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DEPARTMENT OF TREASURY

Office of the Comptroller of the Currency

12 CFR Part 44

Docket No. OCC-2020-0002

RIN 1557-AE67

FEDERAL RESERVE SYSTEM 

12 CFR Part 248 

Docket No. R-1694

RIN 7100-AF70

FEDERAL DEPOSIT INSURANCE CORPORATION 

12 CFR Part 351

RIN 3064-AF17

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 75 

RIN 3038-AE93

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 255 

Release no. BHCA-[]; File no. S7-[]-20 

RIN 3235-AM70

Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and 

Relationships With, Hedge Funds and Private Equity Funds

AGENCY: Office of the Comptroller of the Currency, Treasury (OCC); Board of Governors of 

the Federal Reserve System (Board); Federal Deposit Insurance Corporation (FDIC); Securities 

and Exchange Commission (SEC); and Commodity Futures Trading Commission (CFTC).

ACTION: Final rule.

SUMMARY: The OCC, Board, FDIC, SEC, and CFTC (together, the agencies) are adopting 

amendments to the regulations implementing section 13 of the Bank Holding Company Act

(BHC Act). Section 13 contains certain restrictions on the ability of a banking entity or nonbank 

financial company supervised by the Board to engage in proprietary trading and have certain 

interests in, or relationships with, a hedge fund or private equity fund (covered funds). These

final amendments are intended to improve and streamline the regulations implementing section 
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13 of the BHC Act by modifying and clarifying requirements related to the covered fund 

provisions of the rules.

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

FOR FURTHER INFORMATION CONTACT: 

OCC: Roman Goldstein, Risk Specialist, Treasury and Market Risk Policy, (202) 649-

6360; Tabitha Edgens, Counsel; Mark O’Horo, Senior Attorney, Chief Counsel’s Office, (202) 

649-5490; for persons who are deaf or hearing impaired, TTY, (202) 649-5597, Office of the 

Comptroller of the Currency, 400 7th Street, SW, Washington, DC 20219.

Board: Flora Ahn, Special Counsel, (202) 452-2317, Gregory Frischmann, Senior 

Counsel, (202) 452-2803, Kirin Walsh, Attorney, (202) 452-3058, or Sarah Podrygula, Attorney, 

(202) 912-4658, Legal Division, Elizabeth MacDonald, Manager, (202) 475-6316, Cecily Boggs, 

Senior Financial Institution Policy Analyst, (202) 530-6209, Brendan Rowan, Senior Financial 

Institution Policy Analyst, (202) 475-6685, Christopher Powell, Senior Financial Institution 

Policy Analyst, (202) 452-3442, Nathaniel Grant, Lead Financial Institution Policy Analyst, 

(202) 452-3105, David McArthur, Senior Economist, (202) 452-2985, Division of Supervision 

and Regulation; Board of Governors of the Federal Reserve System, 20th and C Streets, NW, 

Washington, DC 20551. 

FDIC: Bobby R. Bean, Associate Director, bbean@fdic.gov, Andrew D. Carayiannis, 

Senior Policy Analyst, acarayiannis@fdic.gov, or Brian Cox, Senior Policy Analyst, 

brcox@fdic.gov, Capital Markets Branch, (202) 898-6888; Michael B. Phillips, Counsel, 

mphillips@fdic.gov, Benjamin J. Klein, Counsel, bklein@fdic.gov, or Annmarie H. Boyd, 

Counsel, aboyd@fdic.gov, Legal Division, Federal Deposit Insurance Corporation, 550 17th 

Street, NW, Washington, DC 20429.
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CFTC: Cantrell Dumas, Special Counsel, (202) 418-5043, cdumas@cftc.gov, Division 

of Swap Dealer and Intermediary Oversight; Mark Fajfar, Assistant General Counsel, (202) 418-

6636, mfajfar@cftc.gov, Office of the General Counsel; Stephen Kane, Research Economist, 

(202) 418-5911, skane@cftc.gov, Office of the Chief Economist; Commodity Futures Trading 

Commission, Three Lafayette Centre, 1155 21st Street, NW, Washington, DC 20581.

SEC: Juliet M. Han, Senior Counsel, William Miller, Senior Counsel, Benjamin A. 

Tecmire, Senior Counsel, or Jennifer Songer, Branch Chief at (202) 551-6787 or 

IArules@sec.gov, Investment Adviser Regulation Office, Division of Investment Management, 

and Katherine Hsu, Office Chief, or Benjamin Meeks, Special Counsel at (202) 551-3850, Office 

of Structured Finance, Division of Corporation Finance, U.S. Securities and Exchange 

Commission, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Background

II. Notice of Proposed Rulemaking

III. Overview of the Final Rule 

IV. Summary of the Final Rule

A. Qualifying Foreign Excluded Funds

B. Modifications to Existing Covered Fund Exclusions

1. Foreign Public Funds

2. Loan Securitizations

3. Public Welfare and Small Business Funds

C. Additional Covered Fund Exclusions 

1. Credit Funds

2. Venture Capital Funds

3. Family Wealth Management Vehicles

4. Customer Facilitation Vehicles

D. Limitations on Relationships with a Covered Fund

E. Ownership Interest

F. Parallel Investments

G. Technical Amendments

V. Administrative Law Matters

A. Use of Plain Language
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B. Paperwork Reduction Act 

C. Regulatory Flexibility Act Analysis

D. Riegle Community Development and Regulatory Improvement Act

E. OCC Unfunded Mandates Reform Act

F. SEC Economic Analysis

G. Congressional Review Act

I. Background

Section 13 of the BHC Act,

1 also known as the Volcker Rule, generally prohibits any 

banking entity from engaging in proprietary trading or from acquiring or retaining an ownership 

interest in, sponsoring, or having certain relationships with a hedge fund or private equity fund 

(covered fund).2 The statute expressly exempts from these prohibitions various activities, 

including, among other things:

• Underwriting and market making-related activities; 

• Risk-mitigating hedging activities; 

• Activities on behalf of customers; 

• Activities for the general account of insurance companies; and

• Trading and covered fund activities and investments by non-U.S. banking entities 

solely outside the United States.3

In addition, section 13 of the BHC Act contains an exemption that permits banking 

entities to organize and offer, including sponsor, covered funds, subject to certain restrictions, 

including that banking entities do not rescue investors in those funds from loss, and are not

 1

 12 U.S.C. 1851. 

2

 Id.

3

 12 U.S.C. 1851(d)(1). 
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themselves exposed to significant losses due to investments in or other relationships with these 

funds.4

Authority under section 13 of the BHC Act for developing and adopting regulations to 

implement the prohibitions, restrictions, and exemptions of section 13 is shared among the 

Board, the FDIC, the OCC, the SEC, and the CFTC (individually, an agency, and collectively, 

the agencies).5

 The agencies originally issued a final rule implementing section 13 in December 

2013 (the 2013 rule), and those provisions became effective on April 1, 2014.6 

The agencies published a notice of proposed rulemaking in July 2018 (the 2018 proposal) 

that proposed several amendments to the 2013 rule.7 These proposed revisions sought to provide 

greater clarity and certainty about what activities are prohibited under the 2013 rule – in 

particular, under the prohibition on proprietary trading – and to better tailor the compliance 

requirements based on the risk of a banking entity’s trading activities. The agencies issued a 

 4

 12 U.S.C. 1851(d)(1)(G). Other restrictions and requirements include: (1) the banking entity 

provides bona fide trust, fiduciary, or investment advisory services; (2) the fund is organized and 

offered only to customers in connection with the provision of such services; (3) the banking 

entity does not have an ownership interest in the fund, except for a de minimis investment; (4) 

the banking entity complies with certain marketing restrictions related to the fund; (5) no director 

or employee of the banking entity has an ownership interest in the fund, with certain exceptions; 

and (6) the banking entity discloses to investors that it does not guarantee the performance of the 

fund. Id.

5

 12 U.S.C. 1851(b)(2).

6

 Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and 

Relationships with, Hedge Funds and Private Equity Funds; Final Rule, 79 FR 5535 

(Jan. 31, 2014).

7

 Proposed Revisions to Prohibitions and Restrictions on Proprietary Trading and Certain 

Interests in, and Relationships With, Hedge Funds and Private Equity Funds, 83 FR 33432 (July 

17, 2018).
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final rule implementing amendments to the 2013 rule in November 2019 (the 2019 amendments), 

and those provisions became effective in January 2020.

8

As part of the 2018 proposal, the agencies proposed targeted changes to the provisions of 

the 2013 rule relating to acquiring or retaining an ownership interest in, sponsoring, or having 

certain relationships with a fund and sought comments on other aspects of the covered fund 

provisions beyond those changes for which specific rule text was proposed.

9

 The 2019 

amendments finalized those changes to the covered fund provisions for which specific rule text 

was proposed in the 2018 proposal.

10 The agencies indicated they would issue a separate 

proposal addressing and requesting comment on the covered fund provisions of the rule and 

other fund-related issues, and, in February 2020, the agencies issued a separate notice of 

proposed rulemaking that specifically addressed those areas (the 2020 proposal).

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II. Notice of Proposed Rulemaking

In the 2020 proposal, the agencies proposed revisions to a number of the provisions 

regarding covered fund investments and activities as well as to other provisions of the 

implementing regulations related to the treatment of funds. The proposed changes, which were 

based on comments received in response to the agencies’ questions in the 2018 proposal and the 

 8

 Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and 

Relationships With, Hedge Funds and Private Equity Funds, 84 FR 61974 (Nov. 14, 2019). The 

regulations implementing section 13 of the BHC Act, as amended through June 1, 2020, are 

referred throughout as the “implementing regulations.”

9

 83 FR 33471–87. 

10 In response to the 2018 proposal, the agencies received numerous comments related to 

covered fund issues for which no specific rule text was proposed. However, in the preamble to 

the 2019 amendments, the agencies generally deferred public consideration of such comments to 

a future proposed rulemaking. 84 FR 62016.

11 Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and 

Relationships With, Hedge Funds and Private Equity Funds, 85 FR 12120 (Feb. 28, 2020).
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agencies’ experience with the implementing regulations, were intended to reduce the 

extraterritorial impact of the implementing regulations, improve and streamline the covered fund 

provisions, and provide clarity to banking entities regarding the provision of financial services 

and the conduct of permissible activities in a manner that is consistent with the requirements of 

section 13 of the BHC Act.

To better limit the extraterritorial impact of the implementing regulations, the 2020 

proposal would have exempted the activities of certain funds that are organized outside of the 

United States and offered to foreign investors (qualifying foreign excluded funds) from the 

restrictions of the implementing regulations. Under the 2013 rule, in certain circumstances, 

some foreign funds that are not “covered funds” may be subject to the implementing regulations

as “banking entities,” if they are controlled by a foreign banking entity, and thus could be subject 

to more onerous compliance obligations than are imposed on similarly-situated U.S. covered 

funds, even though the foreign funds have limited nexus to the United States. Accordingly, the 

2020 proposal would have codified an existing policy statement by the Federal banking agencies 

(the OCC, Board, and FDIC) that addresses the potential issues related to a foreign banking 

entity controlling qualifying foreign excluded funds. 

The 2020 proposal also would have made modifications to several existing exclusions 

from the covered fund provisions to provide clarity and simplify compliance with the 

requirements of the implementing regulations. First, the 2020 proposal would have revised

certain restrictions in the foreign public funds exclusion to more closely align the provision with 

the exclusion for similarly-situated U.S. registered investment companies. Second, the 2020 

proposal would have permitted loan securitizations excluded from the definition of covered fund

to hold a small amount of non-loan assets, consistent with past industry practice, and would have 
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codified existing staff-level guidance regarding this exclusion. In addition, the 2020 proposal

would have revised the exclusion for small business investment companies to account for the life 

cycle of those companies and requested comment on whether to clarify the scope of the 

exclusion for public welfare and other investments to include rural business investment 

companies and qualified opportunity funds. Finally, the 2020 proposal would have addressed

concerns about certain components of the preamble to the 2013 rule related to calculating a 

banking entity’s ownership interests in covered funds.

The agencies also included in the 2020 proposal several new exclusions from the covered 

fund definition in order to more directly align the regulation with the purpose of the statute. For 

example, the agencies recognized that the implementing regulations have inhibited banking 

entities’ ability to extend credit by restricting their relationships with credit funds, and the 2020 

proposal would have created a new exclusion for such funds. Under the 2020 proposal, banking 

entities would have been able to invest in and have certain relationships with credit funds that 

extend the type of credit that a banking entity may provide directly, subject to certain safeguards. 

Relatedly, the 2020 proposal would have established an exclusion from the definition of covered 

fund for venture capital funds. This provision was intended to facilitate banking entities’

abilities to engage in this important type of development and investment activity, which may 

facilitate capital formation and provide important financing for small businesses, particularly in 

areas where such financing may not be readily available. In addition, the agencies believed that 

excluding such activities would be consistent with the purpose of the statute, as it would exclude 

fund activities that do not present the risks that section 13 of the BHC Act was intended to 

address.
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The 2020 proposal also would have allowed a banking entity to provide certain 

traditional financial services to its customers via a fund structure, subject to certain safeguards

and limitations. First, the 2020 proposal would have excluded from the definition of covered 

fund an entity created and used to facilitate customer exposures to a transaction, investment 

strategy, or other service. Second, the 2020 proposal would have excluded from the covered 

fund definition wealth management vehicles that manage the investment portfolio of a family

and certain other closely related persons. Both of these provisions were intended to allow a 

banking entity to provide such services in the manner best suited to its customers.

In addition, the 2020 proposal would have permitted a banking entity to engage in a 

limited set of covered transactions with a covered fund that the banking entity sponsors or 

advises or with which the banking entity has certain other relationships. The implementing 

regulations generally prohibit all covered transactions between a covered fund and its banking 

entity sponsor or investment adviser. The agencies, in the 2020 proposal, recognized that the 

existing restrictions have prevented banking entities from providing certain traditional banking

services to covered funds, such as standard payment, clearing, and settlement services.

Lastly, the 2020 proposal would have clarified certain aspects of the definition of 

ownership interest. Currently, due to the broad definition of ownership interest, some loans by 

banking entities to covered funds could be deemed ownership interests. The 2020 proposal

included a safe harbor for bona fide senior loans or senior debt instruments to make clear that an 

“ownership interest” in a fund would not include such credit interests in the fund. In addition, 

the 2020 proposal would have clarified the types of creditor rights that may attach to an interest 

without necessarily causing such an interest to fall within the scope of the definition of 

ownership interest. Finally, the 2020 proposal would have simplified compliance efforts by 
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tailoring the calculation of a banking entity’s compliance with the implementing regulations’

aggregate fund limit and covered fund deduction and provided clarity to banking entities 

regarding their permissible investments made alongside covered funds.12

The agencies invited comment on all aspects of the 2020 proposal, including specific 

proposed revisions and questions posed by the agencies. The agencies received approximately 

40 unique comments from banking entities and industry groups, public interest groups, and other 

organizations and individuals. In addition, the agencies received six letters related to the subject 

matter considered in the 2020 proposal prior to the formal comment period. The agencies are 

now finalizing the 2020 proposal, with certain changes based on public comments, as described 

in detail below.

13 

 12 Separately, the agencies proposed various technical edits to the implementing regulations. 

See infra Section IV.G (Technical Amendments). 

13 Comments are generally discussed in the relevant sections, infra. The agencies also received 

several miscellaneous comments. One commenter suggested revising § __.21 (Termination of 

activities or investments; penalties for violations) of the implementing regulations to provide for 

mandatory prison time for violations of the implementing regulations. Anonymous. The 

agencies believe that this comment is beyond the scope of the current rulemaking. Another 

commenter encouraged the agencies to exempt from the implementing regulations international 

banks with a small presence in the United States. Institute of International Bankers (IIB). The 

agencies believe that this comment is beyond the scope of the current rulemaking. A third 

commenter claimed that the 2020 proposal improperly assumed that the implementing 

regulations have certain burdens and that it did not adequately assess the costs and benefits of the 

proposed revisions to the implementing regulations. Occupy the SEC (Occupy). Contrary to the 

commenter’s suggestions, the Federal Register notice for the 2020 proposal contained extensive 

discussion of the costs and benefits of the 2020 proposal. See 85 FR 12151–76. This final rule 

contains similar analyses. See infra, Section IV (Administrative Law Matters). Several 

commenters expressed support for the comment letters submitted by other organizations. E.g., 

IIB; European Banking Federation (EBF); Goldman Sachs Group, Inc. (Goldman Sachs); and 

Canadian Bankers Association (CBA). Finally, one comment was not relevant. See Charity 

Colleen Crouse.
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III. Overview of the Final Rule 

Similar to the 2020 proposal, the final rule clarifies and simplifies compliance with the 

implementing regulations, refines the extraterritorial application of section 13 of the BHC Act, 

and permits additional fund activities that do not present the risks that section 13 was intended to 

address. The agencies received comments from a diverse set of commenters: comments from 

banking entities and financial services industry trade groups were generally supportive of the 

2020 proposal and recommended additional modifications, while several organizations and 

individuals were generally opposed to the 2020 proposal. As described further below, the 

agencies have adopted many of the proposed changes to the implementing regulations, with 

certain targeted adjustments.

