the risk; and

o Assets or strategies that expose the banking entity to large and significant 

concentrations with respect to sectors, risk factors, or counterparties;

Description and documentation of covered fund activities and investments. For each 

organizational unit engaged in covered fund activities and investments, the banking entity’s 

compliance program must document:

o The covered fund activities and investments that the unit is authorized to conduct;

o The banking entity’s plan for actively seeking unaffiliated investors to ensure that any 

investment by the banking entity conforms to the limits contained in § 75.12 or 

registered in compliance with the securities laws and thereby exempt from those 

limits within the time periods allotted in§ 75.12; and

o How it complies with the requirements of subpart C.

Internal Controls. A banking entity must establish, maintain, and enforce internal controls 

that are reasonably designed to ensure that its covered fund activities or investments comply with 

the requirements of section 13 of the BHC Act and this part and are appropriate given the limits 

on risk established by the banking entity. These written internal controls must be reasonably 

designed and established to effectively monitor and identify for further analysis any covered 

fund activity or investment that may indicate potential violations of section 13 of the BHC Act or 

this part.

The internal controls must, at a minimum require:

• Monitoring and limiting the banking entity’s individual and aggregate investments in 

covered funds;

• Monitoring the amount and timing of seed capital investments for compliance with 

the limitations under subpart C (including but not limited to the redemption, sale or 

disposition requirements) of § 75.12, and the effectiveness of efforts to seek 

unaffiliated investors to ensure compliance with those limits;

• Calculating the individual and aggregate levels of ownership interests in one or more 

covered fund required by § 75.12;
73

• Attributing the appropriate instruments to the individual and aggregate ownership 

interest calculations above;

• Making disclosures to prospective and actual investors in any covered fund organized 

and offered or sponsored by the banking entity, as provided under § 75.11(a)(8); 

• Monitoring for and preventing any relationship or transaction between the banking 

entity and a covered fund that is prohibited under § 75.14, including where the 

banking entity has been designated as the sponsor, investment manager, investment 

adviser, or commodity trading advisor to a covered fund by another banking entity; 

and

 Appropriate management review and supervision across legal entities of the banking 

entity to ensure that services and products provided by all affiliated entities comply 

with the limitation on services and products contained in § 75.14. 

Remediation of violations. The banking entity’s compliance program must be reasonably 

designed and established to effectively monitor and identify for further analysis any covered 

fund activity or investment that may indicate potential violations of section 13 of the BHC Act or 

this part and to prevent actual violations of section 13 of the BHC Act and this part. The banking 

entity’s compliance program must describe procedures for identifying and remedying violations 

of section 13 of the BHC Act and this part, and must include, at a minimum, a requirement to

promptly document, address and remedy any violation of section 13 of the BHC Act or this part, 

including § 75.21, and document all proposed and actual remediation efforts. The compliance 

program must include specific written policies and procedures that are reasonably designed to 

assess the extent to which any activity or investment indicates that modification to the banking 

entity’s compliance program is warranted and to ensure that appropriate modifications are 

implemented. The written policies and procedures must provide for prompt notification to 

appropriate management, including senior management and the board of directors, of any 

material weakness or significant deficiencies in the design or implementation of the compliance 

program of the banking entity.

III. Responsibility and Accountability for the Compliance Program

A banking entity must establish, maintain, and enforce a governance and management 

framework to manage its business and employees with a view to preventing violations of section 

13 of the BHC Act and this part. A banking entity must have an appropriate management 

framework reasonably designed to ensure that: appropriate personnel are responsible and 

accountable for the effective implementation and enforcement of the compliance program; a 

clear reporting line with a chain of responsibility is delineated; and the compliance program is 

reviewed periodically by senior management. The board of directors (or equivalent governance 

body) and senior management should have the appropriate authority and access to personnel and 

information within the organizations as well as appropriate resources to conduct their oversight 

activities effectively. 
74

Corporate governance. The banking entity must adopt a written compliance program 

approved by the board of directors, an appropriate committee of the board, or equivalent 

governance body, and senior management.