To reduce the extraterritorial impact of the implementing regulations, the final rule, 

similar to the 2020 proposal, exempts the activities of certain funds that are organized outside of 

the United States and offered to foreign investors (qualifying foreign excluded funds) from 

certain restrictions of the implementing regulations. Specifically, the final rule codifies an 

existing policy statement by the Federal banking agencies that addresses the potential issues 

related to a foreign banking entity controlling a qualifying foreign excluded fund. The final rule 

contains some modifications to the proposed exemption – the anti-evasion provision and 

compliance program requirements – to address comments that the proposed exemption would 

have unintentionally continued to subject qualifying foreign excluded funds to these 

requirements.

The final rule also revises, as proposed, but with some modifications, several existing 

exclusions from the covered fund provisions, to provide clarity and simplify compliance with the 

requirements of the implementing regulations. First, the final rule revises certain restrictions in 
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the foreign public funds exclusion to more closely align the provision with the exclusion for 

similarly situated U.S. registered investment companies. Second, the final rule permits loan 

securitizations excluded from the definition of covered fund to hold a small amount of debt 

securities, consistent with past industry practice, and codifies existing staff-level guidance 

regarding this exclusion. In addition, the final rule revises the exclusion for small business 

investment companies to account for the life cycle of those companies and clarifies the scope of 

the exclusion for public welfare and other investments to include rural business investment 

companies and qualified opportunity funds. Finally, the final rule clarifies the calculation of 

ownership interests in covered funds that are attributed to a banking entity.

The final rule adopts – as proposed, with some modifications – several new exclusions 

from the covered fund definition to more closely align the regulation with the purpose of the 

statute. First, the final rule establishes a new exclusion for funds that extend credit to permit the 

same credit-related activities that banking entities can engage in directly. In addition, the final 

rule creates an exclusion for venture capital funds to help ensure that banking entities can 

indirectly facilitate this important type of development and investment activity to the same 

degree that banking entities can do so directly. Finally, the final rule adopts two exclusions for 

family wealth management and customer facilitation vehicles to provide banking entities 

flexibility to provide advisory and other traditional banking services to customers through a fund 

structure.

In an effort to clarify and simplify compliance with the implementing regulations, the 

final rule adopts revisions to the provisions that govern the relationship between a banking entity 

and a fund and the definition of ownership interest. Specifically, the final rule permits

established, codified categories of limited low-risk transactions between a banking entity and a 
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related fund, including riskless principal transactions, and allows a banking entity to engage in 

certain transactions with a related fund in connection with payment, clearing, and settlement 

activities. In addition, the final rule would provide an express safe harbor for senior loans and 

senior debt and provide clarity about the types of creditor rights that would be considered within 

the scope of the definition of ownership interest. Finally, the agencies are adopting revisions, as 

proposed, to provide clarity regarding a banking entity’s permissible investments in the same 

investments as a covered fund organized or offered by such banking entity.

Frequently Asked Questions

The staffs of the agencies have addressed several questions concerning the implementing 

regulations through a series of staff Frequently Asked Questions (FAQs).14 In the 2020 

proposal, the agencies indicated that the proposed rule would not modify or revoke any 

previously issued staff FAQs, unless otherwise specified.15 Several commenters recommended 

codifying specific FAQs and making explicit that other FAQs would continue to be in effect, 

unmodified.16 Consistent with the 2020 proposal and commenters’ suggestions, the final rule 

does not modify or revoke any previously issued staff FAQs, unless otherwise specified.17 

Comment Period

 14 See https://www.occ.treas.gov/topics/capitalmarkets/financial-markets/tradingvolckerrule/volcker-rule-implementation-faqs.html (OCC); 

https://www.federalreserve.gov/bankinforeg/volcker-rule/faq.htm (Board); 

https://www.fdic.gov/regulations/reform/volcker/faq.html (FDIC); 

https://www.sec.gov/divisions/marketreg/faq-volcker-rule-section13.htm (SEC); 

https://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_28_VolckerRule/index.ht

m (CFTC). 

15 85 FR 12122–23. 

16 E.g., Securities Industry and Financial Markets Association (SIFMA); Financial Services 

Forum (FSF); and IIB.

17 85 FR 12122–23. 
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Since the issuance of the 2020 proposal, the COVID-19 global pandemic has 

substantially disrupted activity in the United States and in other countries. The effects of the 

COVID-19 disruptions have created many challenges for households and businesses, and the 

agencies received comments requesting that the agencies extend the comment period for the 

2020 proposal or delay the rulemaking more generally.18 In contrast, one commenter expressed 

support for the rapid approval of the 2020 proposal, to provide banking entities regulatory relief 

during a period of financial stress.19 The agencies announced on April 2, 2020, that they would 

consider comments submitted before May 1, 2020.20 The agencies, however, do not believe that 

further delay of the rule is warranted, given the volume, depth, and diversity of comments 

submitted. The agencies believe, as well, that the final rule may provide clarity to banking 

entities that will enable banking entities to engage in financial services and other permissible 

activities in a manner that both is consistent with the requirements of section 13 of the BHC Act 

and will facilitate capital formation and economic activity.

Effective and Compliance Dates

The Federal Register notice accompanying the finalization of the 2019 amendments 

provided for a rolling compliance system.21 The effective date of the amendments was January 

1, 2020, and firms are required to comply with the revisions by January 1, 2021. Until the 

mandatory compliance date, banking entities are required to comply with the 2013 rule, or 

 18 E.g., Better Markets, Inc. (Better Markets) and Kathy Bowman.

19 American Bankers Association (ABA).

20 https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200402a.htm.

21 84 FR 61974.
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alternatively, a banking entity may voluntarily comply, in whole or in part, with the 2019 

amendments prior to the compliance date.

Several commenters on the 2020 proposal suggested that the agencies provide for 

voluntary early compliance with the final rule.22 One commenter also suggested establishing a 

transition period of at least one year.23

The effective date for the final rule will be October 1, 2020, to accommodate the 

requirements of the Riegle Community Development and Regulatory Improvement Act.

24 The 

agencies do not believe an extended compliance or transition period is necessary because the 

final rule largely tailors the regulations implementing section 13 of the BHC Act rather than 

increases compliance burdens.

IV. Summary of the Final Rule

A. Qualifying Foreign Excluded Funds

Since the adoption of the 2013 rule, a number of foreign banking entities, foreign 

government officials, and other market participants have expressed concerns regarding instances 

in which certain funds offered and sold outside of the United States are excluded from the 

covered fund definition but still could be considered banking entities in certain circumstances 

(foreign excluded funds).25 This situation may occur if a foreign banking entity controls the 

foreign fund. A foreign banking entity could be considered to control the fund based on 

 22 E.g., SIFMA; FSF; Japanese Bankers Association (JBA); and ABA.

23 JBA.

24 See infra, Section V.D (Riegle Community Development and Regulatory Improvement Act).

25 The implementing regulations generally exclude covered funds from the definition of 

“banking entity.” 2013 rule § __.2(c)(2)(i). However, because foreign excluded funds are not 

covered funds, they can become banking entities through affiliation with other banking entities. 
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common corporate governance structures abroad, such as where the fund’s sponsor selects the 

majority of the fund’s directors or trustees, or the foreign banking entity otherwise controls the 

fund for purposes of section 13 of the BHC Act. As a result, such a fund would be subject to the 

requirements of section 13 and the implementing regulations, including restrictions on 

proprietary trading, restrictions on investing in or sponsoring covered funds, and compliance 

obligations.

The Federal banking agencies released a policy statement on July 21, 2017 (the policy 

statement), to address concerns about the possible unintended consequences and extraterritorial 

impact of section 13 and the implementing regulations for foreign excluded funds.26 The policy 

statement noted that the Federal banking agencies would not take action against a foreign 

banking entity27 based on attribution of the activities and investments of a qualifying foreign 

excluded fund to a foreign banking entity, or against a qualifying foreign excluded fund as a 

banking entity, for a period of one year while staffs of the agencies considered alternative ways 

in which the implementing regulations could be amended, or other appropriate action could be 

taken, to address the issue. The policy statement has since been extended and is currently 

scheduled to expire on July 21, 2021.28

 26 Statement regarding Treatment of Certain Foreign Funds under the Rules Implementing 

Section 13 of the Bank Holding Company Act (July 21, 2017), available at

https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20170721a1.pdf. 

27 “Foreign banking entity” was defined for purposes of the policy statement to mean a banking 

entity that is not, and is not controlled directly or indirectly by, a banking entity that is located in 

or organized under the laws of the United States or any State. Id.

28 Statement regarding Treatment of Certain Foreign Funds under the Rules Implementing 

Section 13 of the Bank Holding Company Act (July 17, 2019), available at

https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20190717a1.pdf.
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For purposes of the policy statement, a “qualifying foreign excluded fund” means, with 

respect to a foreign banking entity, an entity that:

(1) Is organized or established outside the United States and the ownership interests of which 

are offered and sold solely outside the United States;

(2) Would be a covered fund were the entity organized or established in the United States, or 

is, or holds itself out as being, an entity or arrangement that raises money from investors 

primarily for the purpose of investing in financial instruments for resale or other 

disposition or otherwise trading in financial instruments;

(3) Would not otherwise be a banking entity except by virtue of the foreign banking entity’s 

acquisition or retention of an ownership interest in, or sponsorship of, the entity;

(4) Is established and operated as part of a bona fide asset management business; and

(5) Is not operated in a manner that enables the foreign banking entity to evade the 

requirements of section 13 or implementing regulations.

To be eligible for this relief, the foreign banking entity’s acquisition or retention of any 

ownership interest in, or sponsorship of, the qualifying foreign excluded fund must meet the 

requirements for permitted covered fund activities and investments solely outside the United 

States, as provided in section 13(d)(1)(I) of the BHC Act and § __.13(b) of the implementing 

regulations, as if the qualifying foreign excluded fund were a covered fund. To provide greater 

clarity and certainty to banking entities and qualifying foreign excluded funds, and to limit the 

extraterritoriality of the rule, the 2020 proposal included a permanent exemption from the section 

13 restrictions on proprietary trading and investing in or sponsoring covered funds for the 

activities of qualifying foreign excluded funds. The proposed exemption generally included the 

same eligibility criteria from the policy statement, although it included a modified version of the 
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anti-evasion provision such that, in order to qualify, a fund could not be operated in a manner 

that enables “any other banking entity” (rather than “the foreign banking entity”) to evade the 

requirements of section 13 or the implementing regulations.

The agencies requested comment on all aspects of this exemption. Commenters were 

generally supportive of the 2020 proposal to exempt qualifying foreign excluded funds from 

certain requirements of the implementing regulations.

29 Two commenters expressed opposition 

to the proposed exemption.30

Some commenters requested that qualifying foreign excluded funds be excluded from the 

definition of banking entity.31 One commenter expressed concern that the 2020 proposal would 

require qualifying foreign excluded funds to establish section 13 of the BHC Act compliance 

programs, imposing costs on qualifying foreign excluded funds.

32 This commenter noted that 

there may be situations under section 13 of the BHC Act where a foreign banking entity controls 

a qualifying foreign excluded fund, but under foreign law does not have the necessary authority 

to require it to adopt a section 13 compliance program. As such, this commenter advocated for 

either excluding this type of fund from the definition of banking entity or exempting this type of

fund from the compliance program requirements under the rule.33 One commenter expressed 

concern that a qualifying foreign excluded fund would still need to comply with various 

 29 SIFMA; Bank Policy Institute (BPI); Bundesverband Investment und Asset Management e.V.

(BVI); American Investment Council (AIC); ABA; European Fund and Asset Management 

Association (EFAMA); Shareholder Advocacy Forum (SAF); IIB; JBA; CBA; and Credit Suisse.

30 Occupy and Data Boiler Technologies LLC (Data Boiler).

31 IIB; JBA; CBA; Credit Suisse; and EBF.

32 JBA.

33 JBA.
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restrictions under section 13, including the provisions of § __.14 of the implementing regulations 

(i.e., Super 23A) and the compliance program requirements.34

Some commenters requested that the agencies change the anti-evasion provision of the 

qualifying foreign excluded funds definition so that it would only apply to the specific foreign 

banking entity, in a manner consistent with the policy statement.

35 One of these commenters 

suggested, as an alternative, revising the provision so that it would only apply to “any affiliated 

banking entities.”36

One commenter requested an anti-evasion safe harbor and changes to allow a fund to be a 

qualifying foreign excluded fund when a non-U.S. banking entity serves as a management 

company to the fund and is approved to provide fund management in accordance with local 

law.

37 This commenter also requested that the agencies limit the requirements in the proposed 

qualifying foreign excluded funds definition to only those set forth in § __.13(b) of the rule for 

covered fund activities conducted by foreign banking entities solely outside the United States, 

and treat as qualifying foreign excluded funds those funds for which the foreign banking entity 

cannot exercise voting rights.

Pursuant to their authority under section 13(d)(1)(J) of the BHC Act, the agencies are 

adopting the exemption for the activities of qualifying foreign excluded funds substantially as 

proposed, but with modifications to the anti-evasion provision and compliance program 

requirements. Specifically, the agencies are exempting the activities of qualified foreign 

 34 Credit Suisse.

35 IIB; JBA; Credit Suisse; and EBF.

36 Credit Suisse.

37 JBA.
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excluded funds from the restrictions on proprietary trading and investing in or sponsoring 

covered funds, if the acquisition or retention of the ownership interest in, or sponsorship of, the 

qualifying foreign excluded fund by the foreign banking entity meets the requirements for 

permitted covered fund activities and investments conducted solely outside the United States, as 

provided in § __.13(b) of the rule.38 Under the final rule, a qualifying foreign excluded fund has 

the same meaning as in the policy statement as described above and in the 2020 proposal, except 

for the modification to the anti-evasion provision, as described below. 

Section 13(d)(1)(J) of the BHC Act gives the agencies rulemaking authority to exempt 

activities from the prohibitions of section 13, provided the agencies determine that the activity in 

question would promote and protect the safety and soundness of the banking entity and the 

financial stability of the United States.39 For the reasons described below, the agencies have 

determined that exempting the activities of qualifying foreign excluded funds promotes and 

protects the safety and soundness of banking entities and U.S. financial stability. 

This relief is expected to promote and protect the safety and soundness of such funds and 

their foreign banking entity sponsors by putting them on a level playing field with their foreign 

competitors that are not subject to the implementing regulations. If the activities of these foreign 

funds were subject to the restrictions applicable to banking entities, their asset management 

activities could be significantly disrupted, and their foreign banking entity sponsors may be at a 

competitive disadvantage to other foreign bank and non-bank market participants conducting 

asset management business outside of the United States. Exempting the activities of these 

foreign funds allows their foreign banking entity sponsors to continue to conduct their asset 

 38 See final rule § __.13(b).

39 12 U.S.C. 1851(d)(1)(J).
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management business outside the United States as long as the foreign banking entity’s 

acquisition of an ownership interest in or sponsorship of the fund meets the requirements in §

__.13(b) of the implementing regulations. Thus, the exemption is expected to have the effect of 

promoting the safety and soundness of these foreign funds and their sponsors, while at the same 

time limiting the extraterritorial impact of the implementing regulations, consistent with the 

purposes of sections 13(d)(1)(H) and (I) of the BHC Act.

The exemption is also expected to promote and protect U.S. financial stability. While 

qualifying foreign excluded funds have a very limited nexus to the U.S. financial system, the 

exemption would promote U.S. financial stability by providing additional capital and liquidity to 

U.S. capital markets without a concomitant increase in risk borne by U.S. entities. Because the 

exemption requires that the foreign banking entity’s acquisition of an ownership interest in or 

sponsorship of the fund meets the requirements in § __.13(b) of the final rule, the exemption will 

help ensure that the risks of investments made by these foreign funds will be booked at foreign 

entities in foreign jurisdictions, thus promoting and protecting U.S. financial stability. 

Additionally, subjecting such funds to the requirements of the implementing regulations could 

precipitate disruptions in foreign capital markets, which could generate spillover effects in the 

U.S. financial system.

In response to comments regarding the anti-evasion provision, the final rule specifies that 

the qualifying foreign excluded fund must not be operated in a manner that enables the banking 

entity that sponsors or controls the qualifying foreign excluded fund, or any other affiliated 

banking entity (other than a qualifying foreign excluded fund), to evade the requirements of 

section 13 of the BHC Act or the final rule. This change is meant to clarify the scope of the anti-
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evasion provision and provide certainty for banking entities that sponsor or control the qualifying 

foreign excluded fund.

Consistent with feedback from several commenters, the agencies also have modified 

compliance requirements with respect to qualifying foreign excluded funds. While, under the 

final rule, the activities of a qualifying foreign excluded fund are exempted from the proprietary 

trading restrictions of § __.3(a) and the covered fund restrictions of § __.10(a) of the final rule, 

the qualifying foreign excluded fund is still a banking entity. Absent any additional changes, the 

qualifying foreign excluded fund could become subject to the compliance requirements of § 

__.20. However, since these qualifying foreign excluded funds are exempted from the 

proprietary trading requirements of § __.3(a) and covered fund restrictions of § __.10(a) of the 

final rule, the agencies believe that requiring a compliance program for the fund itself is overly 

burdensome and unnecessary. The requirements in § __.20 are intended to ensure and monitor 

compliance with the proprietary trading and covered fund provisions, and there would be no 

benefit to applying these requirements to an entity that is exempt from those provisions.

Therefore, under the final rule, qualifying foreign excluded funds are not required to have

compliance programs or comply with the reporting and additional documentation requirements

under § __.20. However, any banking entity that owns or sponsors a qualifying foreign excluded 

fund will still be required to have in place appropriate compliance programs for itself and its 

other subsidiaries and provide reports and additional documentation as required by § __.20. 

The final rule does not amend the definition of “banking entity” as requested by several 

commenters. Because “banking entity” is specifically defined in section 13 of the BHC Act, the 

agencies find it appropriate to address concerns related to foreign excluded funds through their 

exemptive rulemaking authority. 
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The agencies are not making any change regarding the applicability of § __.14 of the 

implementing regulations, which imposes limitations on relationships with covered funds, with 

respect to qualifying foreign excluded funds. The agencies believe it is appropriate to retain the 

application of § __.14 to qualifying foreign excluded funds to limit risks that may be borne by 

banking entities located in the United States through transactions with such funds.40 Further, 

given the limited set of circumstances in which § __.14 would apply (i.e., a transaction between a 

foreign excluded fund and a covered fund that is sponsored or advised by the same banking 

entity), the agencies do not believe that it is overly burdensome for a banking entity that sponsors 

or controls a qualifying foreign excluded fund to ensure that it is not in violation of § __.14.

B. Modifications to Existing Covered Fund Exclusions

In the preamble to the 2013 rule, the agencies acknowledged that the covered fund 

definition was expansive.41 To effectively tailor the covered fund provisions to the types of 

entities that section 13 of the BHC Act was intended to cover, the 2013 rule excluded various 

types of entities from the covered fund definition.42 In response to comments received on the 

2020 proposal, and based on experience implementing the rule, the agencies are modifying 

certain of the existing exclusions, as described below, to make them more appropriately 

structured to effectuate the intent of the statute and its implementing regulations. 

 40 A U.S. banking entity’s exposure to a fund that would be a qualifying foreign excluded fund 

with respect to a foreign banking entity may still be a covered fund with respect to a U.S. 

banking entity under § __.10(b)(1)(iii) of the implementing regulations. A U.S. banking entity’s 

investment in and relationship with such a fund could therefore be subject to the entirety of the 

applicable prohibitions and restrictions of Subpart C of the implementing regulations. 

41 See 79 FR 5677.

42 See id.
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1. Foreign Public Funds

2013 Rule

To provide consistent treatment for U.S. registered investment companies and their 

foreign equivalents, the implementing regulations exclude foreign public funds from the 

definition of covered fund.43 A foreign public fund is generally defined under the 2013 rule as 

any issuer that is organized or established outside of the United States and the ownership 

interests of which are (1) authorized to be offered and sold to retail investors in the issuer’s home 

jurisdiction and (2) sold predominantly through one or more public offerings outside of the 

United States.44 The agencies stated in the preamble to the 2013 rule that they generally expect 

that an offering is made predominantly outside of the United States if 85 percent or more of the 

fund’s interests are sold to investors that are not residents of the United States.45 The 2013 rule 

defines “public offering” for purposes of this exclusion to mean a “distribution,” as defined in § 

__.4(a)(3) of subpart B, of securities in any jurisdiction outside the United States to investors, 

including retail investors, provided that the distribution complies with all applicable 

requirements in the jurisdiction in which such distribution is being made; the distribution does 

not restrict availability to only investors with a minimum level of net worth or net investment 

assets; and the issuer has filed or submitted, with the appropriate regulatory authority in such 

jurisdiction, offering disclosure documents that are publicly available.46

 43 In adopting the foreign public fund exclusion, the agencies’ view was that it was appropriate 

to exclude these funds from the “covered fund” definition because they are sufficiently similar to 

U.S. registered investment companies. 79 FR 5678.

44 2013 rule § __.10(c)(1); see also 79 FR 5678.

45 79 FR 5678.

46 2013 rule § __.10(c)(1)(iii).
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The 2013 rule places an additional condition on a U.S. banking entity’s ability to rely on 

the foreign public fund exclusion with respect to any foreign fund it sponsors.47 The foreign 

public fund exclusion is only available to a U.S. banking entity with respect to a foreign fund 

sponsored by the U.S. banking entity if, in addition to the requirements discussed above, the 

fund’s ownership interests are sold predominantly to persons other than the sponsoring banking 

entity, the issuer (or affiliates of the sponsoring banking entity or issuer), and employees and 

directors of such entities.48 The agencies stated in the preamble to the 2013 rule that, consistent 

with the agencies’ view concerning whether a foreign public fund has been sold predominantly 

outside of the United States, the agencies generally expect that a foreign public fund would 

satisfy this additional condition if 85 percent or more of the fund’s interests are sold to persons 

other than the sponsoring U.S. banking entity and the specified persons connected to that 

banking entity.49

2020 Proposal

In the 2020 proposal, the agencies acknowledged that some of the conditions of the 2013 

rule’s foreign public fund exclusion may not be necessary to ensure consistent treatment of 

foreign public funds and U.S. registered investment companies. Moreover, some conditions may 

make it difficult for a non-U.S. fund to qualify for the exclusion or for a banking entity to 

 47 Although the discussion of this condition generally refers to U.S. banking entities for ease of 

reading, the condition also applies to foreign subsidiaries of a U.S. banking entity. See 2013 rule 

§ __.10(c)(1)(ii) (applying this limitation “[w]ith respect to a banking entity that is, or is 

controlled directly or indirectly by a banking entity that is, located in or organized under the laws 

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

sponsor”). 

48 See 2013 rule § __.10(c)(1)(ii).

49 79 FR 5678.
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validate whether a non-U.S. fund qualifies for the exclusion, resulting in certain non-U.S. funds 

that are similar to U.S. registered investment companies being treated as covered funds. 

To address these concerns, the 2020 proposal would have made certain modifications to 

the foreign public fund exclusion. First, the agencies proposed to replace the requirement that 

the fund be authorized to be offered and sold to retail investors in the issuer’s home jurisdiction

(the home jurisdiction requirement) and the requirement that the fund interests be sold 

predominantly through one or more public offerings outside of the United States, with a 

requirement that the fund is authorized to offer and sell ownership interests, and such interests 

are offered and sold, through one or more public offerings outside of the United States. This 

change would have permitted foreign funds to qualify for the exclusion if they are organized in 

one jurisdiction but only authorized to be sold to retail investors in another jurisdiction, as this is 

a fairly common way for foreign retail funds to be organized. Also, no longer requiring a fund to 

be sold predominantly through one or more public offerings was intended to reduce the difficulty 

that banking entities have described in determining and monitoring the distribution history and 

patterns of a third-party sponsored fund or a sponsored fund whose interests are sold through 

third-party distributors.

The agencies also proposed modifying the definition of “public offering” from the 

implementing regulations to add a new requirement that the distribution be subject to substantive 

disclosure and retail investor protection laws or regulations, to help ensure that foreign funds 

qualifying for this exclusion are sufficiently similar to U.S. registered investment companies. 

Additionally, the 2020 proposal would have only applied the condition that the distribution 

comply with all applicable requirements in the jurisdiction where it is made to instances in which 

the banking entity acts as the investment manager, investment adviser, commodity trading 
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advisor, commodity pool operator, or sponsor. This proposed change was intended to address 

the potential difficulty that a banking entity investing in a third-party sponsored fund may have 

in determining whether the distribution of such fund complied with all the requirements in the 

jurisdiction where it was made.

To simplify the requirements of the exclusion and address concerns described by banking 

entities with the difficulty in tracking the sale of ownership interests to employees and their 

immediate family members, the 2020 proposal would have eliminated the limitation on selling 

ownership interests of the issuer to employees (other than senior executive officers) of the 

sponsoring banking entity or the issuer (or affiliates of the banking entity or issuer). This change 

was intended to help align the treatment of foreign public funds with that of U.S. registered 

investment companies, as the exclusion for U.S. registered investment companies has no such 

limitation. The 2020 proposal would have continued to limit the sale of ownership interests to 

directors or senior executive officers of the sponsoring banking entity or the issuer (or their 

affiliates), as the agencies believed that such a requirement would be simpler for a banking entity 

to track.

Finally, the 2020 proposal requested comment on the appropriateness of the expectation 

stated in the preamble to the 2013 rule that, for a U.S. banking entity-sponsored foreign fund to 

satisfy the condition that it be “predominantly” sold to persons other than the sponsoring U.S. 

banking entity and certain persons connected to that banking entity, at least 85 percent of the 

ownership interests in the fund should be sold to such other persons.

Discussion of Comments and the Final Rule

The agencies are adopting all of the proposed changes and are making certain 

adjustments in response to comments received, as discussed below.
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Commenters on the 2020 proposal generally supported the proposed changes to the 

foreign public funds exclusion.50 Specifically, commenters supported the elimination of the 

home jurisdiction requirement and the requirement that the fund be sold predominantly through 

one or more public offerings.

51 Commenters supported the proposed change to the “public 

offering” definition to include a requirement that a distribution be subject to substantive 

disclosure and retail investor protection laws or regulations,

52 but did not recommend further 

specifying what substantive disclosure and investor protection requirements should apply 

because they generally viewed it as unnecessary and overly prescriptive.53 Commenters also 

supported eliminating the restriction on share ownership by employees (other than senior 

executives and directors) of the U.S. banking entity that sponsors the foreign public fund.

54 In 

response to a specific question in the 2020 proposal, one commenter indicated that the proposed 

changes to the foreign public funds exclusion would not increase the risk of evasion of the 

requirements of section 13 and the implementing regulations, and thus no additional anti-evasion 

 50 IIB; SIFMA; BPI; ABA; EBF; EFAMA; FSF; Investment Company Institute (ICI); BVI; 

CBA; Committee on Capital Markets Regulation (CCMR); Data Boiler; Goldman Sachs; 

Investment Adviser Association (IAA); JBA; SAF; and U.S. Chamber of Commerce Center for 

Capital Markets Competitiveness (CCMC).

51 IIB; SIFMA; BPI; ABA; EBF; EFAMA; FSF; ICI; BVI; and CBA.

52 IIB; EFAMA; FSF; ICI; and BVI.

53 IIB; ICI; and CBA. One commenter supported this assertion by stating that 95 percent of the 

world’s securities markets, including all major emerging markets, have substantive disclosure 

and retail investor protection rules that are guided by the International Organization of Securities 

Commissions’ common principles for retail funds and the detailed policy work that informs 

those principles. ICI.

54 FSF.
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measures were necessary.

55 Another commenter stated that the proposed changes were less than 

ideal but were acceptable after balancing compliance costs and benefits.

56

Commenters also recommended additional changes to further align the treatment of 

foreign public funds with that of U.S. registered investment companies or to prevent evasion of 

the rule.57 Specifically, some commenters recommended eliminating the requirement that a fund 

actually be sold through a public offering and, instead, only require that a fund be authorized to 

be sold through a public offering.58 These commenters generally viewed this requirement as 

burdensome and difficult to administer and noted that U.S. registered investment companies are 

not required to be sold in public distributions. The agencies do not consider the fact that there is 

no requirement for U.S. registered investment companies to be actually sold through public 

offerings as a sufficient rationale for removing this requirement from the foreign public fund 

exclusion. Requiring foreign public funds to be sold through one or more public offerings is 

intended to ensure that such funds are in fact public funds and thus sufficiently similar to U.S. 

registered investment companies. While there may be certain limited scenarios where a U.S. 

registered investment company is not sold to retail investors, the agencies believe that the vast 

majority of U.S. registered investment companies are sold to retail investors. Furthermore, U.S. 

registered investment companies are subject to robust registration, reporting, and other 

requirements that are familiar to the agencies, whereas foreign public funds are subject to a 

 55 SIFMA.

56 Data Boiler.

57 One commenter recommended that the agencies create an exclusion from the “proprietary 

trading” definition for the activities of regulated funds, including foreign public funds, under 

certain circumstances. ICI. The agencies note that such a change is not within the scope of this 

rulemaking. 

58 IIB; SIFMA; and EBF.
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differing array of requirements depending on the jurisdiction where they are authorized to be 

sold. These other jurisdictions may have less developed requirements for retail funds, which 

may increase the likelihood of a fund seeking authorization for public distribution in certain 

foreign jurisdictions solely as a means of avoiding the covered fund prohibition. The agencies 

believe that eliminating this requirement would increase the risk of evasion by permitting foreign 

funds that may be authorized for sale to retail investors in a foreign jurisdiction—but are only 

sold through private offerings where no substantive disclosure or retail investor protections 

exist—to qualify for the exclusion. Such funds would not be comparable to U.S. registered 

investment companies and would not be the type of fund that foreign public fund exclusion was

intended to address. Accordingly, the agencies are not adopting this suggested modification.

One trade association commenter suggested eliminating a provision in the “public 

offering” requirement that prohibits a distribution from being limited to investors with a 

minimum net worth or net investment assets because some of its members distribute funds, 

including mutual funds, in offerings that do not meet this requirement but that are nonetheless 

subject to substantive disclosure and retail investor protection requirements. Similar to the 

reasons for retaining the requirement that a foreign public fund actually be sold through one or 

more public offerings, the agencies believe that retaining this requirement is necessary to ensure

that funds qualifying for this exclusion are sufficiently similar to U.S. registered investment 

companies. In fact, one of the identifying characteristics of a covered fund is that its offerings 

are limited to investors with minimum net worth or net investment assets.59 The agencies 

 59 Under the Investment Company Act, certain funds whose offerings are limited to investors 

with minimum net worth or net investment assets are exempt from registration as investment 

companies. See 15 U.S.C. 80a-3(c)(7). These funds are generally treated as covered funds under 
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therefore believe that foreign funds that limit their offerings to investors with a minimum net 

worth or net investment assets are generally not sufficiently similar to U.S. registered investment 

companies, and thus the agencies are not adopting this suggested change to the “public offering” 

definition. 

One commenter opposed the proposed elimination of the requirement in the “public 

offering” definition that a distribution comply with all applicable requirements in the jurisdiction 

in which such distribution is being made for a banking entity that does not serve as the fund’s 

investment manager, investment adviser, commodity trading advisor, commodity pool operator, 

or sponsor.

60 The final rule adopts this modification as proposed, because the agencies believe 

the other eligibility criteria for a fund to qualify under the foreign public fund exclusion are 

sufficient to appropriately identify these funds. In addition, the agencies recognize that it may be 

difficult or impossible for a banking entity that invests in a third-party fund to know whether the 

fund’s distribution complied with all applicable requirements in the jurisdiction where it was 

distributed. 

One commenter recommended that the agencies require 85 percent of a foreign public 

fund’s ownership interests be sold to and owned by “bona fide” retail investors in the fund’s 

home jurisdiction.61 However, for the same reasons that the agencies are eliminating the home 

jurisdiction requirement and the requirement that a fund be sold predominantly through public 

offerings, the agencies are not adopting this requirement.

 

section 13 of the BHC Act and the implementing regulations. See 12 U.S.C. 1851(h)(2); 

implementing regulations § __.10(b)(1)(i).

60 Data Boiler.

61 Oleh Zadorestskyy. This commenter also suggested that the agencies require proof that the 

investors were non-U.S. persons. 
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Some commenters suggested that the agencies identify common foreign fund types that 

are presumed to qualify for the exclusion for foreign public funds for the purpose of improving 

efficiency and simplifying compliance with the rule.

62 Other commenters recommended that 

issuers listed on an internationally-recognized exchange and available in retail-level 

denominations should automatically qualify for the exclusion for similar reasons.