Management procedures. The banking entity must establish, maintain, and enforce a 

governance framework that is reasonably designed to achieve compliance with section 13 of the 

BHC Act and this part, which, at a minimum, provides for:

• The designation of appropriate senior management or committee of senior 

management with authority to carry out the management responsibilities of the 

banking entity for each trading desk and for each organizational unit engaged in 

covered fund activities;

• Written procedures addressing the management of the activities of the banking entity 

that are reasonably designed to achieve compliance with section 13 of the BHC Act 

and this part, including:

o A description of the management system, including the titles, qualifications, 

and locations of managers and the specific responsibilities of each person with 

respect to the banking entity’s activities governed by section 13 of the BHC 

Act and this part; and

o Procedures for determining compensation arrangements for traders engaged in 

underwriting or market making-related activities under § 75.4 or riskmitigating hedging activities under § 75.5 so that such compensation 

arrangements are designed not to reward or incentivize prohibited proprietary 

trading and appropriately balance risk and financial results in a manner that 

does not encourage employees to expose the banking entity to excessive or 

imprudent risk.

Business line managers. Managers with responsibility for one or more trading desks of 

the banking entity are accountable for the effective implementation and enforcement of the 

compliance program with respect to the applicable trading desk(s).

Board of directors, or similar corporate body, and senior management. The board of 

directors, or similar corporate body, and senior management are responsible for setting and 

communicating an appropriate culture of compliance with section 13 of the BHC Act and this 

part and ensuring that appropriate policies regarding the management of trading activities and 

covered fund activities or investments are adopted to comply with section 13 of the BHC Act and 

this part. The board of directors or similar corporate body (such as a designated committee of 

the board or an equivalent governance body) must ensure that senior management is fully 

capable, qualified, and properly motivated to manage compliance with this part in light of the 

organization’s business activities and the expectations of the board of directors. The board of 

directors or similar corporate body must also ensure that senior management has established 

appropriate incentives and adequate resources to support compliance with this part, including the 

implementation of a compliance program meeting the requirements of this appendix into 

management goals and compensation structures across the banking entity. 
75

Senior management. Senior management is responsible for implementing and enforcing 

the approved compliance program. Senior management must also ensure that effective 

corrective action is taken when failures in compliance with section 13 of the BHC Act and this 

part are identified. Senior management and control personnel charged with overseeing 

compliance with section 13 of the BHC Act and this part should review the compliance program 

for the banking entity periodically and report to the board, or an appropriate committee thereof, 

on the effectiveness of the compliance program and compliance matters with a frequency 

appropriate to the size, scope, and risk profile of the banking entity’s trading activities and 

covered fund activities or investments, which shall be at least annually.

CEO attestation. Based on a review by the CEO of the banking entity, the CEO of the 

banking entity must, annually, attest in writing to the Commission that the banking entity has in 

place processes to establish, maintain, enforce, review, test and modify the compliance program 

established under this Appendix and § 75.20 of this part in a manner reasonably designed to 

achieve compliance with section 13 of the BHC Act and this part. In the case of a U.S. branch or 

agency of a foreign banking entity, the attestation may be provided for the entire U.S. operations 

of the foreign banking entity by the senior management officer of the United States operations of 

the foreign banking entity who is located in the United States.

IV. Independent Testing

Independent testing must occur with a frequency appropriate to the size, scope, and risk 

profile of the banking entity’s trading and covered fund activities or investments, which shall be 

at least annually. This independent testing must include an evaluation of:

• The overall adequacy and effectiveness of the banking entity’s compliance program, 

including an analysis of the extent to which the program contains all the required 

elements of this appendix;

• The effectiveness of the banking entity’s internal controls, including an analysis and 

documentation of instances in which such internal controls have been breached, and how 

such breaches were addressed and resolved; and

• The effectiveness of the banking entity’s management procedures.

A banking entity must ensure that independent testing regarding the effectiveness of the 

banking entity’s compliance program is conducted by a qualified independent party, such as the 

banking entity’s internal audit department, compliance personnel or risk managers independent

of the organizational unit being tested, outside auditors, consultants, or other qualified 

independent parties. A banking entity must promptly take appropriate action to remedy any 

significant deficiencies or material weaknesses in its compliance program and to terminate any 

violations of section 13 of the BHC Act or this part.

V. Training

Banking entities must provide adequate training to personnel and managers of the 

banking entity engaged in activities or investments governed by section 13 of the BHC Act or 

this part, as well as other appropriate supervisory, risk, independent testing, and audit personnel, 
76

in order to effectively implement and enforce the compliance program. This training should 

occur with a frequency appropriate to the size and the risk profile of the banking entity’s trading 

activities and covered fund activities or investments.

VI. Recordkeeping

Banking entities must create and retain records sufficient to demonstrate compliance and 

support the operations and effectiveness of the compliance program. A banking entity must 

retain these records for a period that is no less than 5 years or such longer period as required by 

the Commission in a form that allows it to promptly produce such records to the Commission on 

request.