63 Although the 

agencies expect many such funds will qualify for the exclusion, the agencies decline to adopt 

either of these suggested changes, as both would require the agencies’ review and on-going 

monitoring of foreign laws and regulations to ensure that the types of funds that would qualify 

under these provisions are sufficiently similar to U.S. registered investment companies and that 

their exclusion as foreign public funds would continue to be appropriate. 

Some commenters recommended that the agencies entirely eliminate the restrictions on 

share ownership by parties affiliated with a U.S. banking entity sponsor of a foreign public 

fund.64 Other commenters suggested that, if the restrictions on share ownership by banking 

entities affiliated with the sponsor were retained, the restrictions on share ownership by senior 

executives and directors should be removed.65 The commenters generally viewed these 

requirements as unnecessary and burdensome to track and monitor. As discussed in the 

preamble to the 2013 rule, these requirements are intended to prevent evasion of section 13 of 

the BHC Act.66 Additionally, the agencies note that U.S. banking entity sponsors of foreign 

public funds would need to track the ownership of such funds by their affiliates and management 

 62 IIB and EBF.

63 IIB; SIFMA; BPI; ABA; FSF; and CBA.

64 SIFMA and FSF. 

65 SIFMA; BPI; ICI; and CCMC.

66 79 FR 5678–79.
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officials even if the requirements were eliminated in order to determine whether they control 

such funds for BHC Act purposes.67 Thus, for a U.S. banking entity relying on this exclusion 

with respect to a fund that it sponsors, the agencies are retaining the requirement that the fund be 

sold predominantly to persons other than the U.S. banking entity sponsor, the fund, affiliates of 

such sponsoring banking entity or fund, and the directors and senior executive officers of such 

entities (collectively, “U.S. banking entity sponsor and associated parties”).

Relatedly, some commenters recommended that the agencies modify their expectation of 

the level of ownership of a foreign public fund that would satisfy the requirement that a fund be 

“predominantly” sold to persons other than its U.S. banking entity sponsor and associated

parties,

68 which, in the preamble to the 2013 rule, the agencies stated was 85 percent or more 

(which would permit the U.S. banking entity sponsor and associated parties to own the remaining 

15 percent). These commenters asserted that the relevant ownership threshold for U.S. registered 

investment companies is 25 percent, and that, for foreign public funds, the threshold should be 

the same. The agencies agree that the permitted ownership level of a foreign public fund by a 

U.S. banking entity sponsor and associated parties should be aligned with the functionally 

equivalent threshold for banking entity investments in U.S. registered investment companies, 

which is 24.9 percent.69 Accordingly, the agencies have amended this provision in the final rule 

 67 See 12 CFR 225.2(e); 12 CFR 225.31(d)(2)(ii). If a foreign public fund is controlled by a 

banking entity for BHC Act purposes, such fund could also be being treated as a banking entity 

under section 13. See implementing regulations § __.2(c); FAQ 14.

68 BPI; FSF; ICI; and CCMC.

69 Although the implementing regulations do not explicitly prohibit a banking entity from 

acquiring 25 percent or more of a U.S. registered investment company, a U.S. registered 

investment company would become a banking entity if it is affiliated with another banking entity 

(other than as described in § __.12(b)(1)(ii) of the implementing regulations). See 79 FR 5732 

(“[F]or purposes of section 13 of the BHC Act and the final rule, a registered investment 
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to require that more than 75 percent of the fund’s interests be sold to persons other than the U.S. 

banking entity sponsor and associated parties.

70 

One commenter recommended that, with respect to foreign public funds sponsored by 

U.S. affiliates of foreign banking entities, the agencies exclude the sponsoring U.S. banking 

entity’s non-U.S. affiliates and their directors and employees from the restrictions on share 

ownership, provided that such non-U.S. affiliates are not controlled by a U.S. banking entity.71 

This commenter asserted that there is no U.S. financial stability or safety and soundness benefit 

to applying this restriction to such non-U.S. affiliates and their directors and employees, as the 

risks of any such investments are borne solely outside the United States. However, with the 

change described above, which permits a U.S. banking entity sponsor and associated parties to 

hold less than 25 percent of a foreign public fund, the agencies do not believe that this change is 

necessary. Even if the requirement were modified as the commenter suggested, the banking 

entity and its affiliates would still be limited to owning less than 25 percent of the fund without 

the fund becoming a banking entity.

 

company . . . will not be considered to be an affiliate of the banking entity if the banking entity 

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

company or fund, and provides investment advisory, commodity trading advisory, 

administrative, and other services to the company or fund only in a manner that complies with 

other limitations under applicable regulation, order, or other authority.”).

70 For a U.S. banking entity that sponsors a foreign public fund, crossing the 24.9 percent 

ownership threshold (other than during a permitted seeding period) would cause the fund to be a 

covered fund (if no other exclusion applied), in which case the banking entity would be in 

violation of the 3 percent per-fund investment limit. See implementing regulations §

__.12(a)(2)(ii)(A). The agencies believe that such a strict prohibition against a U.S. banking 

entity acquiring 25 percent or more of a foreign public fund that it sponsors is appropriate 

because of the elevated risk of evasion by the sponsoring banking entity, which may be able to 

control the investments made by the fund. 

71 IIB.
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One commenter requested that the agencies modify § __.12(b)(1) of the implementing 

regulations, which governs attribution of ownership interests in covered funds to banking 

entities, to clarify that the banking entity “or an affiliate” can provide the advisory, 

administrative, or other services required in § __.12(b)(1)(ii)(B) for the non-attribution rule to 

apply. The commenter requested this clarification because § __.12(b)(1)(ii)(B) is crossreferenced by FAQ 14, which, as discussed above, states that a foreign public fund will not be 

treated as a banking entity if it complies with the test in § __.12(b)(1)(ii) (i.e., the banking entity 

holds less than 25 percent of the voting shares in the foreign public fund and provides advisory, 

administrative, or other services to the fund). The agencies confirm that the requested 

interpretation is correct and, accordingly, have amended § __.12(b)(1)(ii) of the implementing 

regulations to clarify that the ownership limit applies to the banking entity and its affiliates, in 

the aggregate, and the requirement that the banking entity provide advisory or other services can 

be satisfied by the banking entity or its affiliates. 

One commenter noted that FAQ 16, which relates to the seeding period for foreign public 

funds, uses 3 years as an example of the duration of such a seeding period, and requested that the 

agencies confirm that a foreign public fund’s seeding period can be longer than 3 years.72 

Another commenter requested that the agencies codify the 3-year seeding period in the 

implementing regulations.73 The agencies believe that, depending on the facts and circumstances 

of a particular foreign public fund, the appropriate duration of its seeding period may vary and, 

under certain facts and circumstances, may exceed three years. The agencies believe that this 

flexibility is appropriate and thus decline to further specify such a limit. Another commenter 

 72 IAA. 

73 CCMC.
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requested that the agencies codify the foreign public fund seeding FAQ,74 FAQ 14, and FAQ 16, 

both described above, in the implementing regulations.75 The agencies decline to codify these 

FAQs at this time but note that the final rule does not modify or revoke any previously issued 

staff FAQs, unless otherwise specified. 

In the final rule, the agencies are adopting the amendments to the foreign public funds 

exclusion as proposed, with the additional modifications described above. The agencies believe 

the revised requirements will make the foreign public fund exclusion more effective by 

expanding its availability, providing clarity, and simplifying compliance with its requirements,

while continuing to ensure that the funds that qualify are sufficiently similar to U.S. registered 

investment companies. 

2. Loan Securitizations 

Section 13 of the BHC Act provides that “[n]othing in this section shall be construed to 

limit or restrict the ability of a banking entity... to sell or securitize loans in a manner otherwise 

permitted by law.” 76 To effectuate this statutory mandate, the 2013 rule excluded from the 

definition of covered fund loan securitizations that issue asset-backed securities and hold only

loans, certain rights and assets that arise from the structure of the loan securitization or from the 

 74 The foreign public fund seeding FAQ states that staffs of the agencies would not advise that a 

seeding vehicle that is operated pursuant to a written plan to become a foreign public fund and 

that meets certain conditions be treated as a covered fund during such seeding period.

75 IIB.

76 12 U.S.C. 1851(g)(2).
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loans supporting a loan securitization, and a small set of other financial instruments (permissible 

assets).77 

Since the adoption of the 2013 rule, several banking entities and other participants in the 

loan securitization industry have commented that the limited set of permissible assets has 

inappropriately restricted their ability to use the loan securitization exclusion. In the 2018 

proposal, the agencies asked several questions regarding the efficacy and scope of the exclusion 

and the Loan Securitization Servicing FAQ.78 Comments focused on permitting small amounts 

of non-loan assets and clarifying the treatment of leases and related assets. 

In response to these concerns, the 2020 proposal would have codified the Loan 

Securitization Servicing FAQ and permitted loan securitizations to hold a small amount of nonloan assets. The agencies requested comment on all aspects of the proposed changes to the loan 

securitization exclusion, and comments were generally supportive of the proposed revisions.

79 

Several commenters also suggested revisions to the 2020 proposal.80 Comments are discussed in 

detail below.81

 77 See 2013 rule § __.10(c)(8). Loan is further defined as any loan, lease, extension of credit, or 

secured or unsecured receivable that is not a security or derivative. Implementing regulations § 

__.2(t).

78 83 FR 33480–81.

79 E.g., SIFMA; BPI; Managed Funds Association (MFA); PNC Financial Services Group, Inc.

(PNC); Goldman Sachs; Loan Syndications and Trading Association (LSTA); and Structured 

Finance Association (SFA).

80 E.g., SIFMA; CCMC; BPI; and IIB. 

81 One commenter suggested that some jurisdictions’ risk retention rules may vary from the 

regulations implementing section 15G of the Exchange Act (15 U.S.C. 78o-11), which requires a 

banking entity to retain and maintain a certain minimum interest in certain asset-backed 

securities. See IIB. This commenter recommended allowing banking entities to hold certain 

investments in compliance with certain foreign laws (e.g., European risk retention rules). The 

agencies understand that rules for risk retention vary across jurisdictions. However, the agencies 
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Servicing Assets

The implementing regulations permit loan securitizations to hold rights or other assets 

(servicing assets) that arise from the structure of the loan securitization or from the loans 

supporting a loan securitization.82 Rights or other servicing assets are assets designed to 

facilitate the servicing of the underlying loans or the distribution of proceeds from those loans to 

holders of the asset-backed securities.83 In response to confusion regarding the scope of the 

provisions permitting servicing assets and a separate provision limiting the types of permitted 

securities, the staffs of the agencies released the Loan Securitization Servicing FAQ. The FAQ

clarified that a servicing asset may or may not be a security, but if the servicing asset is a 

security, it must be a permitted security under the rule.

The 2020 proposal would have codified the Loan Securitization Servicing FAQ in the 

implementing regulations to clarify the scope of the servicing asset provision.84 Commenters 

generally supported the codification of the Loan Securitization Servicing FAQ, indicating that 

such a codification would promote transparency and ensure continued use of the loan 

 

believe that the requested action is outside the scope of the current rulemaking. In addition, 

another commenter requested that the agencies clarify the definition of asset-backed securities as 

used in the loan securitization exclusions. See Arnold & Porter Kaye Scholer LLP (Arnold & 

Porter). The agencies discuss the definition of asset-backed securities in Section IV.C.1.iii 

(Credit Funds), infra. 

82 §§ __.2(t); __.10(c)(8)(i)(D); __.10(c)(8)(v).

83 See, e.g., FASB Statement No. 156: Accounting for Servicing of Financial Assets, ¶ 61 (FAS 

156).

84 The 2020 proposal also clarified that special units of beneficial interest and collateral 

certificates meeting the requirements of paragraph (c)(8)(v) of the exclusion that are securities 

need not meet the requirements of paragraph (c)(8)(iii) of the exclusion. See 2020 proposal § 

__.10(c)(8)(i)(B). The agencies are adopting this revision, as proposed.
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securitization exclusion.

85 For the above reasons, the final rule adopts the codification of the 

Loan Securitization Servicing FAQ as proposed.

Cash Equivalents

The loan securitization exclusion permits issuers relying on the exclusion to hold certain 

types of contractual rights or assets related to the loans underlying the securitization, including 

cash equivalents. In response to questions about the scope of the cash equivalents provision, the 

Loan Securitization Servicing FAQ stated that “cash equivalents” means high quality, highly 

liquid investments whose maturity corresponds to the securitization’s expected or potential need 

for funds and whose currency corresponds to either the underlying loans or the asset-backed 

securities.86 To promote transparency and clarity, the 2020 proposal would have codified this 

additional language in the Loan Securitization Servicing FAQ regarding the meaning of “cash 

equivalents.”87 The agencies did not propose requiring “cash equivalents” to be “short term,” 

because the agencies recognized that a loan securitization may need greater flexibility to match 

the maturity of high quality, highly liquid investments to its expected or potential need for funds. 

Commenters generally supported the codification of the definition of “cash equivalents” in the 

loan securitization exclusion.88 The final rule adopts the codification of “cash equivalents” as 

proposed.

Limited Holdings of Certain Debt Securities

 85 E.g., SIFMA; PNC; and SFA. One commenter indicated that the current Loan Securitization 

Servicing FAQ was sufficient and that codifying the FAQ was not necessary; however, the 

commenter did not elaborate on or justify this position. Data Boiler.

86 See supra, n.14.

87 2020 proposed rule § __.10(c)(8)(iii)(A).

88 E.g., LSTA; PNC; and SIFMA. One commenter expressed opposition to this codification but 

did not elaborate or justify this position. See Data Boiler.
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In the preamble to the 2013 rule, the agencies declined to permit loan securitizations to 

hold a certain amount of non-loan assets.89 The agencies supported a narrow scope of 

permissible assets in loan securitizations, suggesting that such an approach would be consistent 

with the purpose of section 13 of the BHC Act.90 

Several commenters on the 2018 proposal disagreed with the agencies’ views and 

supported expanding the range of permissible assets in an excluded loan securitization. After 

considering the comments received on the 2018 proposal, the 2020 proposal would have allowed

a loan securitization vehicle to hold up to five percent of the fund’s total assets in non-loan 

assets. The agencies indicated that authorizing loan securitizations to hold small amounts of 

non-loan assets could, consistent with section 13 of the BHC Act, permit loan securitizations to 

respond to investor demand and reduce compliance costs associated with the securitization 

process without significantly increasing risk to banking entities and the financial system.91 The 

agencies requested comment on, among other things, the maximum amount of permitted nonloan assets, the methodology for calculating the cap on non-loan assets, and whether the agencies 

should limit the type of assets that could be held under the non-loan asset provision. 

Specifically, the agencies requested comment on whether the non-loan asset provision should be 

limited to debt securities or should exclude certain financial instruments such as derivatives and 

collateralized debt obligations. 

 89 79 FR 5687–88.

90 79 FR 5687.

91 85 FR 12128–29.
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Commenters were generally supportive of allowing loan securitizations to hold a limited 

amount of non-loan assets.92 These commenters indicated that the requirements for the current 

loan securitization exclusion are too restrictive and excessively limit use of the exclusion and 

prevent issuers from responding to investor demand, and suggested that a limited bucket of nonloan assets would not fundamentally alter the characteristics and risks of securitizations or 

otherwise increase risks in banking entities or the financial system.93 

Several commenters recommended against limiting the type of assets that could be held 

per the non-loan asset provision.

94 For example, one commenter stated that allowing excluded 

loan securitizations to invest in any class of asset would allow those vehicles to achieve 

investment goals during periods of constrained loan supply, while another commenter indicated 

that such a restriction would be unnecessary given that the low limit on non-loan assets would 

constrain risks.95 In contrast, one commenter suggested limiting the type of permissible assets to 

securities with risk characteristics similar to loans.96

Numerous commenters suggested raising the cap on non-loan assets from five percent of 

assets to ten percent of assets,97 while one commenter indicated that a five percent cap would be 

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

93 E.g., LSTA and Goldman Sachs. 

94 E.g., MFA; LSTA; and SFA. One commenter also requested that the agencies make clear that 

the non-loan assets would not be subject to the other provisions of the loan securitization 

exclusion. LSTA.

95 SFA and LSTA.

96 JBA.

97 SIFMA; CCMC; ABA; Credit Suisse; MFA; Goldman Sachs; LSTA; and SFA.
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sufficient.98 Commenters that supported an elevated limit on non-loan assets generally argued 

that a ten percent limit would further reduce compliance burdens while not materially increasing 

risk.99

Several commenters also suggested a method for calculating the cap on non-loan assets: 

the par value of assets on the day they are acquired.100 These commenters suggested that relying 

on par value is accepted practice in the loan securitization industry and would obviate concerns 

related to tracking amortization or prepayment of loans in a securitization portfolio.101 One of 

these commenters further specified that the limit should be calculated (1) according to the par 

value of the acquired assets on the date of investment over the securitization’s total collateral 

pool and (2) only at the time of investment.102 Another commenter indicated that the cap should 

be calculated as the lower of the purchase price and par value of the non-qualifying assets over 

the issuer’s aggregate capital commitments plus its subscription based credit facility.103 A third 

commenter suggested having a separate valuation mechanism for equity securities, which the 

commenter suggested should be market value upon acquisition.104

Finally, two commenters opposed allowing excluded loan securitizations to hold nonloan assets and suggested that such a change would be contrary to the purpose of section 13 of 

the BHC Act or would result in loan securitizations with differing risk characteristics, potentially 

 98 PNC. Another commenter who generally supported the proposed modifications to the loan 

securitization exclusion did not urge the agencies to raise the cap on non-loan assets. See BPI.

99 E.g., LSTA; SIFMA; and Goldman Sachs.

100 SIFMA; BPI; ABA; and LSTA.

101 SIFMA and BPI.

102 BPI.

103 Goldman Sachs 

104 SFA.
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increasing monitoring costs on investors.105 In addition, a commenter claimed that the 2020 

proposal to allow excluded loan securitizations to hold non-loan assets would be contrary to 

section 13 of the BHC Act.106 Specifically, this commenter suggested that the rule of 

construction in 12 U.S.C. 1851(g)(2) only permits the securitization or sale of loans and that 

legislative history supports this reading of the statute. 

The agencies previously concluded and continue to believe they have legal authority to 

adopt the proposed allowance for a limited amount of non-loan assets.107 Section 13(g)(2) of the 

BHC Act states, “[n]othing in this section shall be construed to limit or restrict the ability of a 

banking entity or nonbank financial company supervised by the Board to sell or securitize loans 

in a manner otherwise permitted by law.”108 This rule of construction is permissive — it allows 

the agencies to design the regulations implementing section 13 in a way that accommodates and 

does not unduly “limit or restrict” the ability of banking entities to sell or securitize loans. 

Contrary to the commenter’s argument, this provision does not mandate that any loan 

securitization exclusion only relate to loans. As discussed in this section and the preamble to the 

2020 proposal,109 the agencies believe that allowing excluded loan securitizations to hold limited 

amounts of non-loan assets would, in fact, promote the ability of banking entities to sell or 

securitize loans.

 105 JBA and Data Boiler.

106 Occupy.

107 See 79 FR 5688–92 (stating, for example, that “[t]he [a]gencies also do not believe that they 

lack the statutory authority to permit a loan securitization relying on the loan securitization 

exclusion to use derivative[s,] as suggested by [Occupy]” and that, more broadly, the agencies 

have the authority to allow excluded loan securitizations to hold non-loan assets).

108 12 U.S.C. 1851(g)(2).

109 85 FR 12128–29.
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After considering the foregoing comments, the agencies are revising the loan 

securitization exclusion to permit a loan securitization to hold a limited amount of debt 

securities. Loan securitizations provide an important mechanism for banking entities to fund 

lending programs. Allowing loan securitizations to hold a small amount of debt securities in 

response to customer and market demand may increase a banking entity’s capacity to provide 

financing and lending. To minimize the potential for banking entities to use this exclusion to 

engage in impermissible activities or take on excessive risk, the final rule permits a loan 

securitization to hold debt securities (excluding asset-backed securities and convertible 

securities), as opposed to any non-loan assets, as the 2020 proposal would have allowed.110 

Although several commenters supported allowing a loan securitization to hold any nonloan asset to provide flexibility and allow the issuer’s investment manager to respond to 

changing market demands, the agencies believe that limiting the assets to debt securities is more 

consistent with the activities of an issuer focused on securitizing loans, rather than engaging in 

other activities. The agencies have determined, consistent with the views of another commenter, 

that non-loan assets with materially different risk characteristics from loans could change the 

character and complexity of an issuer and raise the type of concerns that section 13 of the BHC 

Act was intended to address. Moreover, as described further below, limiting the assets to those 

with risk characteristics that are similar to loans will allow for a simpler and more transparent 

calculation of the five percent limit, which will facilitate banking entities’ compliance with the 

exclusion. For the same reasons, the final rule does not permit a loan securitization to hold assetbacked securities or convertible securities as part of its five percent allowance for debt securities. 

 110 Final rule § __.10(c)(8)(i)(E).
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This helps to ensure that a loan securitization will not be exposed to complex financial 

instruments and will retain the general characteristic of a loan securitization issuer.

Similarly, to reduce potential risk-taking and to ensure that the fund is composed almost 

entirely of loans with minimal non-loan assets, the final rule retains the 2020 proposal’s five 

percent limit on non-loan assets. Commenters differed on whether raising the limit on non-loan 

assets was appropriate or necessary to ensure flexibility, and it is not clear what benefit would 

accrue to issuers who could hold debt securities of, for example, seven or ten percent versus five 

percent. The amount of non-loan assets held by a fund should not be so significant that it 

fundamentally changes the character of the fund from one that is engaged in securitizing loans to 

one that is engaged in investing in other types of assets. 

The agencies are also clarifying the methodology for calculating the five percent limit on 

non-convertible debt securities.111 The 2020 proposal only provided that “the aggregate value of 

any such other assets must not exceed five percent of the aggregate value of the issuing entity’s 

assets” and requested comment about how the agencies should calculate this limit.112 As 

suggested by several commenters, the final rule specifies that the limit on non-convertible debt 

securities must be calculated at the most recent time of acquisition of such assets. Specifically, 

the aggregate value of debt securities held under § __.10(c)(8)(i)(E) of the final rule may not 

exceed five percent of the aggregate value of loans held under § __.10(c)(8)(i)(A), cash and cash 

equivalents held under § __.10(c)(8)(iii)(A), and debt securities held under § __.10(c)(8)(i)(E), 

 111 Final rule § __.10(c)(8)(i)(E)(1)-(2).

112 2020 proposal § __.10(c)(8)(i)(E); 85 FR 12129.
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where the value of the loans, cash and cash equivalents, and debt securities is calculated at par 

value at the time any such debt security is purchased.

113 

The agencies have chosen the most recent time of acquisition of non-convertible debt 

securities as the moment of calculation to simplify the manner in which the 5 percent cap 

applies. This would permit an issuer that, at some point in its life, held debt securities in excess 

of five percent of its assets to qualify for the exclusion if it came into compliance with the five 

percent limit prior to a banking entity relying on the exclusion with respect to such issuer. The 

agencies believe that a continuous monitoring obligation could impose significant burdens on 

excluded issuers and could cause an issuer to be disqualified from the loan securitization 

exclusion based on market events not under its control. It is also unnecessary to require this 

calculation at other intervals because limiting permissible assets to those that have similar 

characteristics as loans addresses the potential for evasion of the five percent limit that could 

arise if the issuer held more volatile assets.114 

In the final rule, this measurement is based only on the value of the loans and debt 

securities held under §§ __.10(c)(8)(i)(A) and (E) and the cash and cash equivalents held under § 

__.10(c)(8)(iii)(A) rather than the aggregate value of all of the issuing entity’s assets. The 

purpose of the five percent limit is to ensure the investment pool of a loan securitization is 

composed of loans. Therefore, the calculation takes into account the assets that should make up 

the issuing entity’s investment pool and excludes the value of other rights or incidental assets, as 

well as derivatives held for risk management. This further simplifies the calculation 

 113 Final rule § __.10(c)(8)(i)(E)(1)-(2). 

114 The agencies also have authority to address acts that function as an evasion of the 

requirements of the exclusion. See implementing regulations § __.21. 
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methodology by excluding assets that may be more complex to value and that are ancillary to the 

loan securitization’s investment activities. This straightforward calculation methodology will 

ensure that the loan securitization exclusion remains easy to use and will facilitate banking 

entities’ compliance with the exclusion. 

The agencies recognize that a loan securitization’s transaction agreements may require 

that some categories of loans, cash equivalents, or debt securities be valued at fair market value

for certain purposes. To accommodate such situations, the exclusion provides that the value of 

any loan, cash equivalent, or permissible debt security may be based on its fair market value if 

(1) the issuing entity is required to use the fair market value of such loan or debt security for 

purposes of calculating compliance with concentration limitations or other similar calculations 

under its transaction agreements and (2) the issuing entity’s valuation methodology values 

similarly situated assets, for example non-performing loans, consistently. This provision is 

intended to provide issuers with the flexibility to leverage existing calculation methodologies 

while preventing issuers from using inconsistent methodologies in a manner to evade the 

requirements of the exclusion. 

Leases

A commenter on the 2018 proposal suggested that the loan securitization exclusion be 

expanded to cover leases and related assets, including operating or capital leases.115 In response, 

in the 2020 proposal the agencies stated that they were “not proposing to separately list leases 

within the loan securitization exclusion because leases are included in the definition of loan and 

thus are permitted assets for loan securitizations under the current exclusion.”116 That same 

 115 See 85 FR 12128.

116 Id.
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commenter made a comment on the 2020 proposal urging the agencies to reconsider explicitly 

including operating leases and leased properties in the loan securitization exclusion.

117 This 

commenter asserted that unless the agencies specifically revise the definition of “rights or other 

assets” to explicitly include leased property, then securitization vehicles with operating leases 

that rely on the residual property value after expiration of the lease to support their asset-backed 

securities would not be able to qualify under the loan securitization exemption, despite the 2013 

rule’s provisions for special units of beneficial interest and collateral certificates.

Consistent with the 2020 proposal, the agencies are not separately listing leases within 

the loan securitization exclusion because leases are included in the definition of loan and thus are 

permitted assets for loan securitizations under the current exclusion. The agencies are also not 

modifying the definition of “rights or other assets” to explicitly include leased property, as any 

residual value of such leased property upon expiration of an operating lease should meet the

requirements to constitute an asset that is related or incidental to purchasing or otherwise 

acquiring and holding loans.

3. Public Welfare and Small Business Funds

i. Public Welfare Funds

Section 13(d)(1)(E) of the BHC Act permits, among other things, a banking entity to 

make and retain investments that are designed primarily to promote the public welfare of the 

type permitted under 12 U.S.C. 24(Eleventh).118 Consistent with the statute, the implementing 

regulations exclude from the definition of “covered fund” issuers that make investments that are 

designed primarily to promote the public welfare, of the type permitted under paragraph 11 of 

 117 SFA. 

118 See 12 U.S.C. 1851(d)(1)(E).
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section 5136 of the Revised Statutes of the United States (12 U.S.C. 24), including the welfare of 

low- and moderate-income communities or families (such as providing housing, services, or 

jobs) (the public welfare investment exclusion).119

The 2020 proposal noted that the OCC’s regulations implementing 12 U.S.C. 

24(Eleventh) provide that investments that receive consideration as qualified investments under 

the regulations implementing the Community Reinvestment Act (CRA) are public welfare 

investments for national banks.

120 The 2020 proposal requested comment on whether any 

change should be made to clarify that all permissible public welfare investments, under any 

agency’s regulation, are excluded from the covered fund restrictions.121 The 2020 proposal 

specifically asked whether investments that would receive consideration as qualified investments 

under the CRA should be excluded from the definition of covered fund, either by incorporating 

these investments into the public welfare investment exclusion or by establishing a new 

exclusion for CRA-qualifying investments.122 

In addition, the 2020 proposal requested comment on whether Rural Business Investment 

Companies (RBICs) are typically excluded from the definition of “covered fund” because of the 

public welfare investment exclusion or another exclusion and on whether the agencies should 

expressly exclude RBICs from the definition of covered fund.123 RBICs are licensed under a 

program designed to promote economic development and job creation in rural communities by 

 119 Implementing regulations § __.10(c)(11)(ii)(A).

120 See 85 FR 12130; 12 CFR 24.3.

121 See 85 FR 12130 (noting that such a change could provide additional certainty regarding 

community development investments made through fund structures).

122 See id.

123 See id.
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investing in companies involved in the production, processing, and supply of food and 

agriculture-related products.124 

The Tax Cuts and Jobs Act established the “opportunity zone” program to provide tax 

incentives for long-term investing in designated economically distressed communities.125 The 

program allows taxpayers to defer and reduce taxes on capital gains by reinvesting gains in 

“qualified opportunity funds” (QOF) that are required to have at least 90 percent of their assets in 

designated low-income zones.126 The 2020 proposal requested comment on whether many or all 

QOFs would meet the terms of the public welfare investment exclusion and on whether the 

agencies should expressly exclude QOFs from the definition of covered fund.127

Commenters generally supported clarifying that funds that make investments that qualify 

for consideration under the CRA qualify for the public welfare investment exclusion.128 

Commenters noted that this clarification would be consistent with the OCC’s regulations 

concerning public welfare investments and the CRA, provide greater certainty, and avoid 

unnecessarily chilling public welfare investment activities.129 One commenter stated that some 

banking entities have been reluctant to invest in certain community development funds due to 

 124 See id.

125 See id.

126 See id.

127 See id.

128 See SIFMA; FSF; BPI; ABA; PNC; Community Development Venture Capital Alliance 

(CDVCA); IIB; and Data Boiler (stating that incorporating the CRA public welfare exemption 

may ease some challenges faced by communities during the current COVID pandemic, but all 

PWI should not be excluded).

129 See SIFMA; FSF; and CDVCA.
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uncertainty as to whether these funds were covered funds.130 This commenter stated that 

explicitly excluding funds that qualify for consideration under the CRA from the definition of 

covered fund would eliminate this uncertainty and would help support the type of community 

development efforts that the public welfare investment exclusion was designed to promote.131 In 

addition, some commenters recommended excluding funds that qualify for the public welfare 

investment exclusion from the definition of “banking entity.”132

Commenters also generally favored explicitly excluding RBICs and QOFs from the 

definition of “covered fund,” either by adopting new exclusions, or by clarifying the scope of the 

public welfare investment exclusion.133 Commenters stated that explicitly excluding these funds 

from the definition of “covered fund” would be consistent with the statutory provision permitting 

public welfare investments. Commenters stated that RBICs and QOFs must make investments 

that are clearly designed primarily to promote the public welfare because they are required to 

invest primarily in ways that promote job creation in rural communities (which may have 

significant low- and moderate-income populations or be economically disadvantaged and in need 

of revitalization or stabilization) and in economically distressed communities, respectively.134 

Commenters stated that certain RBICs and QOFs qualify for the public welfare investment 

exclusion, but providing an express exclusion for these funds would reduce uncertainty and 

associated compliance burdens and would encourage banking entities to provide capital to 

 130 See CDVCA. 

131 See id.

132 See SIFMA; BPI; ABA; and IIB.

133 See SIFMA; FSF; ABA (addressing QOFs); and Small Business Investor Alliance (SBIA)

(addressing RBICs).

134 See SIFMA and FSF.
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projects that promote economic development in rural and low-income communities.135 One 

commenter stated that RBICs and QOFs engage in investments that are substantively similar or 

identical to those of public welfare investment funds that are already excluded from the 

definition of covered fund and of the type that Congress recognized that section 13 of the BHC 

Act was not designed to prohibit.136 Another commenter stated that explicitly excluding RBICs 

would result in the provision of valuable expertise and services to RBICs and provide funding 

and assistance to small businesses and low- and moderate-income communities.137 One 

commenter expressed skepticism about providing a new exclusion for RBICs and QOFs but 

suggested that certain of these funds may currently qualify for the public welfare investment 

exclusion.138 Another commenter stated that it is not necessary to expressly exclude QOFs from 

the definition of covered fund, noting that these funds should be of the type primarily intended to 

promote the public welfare of low- and moderate-income areas and should therefore qualify for 

the current public welfare investment exclusion.139

After carefully considering the comments received, the agencies are revising the public 

welfare investment exclusion to explicitly incorporate funds, the business of which is to make 

investments that qualify for consideration under the Federal banking agencies’ regulations 

implementing the CRA.140 Explicitly excluding these types of investments from the definition of 

covered fund clarifies and gives full effect to the statutory exemption for public welfare 

 135 See SIFMA and FSF.

136 See SIFMA.

137 See SBIA.

138 See Data Boiler.

139 See PNC.

140 Final rule § __.10(c)(11)(ii)(A).
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investments.141 In addition, this clarification will reduce uncertainty and will facilitate public 

welfare investments by banking entities.

The agencies are also adopting explicit exclusions from the definition of covered fund for 

RBICs and QOFs in § __.10(c)(11) of the final rule. These types of funds were created by 

Congress to promote development in rural and low-income communities, and, due to their 

similarity to SBICs and public welfare investments, the agencies believe that section 13 of the 

BHC Act was not intended to restrict the types of funds that engage in those activities. RBICs 

are companies licensed under the Rural Business Investment Program, a program designed to 

promote economic development and the creation of wealth and job opportunities among 

individuals living in rural areas and to help meet the equity capital investment needs primarily of 

smaller enterprises located in such areas.142 Likewise, QOFs were developed as part of a 

program to promote long-term investing in designated economically distressed communities and 

are required to have at least 90 percent of their assets in designated low-income zones.143 

Congress created RBICs and QOFs to encourage investment in rural areas, small enterprises, and 

low-income areas. Providing an explicit exclusion for these funds in the implementing 

regulations gives effect to section 13 of the BHC Act’s provision permitting public welfare 

investments and avoids chilling the activities of funds that were not the target of section 13 of the 

 141 See 12 U.S.C. 1851(d)(1)(E). A banking entity must have independent authority to make a 

public welfare investment. For example, a banking entity that is a state member bank may make 

a public welfare investment to the extent permissible under 12 U.S.C. 338a and 12 CFR 208.22.

142 See, e.g., Rural Business Investment Company (RBIC) Program, 85 FR 16519, 16520 (Mar. 

24, 2020).

143 See 26 U.S.C. 1400Z-2(d).
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BHC Act.144 Although many of these funds may already qualify for the public welfare 

investment exclusion, the agencies are explicitly excluding these funds from the definition of 

covered fund to reduce uncertainty and compliance burden. Thus, under the final rule, a covered 

fund does not include an issuer that has elected to be regulated or is regulated as a RBIC, as 

described in 15 U.S.C. 80b-3(b)(8)(A) or (B), or that has terminated its participation as a RBIC 

in accordance with 7 CFR 4290.1900 and does not make any new investments (other than 

investments in cash equivalents, which, for the purposes of this paragraph, means high quality, 

highly liquid investments whose maturity corresponds to the issuer’s expected or potential need 

for funds and whose currency corresponds to the issuer’s assets) after such termination.145 

Likewise, under the final rule, a covered fund does not include an issuer that is a QOF, as 

defined in 26 U.S.C. 1400Z-2(d).146

The final rule does not exclude funds that qualify for the public welfare investment 

exclusion from the definition of “banking entity” as requested by some commenters.147 The term 

“banking entity” is specifically defined in section 13 of the BHC Act.148 In addition, the 

agencies do not believe that applying the definition of banking entity places an undue burden on 

 144 See 12 U.S.C. 1851(d)(1)(E); 156 Cong. Rec. S5896 (daily ed. July 15, 2010) (Statement of 

Sen. Merkley) (noting that Section 13(d)(1)(E) permits investments “of the type” permitted 

under 12 U.S.C. § 24 (Eleventh), including “a range of low-income community development and 

other projects,” but “is flexible enough to permit the [agencies] to include other similar low-risk 

investments with a public welfare purpose”).

145 Final rule § __.10(c)(11)(iii). As with SBICs, discussed below, the final rule contemplates 

that an issuer that ceases to be a RBIC during wind-down may continue to qualify for the 

exclusion from the definition of “covered fund” for RBICs if the issuer satisfies certain 

conditions designed to prevent abuse. 

146 Final rule § __.10(c)(11)(iv). As with other types of issuers excluded from the covered fund 

definition, a banking entity must have independent authority to invest in a QOF. 

147 See SIFMA and BPI.

148 12 U.S.C. 1851(h)(1).
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banking entities’ public welfare investments. The agencies believe that banking entities are able 

to design their permissible public welfare investments so as not to cause the investment fund to 

become a banking entity. For public welfare investment funds that are banking entities, the 

agencies believe that the burden-reducing amendments adopted in this final rule and the 2019 

amendments should mitigate concerns about compliance burdens.

ii. Small Business Investment Companies

Consistent with section 13 of the BHC Act,149 the implementing regulations exclude from 

the definition of “covered fund” SBICs and issuers that have received notice from the Small 

Business Administration to proceed to qualify for a license as an SBIC, which notice or license 

has not been revoked.150 The agencies proposed revising the exclusion for SBICs to clarify how 

the exclusion would apply to SBICs that surrender their licenses during wind-down phases.151 

Specifically, the agencies proposed revising the exclusion for SBICs to apply explicitly to an 

issuer that has voluntarily surrendered its license to operate as an SBIC in accordance with 13 

CFR 107.1900 and does not make new investments (other than investments in cash equivalents) 

after such voluntary surrender.152 The agencies explained that applying the exclusion to an 

issuer that has surrendered its SBIC license is appropriate because of the statutory exemption for 

investments in SBICs and because banking entities may otherwise become discouraged from 

investing in SBICs due to concerns that an SBIC may become a covered fund during its wind-

 149 See 12 U.S.C. 1851(d)(1)(E) (permitting investments in SBICs).

150 See implementing regulations § __.10(c)(11)(i).

151 See 85 FR 12131.

152 See id.
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down phase.153 The agencies further noted that the proposed revisions included a number of 

requirements designed to ensure that the exclusion would not be abused.154 In particular, the 

exclusion would apply only to an issuer that voluntarily surrenders its license in accordance with 

13 CFR 107.1900 and that does not make any new investments (other than investments in cash 

equivalents).155

Most commenters that directly addressed the 2020 proposal’s revisions concerning SBICs 

supported the proposed revisions, stating that the proposed revisions would provide greater 

certainty to banking entities wishing to invest in SBICs and would increase investment in small 

businesses.156 One commenter stated that revising the exclusion for SBICs would prevent a 

banking entity from being forced to sell an interest in an SBIC that became a covered fund for 

reasons outside of the banking entity’s control.157 Commenters further noted that the proposed 

revisions included sufficient safeguards against evasion and did not present safety or soundness 

concerns.158 One commenter recommended against revising the exclusion from the definition of 

covered fund for SBICs. This commenter expressed concern about frequent buying and selling 

of SBICs and noted that section 13 of the BHC Act and its implementing regulations do not 

prohibit a banking entity from lending to small businesses.159 The commenter further expressed 

 153 See id.; 12 U.S.C 1851(d)(1)(E).

154 See 85 FR 12131.

155 See id.

156 See SIFMA; BPI; ABA; PNC; and SBIA.

157 See SBIA.

158 See SIFMA; BPI; and SBIA.

159 See SIFMA; BPI; and SBIA.
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concern that an SBIC that surrenders its license may be doing so because it has failed or no 

longer wishes to comply with the Small Business Administration’s regulations.160

After carefully considering the comments received, the agencies are adopting the 

revisions to the exclusion from the definition of covered fund for SBICs, as proposed.161 The 

revisions will provide greater certainty to banking entities, give full effect to the provision of 

section 13 of the BHC Act that permits investments in SBICs, and support capital formation for 

small businesses. In response to one commenter’s concerns regarding the exclusion for 

SBICs,162 the agencies note that a banking entity’s investment in an SBIC must comply with all 

applicable laws and regulations, including the prohibition against proprietary trading under 

section 13 of the BHC Act and its implementing regulations. Furthermore, as noted above, the 

revised exclusion for SBICs includes safeguards designed to prevent abuse or evasion. In 

particular, the exclusion would only apply to an issuer that has voluntarily surrendered its license 

to operate as an SBIC in accordance with 13 CFR 107.1900 and that does not make new 

investments (other than investments in cash equivalents) after such voluntary surrender.

C. Additional Covered Fund Exclusions

In addition to modifying certain existing exclusions, the agencies are creating four new 

exclusions from the definition of “covered fund” to better tailor the provision to the types of 

entities that section 13 was intended to cover. These exclusions are for credit funds, venture 

capital funds, family wealth management vehicles, and customer facilitation vehicles.

General Comments

 160 See Data Boiler.

161 See final rule § __10(c)(11)(i).

162 See Data Boiler.
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Many commenters were broadly supportive of the proposed new exclusions from the 

definition of “covered fund.”163 Some commenters recommended adopting additional exclusions 

for an array of fund types and situations, including for tender bond vehicles,164 ownership 

interests erroneously acquired or retained,165 certain real estate funds,166 and funds in their 

seeding period.167 The agencies are declining to adopt these suggested exclusions because the 

requested actions are outside the scope of the current rulemaking. In addition, one commenter 

urged the agencies to redefine the definition of “covered fund,” to rely on a characteristics-based 

approach.168 The agencies decline to revise the definition of “covered fund” for the reasons 

articulated in the preamble to the 2013 rule.169

1. Credit Funds

i. Background and 2020 Proposal

In the preamble to the 2013 rule, the agencies declined to establish an exclusion from the 

definition of covered fund for funds that make loans, invest in debt, or otherwise extend the type 

of credit that banking entities may provide directly under applicable banking law (credit 

funds).

170 The agencies cited concerns about whether credit funds could be distinguished from 

private equity funds and hedge funds and the possible evasion of the requirements of section 13 

 163 E.g., SIFMA; JBA; Credit Suisse; and SAF.

164 SIFMA.

165 SIFMA and BPI.

166 IAA.

167 ABA.

168 JBA. 

169 See 79 FR 5671.

170 See 79 FR 5705. 
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of the BHC Act through the availability of such an exclusion. In addition, the agencies 

suggested that some credit funds would be able to operate using other exclusions from the 

definition of covered fund in the 2013 rule, such as the exclusion for joint ventures or the 

exclusion for loan securitizations.171

However, commenters on the 2018 proposal noted that many credit funds have not been 

able to utilize the joint venture and loan securitization exclusions. In response, the agencies 

included in the 2020 proposal a specific exclusion for credit funds. Under the 2020 proposal, a

credit fund would have been an issuer whose assets consist solely of: 

• Loans; 

• Debt instruments; 

• Related rights and other assets that are related or incidental to acquiring, holding, 

servicing, or selling loans, or debt instruments; and 

• Certain interest rate or foreign exchange derivatives.172

The proposed exclusion would have been subject to certain additional requirements to 

reduce evasion concerns and help ensure that banking entities invest in, sponsor, or advise credit 

funds in a safe and sound manner. For example, the proposed exclusion would have imposed (1) 

certain activity requirements on the credit fund, including a prohibition on proprietary trading;173

(2) disclosure and safety and soundness requirements on banking entities that sponsor or serve as 

an advisor for a credit fund;174 (3) safety and soundness requirements on all banking entities that 

 171 Id.

172 2020 proposal § __.10(c)(15)(i).

173 2020 proposal § __.10(c)(15)(ii).

174 2020 proposal § __.10(c)(15)(iii).
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invest in or have certain relationships with a credit fund;175 and (4) restrictions on the banking 

entity’s investment in, and relationship with, a credit fund.176 The proposed exclusion also 

would have permitted a credit fund to receive and hold a limited amount of equity securities (or 

rights to acquire equity securities) that were received on customary terms in connection with the 

credit fund’s loans or debt instruments.177 

ii. Comments

The agencies requested comment on all aspects of the proposed credit fund exclusion. In 

addition, the agencies solicited comment on specific provisions of the proposed exclusion, 

including the permissibility of certain assets and requirements related to the activities of the 

credit fund and the relationship between a banking entity and a credit fund.178

General

Commenters were generally supportive of adopting an exclusion for credit funds, and 

several commenters suggested specific revisions to the proposed exclusion.179 Several 

commenters supportive of the 2020 proposal urged the agencies not to adopt any further 

limitations on the proposed exclusion and indicated that the proposed exclusion would not 

increase the risk of evasion of the requirements of section 13 of the BHC Act.

180 Two 

 175 2020 proposal § __.10(c)(15)(iv).

176 2020 proposal § __.10(c)(15)(v).

177 2020 proposal § __.10(c)(15)(i)(C)(1)(iii).

178 See 85 FR 12133.

179 E.g., CCMC; AIC; SIFMA; FSF; ABA; Arnold & Porter; and Goldman Sachs.

180 E.g., SIFMA; Credit Suisse; Goldman Sachs; and Arnold & Porter.
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commenters expressed general opposition to or concern about the proposed credit fund 

exclusion.181

Asset Requirements

Commenters were generally supportive of allowing a credit fund to invest broadly in 

loans and debt instruments, certain related assets, and certain derivatives.

182 One commenter 

recommended against delineating between permissible and non-permissible types of loans and 

debt instruments, arguing that credit funds should be able to extend credit to the same degree as 

would be permitted for the banking entity to extend directly.

183 Another commenter encouraged 

the agencies to clarify and expand the definition of debt instrument and derivatives, to include all 

tranches of debt, collateralized loan and collateralized debt obligations, and any derivatives

related to hedging credit risk, such as credit default swaps and total return swaps.

184 In addition,

a commenter suggested clarifying that no specific credit standard applies to loans held by a credit 

fund.

185 One commenter also urged the agencies to establish a safe harbor to the permissible 

 181 Better Markets and Data Boiler. One of these commenters suggested that banking entities 

should instead rely on the exclusions for joint ventures and loan securitizations. Data Boiler.

182 E.g., SIFMA; Arnold & Porter; and ABA. One commenter also noted that the permissible 

holding period for debt previously contracted varies depending on applicable regulations and 

suggested that the agencies specify the holding period for debt previously contracted assets 

owned by a credit fund and provide for an extension process. Arnold & Porter.

183 SIFMA. The same commenter also urged the agencies to permit credit funds to hold 

commodity forward contracts, which the commenter argued may be an appropriate hedge for 

extensions of credit to agricultural businesses. SIFMA. 

184 Credit Suisse. See also Arnold & Porter (recommending expanding the types of permissible 

derivatives, to allow for more effective hedging and easier disposal of portfolio assets). 

185 ABA.
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asset restrictions for banking entities that rely, in good faith, on a representation by the credit 

fund that the credit fund only invests in permissible assets.

186

Two commenters recommended limiting permissible assets to only loans or debt 

instruments, and not equity.187 In contrast, a range of commenters argued that allowing a credit 

fund to receive certain assets, like equity, related to an extension of credit would promote the 

sale of loans and extensions of credit.

188 Some of these commenters suggested that taking equity 

as partial consideration for extending credit is commonplace in the debt and loan markets and 

that such a provision could ensure that credit funds are able to facilitate loan and debt workouts 

and restructurings, a critical financial intermediation function.189 Most commenters supportive 

of the 2020 proposal were generally opposed to a quantitative limit on the amount of equity 

securities (or rights to acquire an equity security) received on customary terms in connection 

with such loans or debt instruments that could be held by a credit fund, citing compliance costs 

 186 Arnold & Porter.

187 Data Boiler and Better Markets. One of these commenters argued that the inclusion of nonloan instruments would be contrary to the purpose of section 13 of the BHC Act. Data Boiler. 

As indicated by the agencies in the preamble to the 2020 proposal, taking limited amounts of 

non-loan or debt assets as consideration for an extension of credit is common and is a permitted 

practice for insured depository institutions. Therefore, the agencies believe it would not be 

inconsistent with section 13 of the BHC Act to facilitate the sale of loans by establishing a credit 

fund exclusion that allows a credit fund to hold a limited amount of certain equity instruments 

related to extensions of credit. See also the discussion about permitting excluded loan 

securitizations to hold a small amount of non-loan assets, supra Section IV.B.2 (Loan 

Securitizations).

188 E.g., SIFMA; Credit Suisse; ABA; and Arnold & Porter

189 E.g., SIFMA; Credit Suisse; and Arnold & Porter. 
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and diminished flexibility,190 but some commenters indicated that a limitation of 20 or 25 

percent of total assets could be acceptable if the agencies were to impose a limit.

191

Commenters supportive of allowing credit funds to hold certain related assets, such as 

equity, in connection with an extension of credit suggested that the provision would not raise 

significant safety and soundness or evasion concerns. For example, one commenter claimed that 

such a provision would not raise the risk of evasion, in part, because equity options received as 

consideration generally expire unexercised.

192 Other commenters argued that the activity

requirements of the exclusion would prevent a credit fund from becoming actively involved in 

the purchase and sale of equity instruments.

193 Another commenter suggested that the agencies 

could impose a requirement that non-loan or non-debt assets be acquired on arms-length terms 

and adhere to bank safety and soundness standards.

194

Separately, several commenters recommended allowing excluded credit funds to hold any 

type of asset, up to a certain percentage of aggregate assets, either 20 or 25 percent of a credit 

fund’s total assets.195 These commenters asserted that permitting a credit fund to own equity 

securities and other assets would help the fund more effectively provide credit, without altering 

the character of the credit fund, and would reduce compliance burdens associated with launching 

 190 SIFMA; FSF; CCMC; AIC; ABA; and Goldman Sachs

191 SIFMA and CCMC.

192 Arnold & Porter.

193 Goldman Sachs and FSF.

194 ABA.

195 SIFMA; FSF; Credit Suisse; ABA; and Goldman Sachs. One commenter also suggested a 

formula for determining the cap. Goldman Sachs.
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and operating a credit fund.

196 In addition, these commenters claimed that a limited bucket for 

non-loan and non-debt assets would be consistent with the ability of banking entities and some 

business development companies to invest in equity.

197

Banking Entity and Issuer Requirements

Generally, commenters either agreed that certain restrictions to ensure that a credit fund 

is actually engaged in prudently providing credit and credit intermediation and is not operated for 

the purpose of evading the provisions of section 13 of the BHC Act were appropriate or did not 

object to the inclusion of these requirements.198 Several commenters, however, offered revisions 

to the activities, sponsor or advisor, banking entity, or investment and relationship limit 

requirements. For example, several commenters requested clarification on the prohibition on 

proprietary trading by an excluded credit fund contained in § __.10(c)(15)(ii)(A) of the 2020 

proposal. One commenter suggested that the definition of proprietary trading for a credit fund 

should depend on the definition used by the banking entity.199 Another commenter encouraged

the agencies to incorporate the exclusions and exemptions from the prohibition on proprietary 

trading into the credit fund exclusion’s prohibition on proprietary trading.200 A third commenter 

 196 E.g., SIFMA and Goldman Sachs.

197 Id.

198 E.g., SIFMA; Better Markets; FSF; and Goldman Sachs. One commenter also indicated that 

the disclosure requirement for banking entities that sponsor or advise funds is appropriate. 

Arnold & Porter.

199 SIFMA. For example, the commenter suggested that a credit fund sponsored by a banking 

entity subject to the market risk rule should be permitted to use the definitions of proprietary 

trading and trading account in § __.3(b)(1)(ii).

200 FSF.
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recommended making explicit that exercising rights for certain related assets, such as an equity 

warrant, is not proprietary trading.201

Commenters also requested revisions to and clarification about the limits on a banking 

entity’s investment in, and relationship with, a credit fund. One commenter argued that the 

imposition of § __.14 of the implementing regulations (which imposes limitations on the 

relationship between a banking entity and a fund it sponsors or advises) would be duplicative of 

(1) the requirement that the banking entity not, directly or indirectly, guarantee, assume, or 

otherwise insure the obligations or performance of the credit fund and (2) certain conflict of 

interest, high-risk, and safety and soundness restrictions.202 Another commenter claimed that 

there was little benefit to imposing the requirements of § __.14 (described above) and § __.15 

(which imposes certain material conflicts of interest, high-risk investments, and safety and 

soundness and financial stability requirements on permitted covered fund activities) of the 

implementing regulations in the context of credit funds and suggested that the partial application 

of § __.14, in particular, could lead to unexpected and inappropriate outcomes, such as allowing 

a banking entity to invest in the equity of a credit fund, but not the debt instruments issued by 

that same credit fund.203 That same commenter also recommended eliminating §

__.10(c)(15)(v)(B) of the 2020 proposal – which would have required that the banking entity’s 

investment in, and relationship with, the credit fund be conducted in compliance with, and 

 201 Arnold & Porter.

202 SIFMA.

203 Arnold & Porter.
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subject to, applicable banking laws and regulations – because applicable banking laws and 

regulations apply regardless of the banking entity’s use of the credit fund exclusion.

204

In addition, a commenter argued that banking entities that serve as investment advisers or 

commodity trading advisors to credit funds should not be subject to the disclosure and safety and 

soundness requirements of § __.10(c)(15)(iii) of the 2020 proposal since investment advisers and 

commodity trading advisors who do not otherwise sponsor or invest in a fund are generally not 

subject to section 13 of the BHC Act. The commenter argued that § __.10(c)(15)(iii) of the 2020 

proposal would impose differing requirements on a credit fund depending on whether the 

investment adviser or commodity trading advisor was an insured depository institution or a bank 

holding company. That commenter also claimed that the portfolio requirements in §

__.10(c)(15)(iv)(B) of the 2020 proposal could require banking entities to establish complex 

compliance programs to assess credit fund compliance with state and foreign laws and that the 

agencies should limit the scope of the provision to only federal banking laws and regulations.205

Finally, one commenter contended that the application of certain requirements in the 

exclusion is contingent on the type of banking entity that invests in or sponsors a credit fund and 

urged the agencies to make explicit that only the identity of the sponsor of the credit fund, and 

not its affiliates or third-party investors, determines which portfolio quality and safety and 

soundness requirements apply to the credit fund.

206 More generally, this commenter asked the 

 204 Arnold & Porter.

205 Id.

206 Id.
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agencies to make explicit in the preamble to the final rule that the actions of unaffiliated, thirdparty banking entities do not affect whether a banking entity may invest in a fund.207

Other Comments

Commenters also submitted several miscellaneous comments about the proposed 

exclusion for credit funds. One commenter requested that the agencies clarify the definition of 

asset-backed securities as used in the proposed credit fund exclusion and the current loan 

securitization exclusion.

208 That same commenter also urged the agencies to revise the proposed

credit fund exclusion to allow banking entities with more stringent credit requirements, such as

insured depository institutions, to invest in credit funds that hold distressed debt.209

Finally, the 2020 proposal requested comment on whether to combine the proposed credit 

fund exclusion with the loan securitization exclusion. Commenters were generally opposed to 

combining the two exclusions, citing different classes of assets in which the two types of issuers 

invest and a fundamental difference in structure (loan securitizations issue asset-backed 

securities, while credit funds do not).210 In addition, one commenter argued that while 

combining the two exclusions would increase the simplicity of the rule, such an amalgamated 

exclusion could result in increased compliance burdens for issuers who are accustomed to the 

lack of credit requirements in the current loan securitization exclusion.211

 207 Id.

208 Id.

209 Id.

210 SIFMA; FSF; CCMC; Credit Suisse; and Data Boiler.

211 Arnold & Porter. 
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iii. Final Exclusion

After consideration of the comments, the agencies are adopting the credit fund exclusion 

as proposed, with certain modifications. The agencies believe that the credit fund exclusion in 

the final rule (1) addresses the application of the covered fund provisions to credit-related 

activities that certain banking entities are permitted to engage in directly and (2) is consistent 

with Congress’s intent that section 13 of the BHC Act limit banking entities’ investment in and 

relationships with hedge funds and private equity funds, but not limit or restrict banking entities’ 

ability to extend credit.

212 The agencies also believe that the credit fund exclusion in the final 

rule, with the eligibility criteria described below, will address concerns the agencies expressed in 

the preamble to the 2013 rule about the ability to administer an exclusion for credit funds and the 

potential evasion of section 13 of the BHC Act.213 Banking entities already have experience 

using and complying with the loan securitization exclusion. Establishing an exclusion for credit 

funds based on the framework provided by the loan securitization exclusion allows banking 

entities to provide traditional extensions of credit regardless of the specific form, whether 

directly via a loan made by a banking entity, or indirectly through an investment in or 

relationship with a credit fund that transacts primarily in loans and certain debt instruments.

The credit fund exclusion limits the universe of potential funds that can rely on the 

exclusion by clearly specifying the types of activities in which those funds may engage. 

Excluded credit funds can transact in or hold only loans; debt instruments that would be 

permissible for the banking entity relying on the exclusion to hold directly; certain rights or 

 212 See 12 U.S.C. 1851(g)(2), (h)(2). Paragraph (g)(2) of section 13 of the BHC Act makes clear 

that the Volcker rule is not intended to impede banking entities’ ability to extend credit by, for 

example, selling loans or securitize loans. See 12 U.S.C. 1851(g)(2).

213 See 79 FR 5705.
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assets that are related or incidental to the loans or debt instruments, including equity securities

(or rights to acquire an equity security) received on customary terms in connection with such 

loans or debt instruments; and certain interest rate and foreign exchange derivatives. The credit 

fund exclusion, with these eligibility criteria, should not raise evasion concerns. Similarly, the 

agencies’ expectations regarding the amount of permissible equity securities (or rights to acquire 

an equity security) held and the requirement that the credit fund not engage in activities that 

would constitute proprietary trading should help to ensure that the extensions of credit, whether

directly originated or acquired from a third party, are held by the credit fund for the purpose of 

facilitating lending and not for the purpose of evading the requirements of section 13. Finally, 

the restrictions on guarantees and other limitations should eliminate the ability and incentive for 

either the banking entity sponsoring a credit fund or any affiliate to provide additional support 

beyond the ownership interest retained by the sponsor. Thus, the agencies expect that, together, 

the criteria for the credit fund exclusion will prevent a banking entity from having any incentive 

to bail out such funds in periods of financial stress or otherwise expose the banking entity to the 

types of risks that the covered fund provisions of section 13 were intended to address.

Consistent with commenters’ suggestions, the agencies are keeping separate the credit 

fund exclusion and the loan securitization exclusion because the structures and purposes of those 

two types of issuers differ sufficiently to warrant different requirements. For example, loan 

securitizations and credit funds have different asset composition and different financing and legal 

structures. Therefore, the agencies are finalizing a credit fund exclusion separate from the loan

securitization exclusion.

Asset Requirements
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Under the final rule, a credit fund, for the purposes of the credit fund exclusion, is an 

issuer whose assets consist solely of: 

• Loans; 

• Debt instruments; 

• Related rights and other assets that are related or incidental to acquiring, holding, 

servicing, or selling loans, or debt instruments; and 

• Certain interest rate or foreign exchange derivatives.214

Several provisions of the exclusion are similar to and modeled on conditions in the loan 

securitization exclusion to ease compliance burdens. For example, any derivatives held by the 

credit fund must relate to loans, permissible debt instruments, or other rights or assets held and 

reduce the interest rate and/or foreign exchange risks related to these holdings.215 In addition, 

any related rights or other assets held that are securities must be cash equivalents, securities 

received in lieu of debts previously contracted with respect to loans held or, unique to the credit 

fund exclusion, equity securities (or rights to acquire equity securities) received on customary 

terms in connection with the credit fund’s loans or debt instruments.216

In the 2020 proposal, the agencies requested comment on whether to impose a limit on 

the amount of equity securities (or rights to acquire equity securities) that may be held by an 

 214 Final rule § __.10(c)(15)(i).

215 Final rule § __.10(c)(15)(i)(D).

216 Final rule § __.10(c)(15)(i)(C). In a minor change from the 2020 proposal, the agencies are 

making clear that rights or other assets held under paragraph (c)(15)(i)(C) of that section may not 

include any derivative, other than a derivative that meets the requirements of paragraph 

(c)(15)(i)(D) of that section. 
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excluded credit fund.

217 After a review of the comments and further deliberation, the agencies 

are not adopting a quantitative limit on the amount of equity securities (or rights to acquire 

equity securities) that may be held by an excluded credit fund. Any such equity securities or 

rights are limited by the requirements that they be (a) received on customary terms in connection 

with the fund’s loans or debt instruments and (b) related or incidental to acquiring, holding, 

servicing, or selling those loans or debt instruments. The agencies generally expect that the 

equity securities or rights satisfying those criteria in connection with an investment in loans or 

debt instruments of a borrower (or affiliated borrowers) would not exceed five percent of the 

value of the fund’s total investment in the borrower (or affiliated borrowers) at the time the 

investment is made. The agencies understand that the value of those equity securities or other 

rights may change over time for a variety of reasons, including as a result of market conditions 

and business performance, as well as more fundamental changes in the business and the credit 

fund’s corresponding management of the investment (e.g., exchanges of debt instruments for 

equity in connection with mergers and restructurings or a disposition of all portion of the credit 

investment without a corresponding disposition of the equity securities or rights due to 

differences in market conditions or other factors). Accordingly, the agencies can foresee various 

circumstances where the relative value of such equity securities or rights in a borrower (or 

affiliated borrowers) would over the life of the investment exceed five percent on a basis 

consistent with the requirements. Nonetheless, the agencies expect that the fund’s exposure to 

equity securities (or other rights), individually and collectively and when viewed over time, 

would be managed on a basis consistent with the fund’s overall purpose.

 217 85 FR 12133.
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The agencies are also not imposing additional restrictions on the types of equity securities 

(or rights to acquire an equity security) that a credit fund may hold. The final rule prevents a 

banking entity from relying on the credit fund exclusion unless any debt instruments and equity 

securities (or rights to acquire an equity security) held by the credit fund and received on 

customary terms in connection with the credit fund’s loans or debt instruments are permissible 

for the banking entity to acquire and hold directly and a sponsor of a credit fund must ensure that 

the credit fund complies with certain safety and soundness standards.218 Combined with the 

prohibition on proprietary trading by a credit fund,219 these limitations are expected to prevent 

evasion of section 13 of the BHC Act and should be sufficient to prevent banking entities from 

investing in or sponsoring credit funds that hold excessively risky equity securities (or rights to 

acquire an equity security).

220

The agencies are, however, clarifying that the provision allowing related rights and other 

assets does not separately permit the holding of derivatives. The preamble to the 2020 proposal 

made clear that “any derivatives held by the credit fund must relate to loans, permissible debt 

instruments, or other rights or assets held, and reduce the interest rate and/or foreign exchange 

 218 Final rule § __.10(c)(15)(iv)(B), (iii)(B).

219 Final rule § __.10(c)(15)(ii)(A).

220 One commenter suggested requiring that equity securities (or rights to acquire an equity 

security) be acquired via arms-length market transactions and adhere to bank safety and 

soundness standards. See ABA. Under the final rule, a banking entity may not rely on the credit 

fund exclusion unless any equity securities (or rights to acquire an equity security) held by the 

credit fund are permissible for the banking entity to acquire and hold directly under applicable 

federal banking laws and regulations. Final rule § __.10(c)(15)(iv)(B). In addition, the final rule 

requires that equity securities (or rights to acquire an equity security) related or incidental to 

acquiring, holding, servicing, or selling such loans or debt instruments must be received on 

customary terms in connection with such loans or debt instruments. Final rule § 

__.10(c)(15)(i)(C)(1)(iii). Finally, a banking entity's investment in, and relationship with, the 

issuer must comply with the limitations imposed in § __.15, as if the issuer were a covered fund. 

Final rule § __.10(c)(15)(v)(A).
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risks related to these holdings.”221 The agencies suggested then and currently believe that 

allowing a credit fund issuer to hold derivatives not related to interest rate or foreign exchange 

hedging would not be necessary to facilitate the indirect extension of credit by banking entities 

and may pose the very risks that section 13 of the BHC Act was intended to reach. To ensure 

that the credit fund exclusions does not inadvertently allow the holding of certain derivatives 

unrelated to interest rate and/or foreign exchange risks, the final rule explicitly excludes 

derivatives from permissible related right and other assets.222

The agencies are not adopting a broad expansion of permissible assets, as recommended 

by several commenters. Contrary to commenters’ suggestions, allowing credit funds to hold 

unlimited amounts of non-debt instruments or derivatives, such as credit default or total return

swaps, could present evasion concerns and is not necessary for effectuating the rule of 

construction.

223 The agencies believe that only those instruments that facilitate the extension of 

credit and directly-related hedging activities should be permitted under the exclusion. For 

 221 85 FR 12132. 

222 Final rule § __.10(c)(15)(i)(C)(2).

223 The agencies’ rationale, in the preamble to the 2013 rule, for limiting the permissible assets 

for the loan securitization exclusion is particularly relevant. See 79 FR 5691 (“Under the final 

rule as adopted, an excluded loan securitization would not be able to hold derivatives that would 

relate to risks to counterparties or issuers of the underlying assets referenced by these derivatives 

because the operation of derivatives, such as these, that expand potential exposures beyond the 

loans and other assets, would not in the Agencies’ view be consistent with the limited exclusion 

contained in the rule of construction under section 13(g)(2) of the BHC Act, and could be used to 

circumvent the restrictions on proprietary trading and prohibitions in section 13(f) of the BHC 

Act. The Agencies believe that the use of derivatives by an issuing entity for asset-backed 

securities that is excluded from the definition of covered fund under the loan securitization 

exclusion should be narrowly tailored to hedging activities that reduce the interest rate and/or 

foreign exchange risks directly related to the asset-backed securities or the loans supporting the 

asset-backed securities because the use of derivatives for purposes other than reducing interest 

rate risk and foreign exchange risks would introduce credit risk without necessarily relating to or 

involving a reduction of interest rate risk or foreign exchange risk.”).
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example, allowing the unlimited holding of credit default swaps by a majority owned or 

sponsored credit fund could raise the risks that section 13 of the BHC Act was intended to 

address. Moreover, permitting excluded credit funds to invest up to 25 percent of total assets in 

any type of asset could turn the exclusion for credit funds into an exclusion for the type of funds

that section 13 of the BHC Act was intended to address. Such a result would be contrary to 

section 13 of the BHC Act. 

There are several additional changes recommended by commenters that the agencies are 

not including in the final rule. Specifically, the final rule does not:

• Allow excluded credit funds to hold commodity forward contracts. Although these 

contracts have legitimate value as hedging instruments, the agencies do not believe 

this type of hedging activity is consistent with the purpose of the exclusion for credit 

funds, which is to allow banking entities to share the risks of their permissible lending 

activities or to engage in permissible lending activities indirectly through a fund 

structure.

• Permit banking entities that are insured depository institutions or their operating 

subsidiaries to invest in credit funds through a contribution to a credit fund of 

troubled loans and debt previously contracted assets from the banking entity’s 

portfolio. The conditions in the final rule are intended to ensure that a credit fund 

generally engages in activities that the banking entity may engage in directly and that 

the banking entity’s investment in and relationship with the fund are conducted in a 

safe and sound manner. The agencies decline to deviate from these standards for any 

particular type of credit fund because doing so could permit activities that raise the 

type of concerns that section 13 of the BHC Act was intended to address.
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• Further specify the holding period for securities held in lieu of debts previously 

contracted held by a credit fund. Generally, a banking entity may not rely on this 

exclusion unless any debt instruments and equity securities (or rights to acquire 

equity securities) held by the fund would be permissible for the banking entity to 

acquire and hold directly under applicable federal banking laws and regulations. 

However, the requirement that a banking entity be able to hold a given asset directly

does not apply to securities held in lieu of debts previously contracted under the final 

regulations. Because a banking entity’s ability to invest in or sponsor an excluded 

credit fund is not contingent on how long the credit fund holds securities held in lieu 

of debts previously contracted, the agencies do not believe it is necessary to amend 

the regulations to impose a specific holding period on securities held by a credit fund 

in lieu of debts previously contracted.

224

• Revise or expand on the definition of debt instrument. The agencies believe that the 

term debt instrument already has a general meaning that is used in the marketplace

and by regulators and that a new definition is unnecessary given this widely 

understood meaning and could cause confusion.

• Adopt a safe harbor for banking entities that rely, in good faith, on a representation by

the credit fund that it only invests in permissible assets. It is the responsibility of the 

banking entity to ensure that it complies with section 13 of the BHC Act and the 

implementing regulations, and such responsibility cannot be substituted solely with a 

representation from a credit fund.

 224 The agencies note that banking entities must otherwise comply with applicable law. See 

infra, Additional Banking Entity Requirements.
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Activity requirements

The agencies are adopting the activity requirements for issuers in the 2020 proposal 

without revision. Under the final rule, a credit fund is not a covered fund, provided that: 

• The fund does not engage in activities that would constitute proprietary trading, as 

defined in § __.3(b)(1)(i) of the rule, as if the fund were a banking entity;225 and

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

The agencies decline to adopt changes recommended by commenters because the 

agencies believe the activity requirements are clear and appropriate. The first provision 

explicitly references the prohibition on proprietary trading by a banking entity in § __.3 of the 

implementing regulations and, in particular, the short-term intent prong contained in § 

__.3(b)(1)(i). For the avoidance of doubt, a credit fund would not be able to elect a different 

definition of proprietary trading or trading account. Varying the definition of proprietary trading 

depending on the type of banking entity that sponsors or invests in the credit fund, as suggested 

by a commenter, could result in conflicting requirements for credit funds with multiple banking 

entity investors and generally increase compliance burdens on credit funds. The agencies also 

note that activities permitted under § __.10(c)(15) generally would not be considered proprietary 

trading, provided that an excluded credit fund does not purchase or sell one or more financial 

instruments principally for the purpose of short-term resale, benefit from actual or expected 

short-term price movements, realize short-term arbitrage profits, or hedge one or more of the 

positions resulting from the purchases or sales of financial instruments.

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

226 Final rule § __.10(c)(15)(ii)(B).
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The agencies are not expressly incorporating the permitted activities in §§ __.4, __.5, and 

__.6 of the implementing regulations into the text of the final credit fund exclusion. The 

exclusion for credit funds is intended to allow banking entities to share the risks of otherwise 

permissible lending activities. Accordingly, the agencies would not expect that a credit fund 

would be formed for the purpose of engaging, or in the ordinary course would be engaged, in the 

activities permitted under §§ __.4, __.5, and __.6 of the implementing regulations. Nevertheless, 

to the extent that a credit fund seeks to engage in any of those activities as an exemption from the 

prohibition on engaging in proprietary trading, as defined in § __.3(b)(1)(i) of the final rule, and 

does so in compliance with the requirements and conditions of the applicable exemption, then 

the final rule would not preclude such activities.227 Similarly, with respect to the exclusions 

from the definition of proprietary trading contained in § __.3(d) of the implementing regulations, 

the agencies note that the trading activities identified in § __.3(d) are by definition not deemed to 

be proprietary trading, such that the performance by an excluded credit fund of those activities 

would not be inconsistent with the final credit fund exclusion.228

 227 The agencies recognize, however, that compliance with certain requirements and conditions 

in §§ __.4, __.5, and __.6 of the implementing regulations may be inapt and/or highly 

impractical in the context of a credit fund, particularly given the asset and activity restrictions 

contained in § __.10(c)(15). For example, the exemptions for underwriting and market makingrelated activities in § __.4 require that a banking entity relying on such exemptions, among other 

things, be licensed or registered to engage in the applicable activity in accordance with 

applicable law. Moreover, to the extent that a credit fund is a banking entity with significant 

trading assets and liabilities (i.e., because it, together with its affiliates and subsidiaries, has 

trading assets and liabilities that equal or exceed $20 billion over the four previous calendar 

quarters), it also would be required to maintain a separate compliance program specific to those 

exemptions.

228 Similarly, trading activity that satisfies the 60-day rebuttable presumption in § __.3(b)(4)

would be presumed not to be proprietary trading for these purposes. 
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Finally, the agencies are not revising the definition of “asset-backed security” in the 

implementing regulations. The definition of “asset-backed security” in the implementing 

regulations specifically refers to the meaning specified in section 3(a)(79) of the Exchange Act 

(15 U.S.C. 78c(a)(79)).229 This definition is used elsewhere in banking law,230 and banking 

entities and others in the loan securitization industry have adapted their operations in reliance of 

the definition contained in the Exchange Act. Moreover, the 2013 rule included the requirement 

that the fund issue asset backed securities as part of the loan securitization criteria, and banking 

entities have become familiar with this definition, as they have implemented and utilized the 

exclusion.

Requirements for a sponsor, investment adviser, or commodity trading advisor

The agencies are adopting the proposed requirements for a sponsor, investment adviser, 

or commodity trading advisor to an excluded credit fund with one modification. 

Investors in a credit fund that a banking entity sponsors or for which the banking entity 

serves as an investment adviser or commodity trading advisor may have expectations related to 

the performance of the credit fund that raise bailout concerns. To ensure that these investors are 

adequately informed of the banking entity’s role in the credit fund, the final rule requires a 

banking entity that acts as a sponsor, investment adviser, or commodity trading advisor to an 

excluded credit fund to provide prospective and actual investors the disclosures specified in §

__.11(a)(8) of the implementing regulations.231

 229 Implementing regulations § __.10(d)(2). 

230 See 12 CFR §244 (Credit Risk Retention)

231 Final rule § __.10(c)(15)(iii)(A). These disclosures include, among other things, that losses 

are borne solely by investors and not the banking entity, that investors should examine fund 
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Second, a banking entity that acts as a sponsor, investment adviser, or commodity trading 

advisor must ensure that the activities of the credit fund are consistent with safety and soundness 

standards that are substantially similar to those that would apply if the banking entity engaged in 

the activities directly.232 The agencies note, contrary to the suggestion of a commenter, that this 

provision does not apply to any investment adviser or commodity trading advisor to a credit fund

who does not also sponsor or acquire an ownership interest in the credit fund. Rather, the 

requirements in § __.10(c)(15) apply only to a sponsor, investment adviser, or commodity 

trading adviser that relies on the exclusion to sponsor or acquire an ownership interest in the 

credit fund. The covered fund provisions in § __.10 of the implementing regulations only affect 

the operations of banking entities that, as principal, directly or indirectly, acquire or retain any 

ownership interest in or sponsor a covered fund.

233 Thus, the safety and soundness provision 

only applies to banking entities that sponsor an excluded credit fund or that have an ownership 

interest in an excluded credit fund and also serve as an investment adviser or commodity trading 

advisor to the fund.

More generally, to clarify an issue raised by some commenters, the agencies note that 

whether a specific banking entity may use the credit fund exclusion to make or have an otherwise 

impermissible investment in or relationship with a credit fund is contingent on the permissible 

activities of the banking entity. That is, the same fund may be a covered fund with respect to one 

banking entity and an excluded credit fund with respect to a different banking entity. A banking 

entity continues to be responsible for ensuring that its particular investment, sponsorship, or 

 

documents, and that ownership interests are not insured by the FDIC or guaranteed. Final rule § 

__.11(a)(8).

232 Final rule § __.10(c)(15)(iii)(B). 

233 Implementing regulations § __.10(a)(1). 
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adviser activities comply with section 13 of the BHC Act and its implementing regulations. This 

principle applies to paragraphs (iii), (iv), and (v) of the credit fund exclusion.

The final rule moves the requirement that the banking entity must comply with § __.14 of 

the implementing regulations to § __.10(c)(15)(iii). This organizational change is in response to 

commenters that requested the agencies confirm that that the § __.14 limitations do not apply to 

a banking entity that merely invests in a credit fund, as opposed to a banking entity that sponsors 

or advises the fund. The agencies believe this change is appropriate because the limitations on 

banking entities’ relationships with a covered fund in § __.14 only apply when a banking entity 

serves, directly or indirectly, as the investment manager, investment adviser, commodity trading 

advisor, or sponsor to a covered fund.

234 In addition, the agencies appreciate that mere 

investment by a banking entity in a credit fund does not raise the type of concerns Super 23A 

was intended to address, and thus the agencies are applying § __.14 only when a banking entity 

acts as a sponsor, investment adviser, or commodity trading advisor to a credit fund, in each case 

as though the credit fund were a covered fund.

235 The limitations in § __.15 of the implementing 

regulations regarding material conflicts of interest, high-risk investments, and safety and 

soundness and financial stability remain applicable to banking entities’ investment in, and 

relationship with, excluded credit funds.

Additional Banking Entity Requirements

As provided in the 2020 proposal, a banking entity may not rely on the credit fund 

exclusion if it guarantees the performance of the fund.236 In a revision to the 2020 proposal,

 234 Final rule § __.14(a)(1).

235 Final rule § __.10(c)(15)(iii)(C).

236 Final rule § __.10(c)(15)(iv).
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under the final rule a banking entity may not rely on the credit fund exclusion if the fund holds 

any debt instruments or equities (or rights to acquire an equity security) received on customary 

terms in connection with loans or debt instruments held by the credit fund that the banking entity 

is not permitted to acquire and hold directly under applicable federal banking laws and 

regulations.

237 This change is to clarify, as suggested by a commenter, that this requirement is 

specific only to federal banking laws and regulations. Whether a credit fund’s holdings are 

permissible for a banking entity to hold under state or foreign laws is not relevant to compliance 

with section 13 of the BHC Act. That said, the agencies note that banking entities must comply 

with the laws of the jurisdiction applicable to its activities and operations and should be 

cognizant of whether a credit fund it sponsors or in which it invests complies with the laws of the 

jurisdictions in which the credit fund operates.238

Investment and Relationship Limits

Finally, the agencies are adopting the proposed provisions related to a banking entity’s 

investment in and relationship with a credit fund with one revision. Under the final rule, a

banking entity’s investment in, and relationship with, the issuer must comply with the limitations 

in § __.15 of the implementing regulations regarding material conflicts of interest, high-risk 

investments, and safety and soundness and financial stability, in each case as though the credit 

fund were a covered fund.239

In addition, a banking entity's investment in, and relationship with, a credit fund must be 

conducted in compliance with, and subject to, applicable banking laws and regulations, including

 237 Final rule § __.10(c)(15)(iv)(B).

238 For example, banking entities that are organized under state or foreign laws may, depending 

on the nature of the organization, need to comply with other laws.

239 Final rule § __.10(c)(15)(v)(A).
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the safety and soundness standards applicable to the banking entity.

240 The agencies believe it is 

important to highlight that the requirements applicable to the banking entity also govern the 

ability of the banking entity to invest in a fund that relies on the credit fund exclusion as well as 

the types of transactions that a banking entity may conduct with such funds.241 This means, for 

example, that a banking entity that invests in or has a relationship with a credit fund is subject to 

capital charges and other requirements under applicable banking law.242 

2. Venture Capital Funds

i. Venture Capital Funds

2020 Proposal

The 2020 proposal included an exclusion for “qualifying venture capital funds.”243 As 

described in the 2020 proposal, venture capital funds that provide capital to small and start-up 

businesses are covered funds unless they can rely on an exclusion other than section 3(c)(1) or 

3(c)(7) to avoid registration under the Investment Company Act of 1940 (Investment Company 

Act) or qualify for an exclusion under the implementing regulations. 

Under the 2020 proposal, the exclusion would have been available to “qualifying venture 

capital funds,” which the 2020 proposal defined as an issuer that meets the definition in 17 CFR 

 240 Final rule § __.10(c)(15)(v)(B).

241 The agencies also note that § __.10(c)(15)(v)(B) does not impose any additional burdens and 

should not generate confusion. 

242 For example, a banking entity’s investment in or relationship with a credit fund could be 

subject to the regulatory capital adjustments and deductions relating to investments in financial 

subsidiaries or in the capital of unconsolidated financial institutions, if applicable. See 12 CFR 

217.22. 

243 2020 proposal § __.10(c)(16).
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275.203(l)-1 (Rule 203(l)-1), as well as several additional criteria. Specifically, the agencies 

proposed to exclude from the definition of covered fund an issuer that: 

• Is a venture capital fund as defined in Rule 203(l)-1; and

• Does not engage in any activity that would constitute proprietary trading, under §

__.3(b)(1)(i), as if it were a banking entity.

With respect to any banking entity that acts as sponsor, investment adviser, or commodity 

trading advisor to the issuer, and that relies on the exclusion to sponsor or acquire an ownership 

interest in the qualifying venture capital fund, the banking entity would have been required to: 

• Provide in writing to any prospective and actual investor the disclosures required 

under § __.11(a)(8), as if the issuer were a covered fund; and 

• Ensure that the activities of the issuer are consistent with the safety and soundness 

standards that are substantially similar to those that would apply if the banking entity 

engaged in the activities directly. 

In addition, a banking entity that relied on the exclusion would not have been permitted, directly 

or indirectly, to guarantee, assume, or otherwise insure the obligations or performance of the 

issuer. Finally, the 2020 proposal would have required a banking entity’s ownership interest in 

or relationship with a qualifying venture capital fund to: 

• Comply with the limitations imposed in § __.14 (except the banking entity may 

acquire and retain any ownership interest in the issuer) and § __.15 of the 

implementing regulations, as if the issuer were a covered fund; and

• Be conducted in compliance with and subject to applicable banking laws and 

regulations, including applicable safety and soundness standards. 

Comments
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Several commenters supported an exclusion for venture capital funds.244 Some of these 

commenters argued the Volcker Rule has severely impacted investment in venture funds and 

businesses and that venture capital is a critical financing source for innovative businesses.245 

These commenters described their view of the positive economic impact of venture capital 

investment.246 For example, these commenters said companies funded with venture capital 

promote research and development and job creation.247 Similarly, several commenters argued

that venture capital investments by banking entities can contribute to economic growth, 

innovation, and job creation.248 At least one commenter said increased venture capital 

investment may increase employment by small employers.

249

Several commenters said an exclusion for venture capital funds would benefit 

underserved regions where venture capital funding is not readily available currently.250 One 

commenter said venture capital fund sizes are often too small for institutional investors, and 

banks have historically served an important source of investment for small and regional venture 

capital funds.251 This commenter said the loss of banking entities as limited partners in venture 

capital funds has had a disproportionate impact on cities and regions with emerging 

 244 Representatives Gonzalez, Steil, Stivers, Barr, Hill, Riggleman, Zeldin, Davidson, Budd, 

Gooden, Rose, Emmer, Timmons, Posey, Kustoff, and Loudermilk (Gonzalez et al.); Crapo; 

FSF; SIFMA; CCMC; IIB; Goldman Sachs; Credit Suisse; AIC; National Venture Capital 

Association (NVCA); ABA; and SAF.

245 E.g., Gonzalez et al. and NVCA.

246 Gonzalez et al.; NVCA; and CCMC.

247 Id.

248 E.g., FSF; SIFMA; and Goldman Sachs.

249 SAF.

250 FSF; SIFMA; CCMC; and NVCA.

251 NVCA.
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entrepreneurial ecosystems areas outside of Silicon Valley and other traditional technology 

centers.252 Two commenters noted that an exclusion for venture capital funds would promote 

investments in and financing to small businesses and start-ups in a broad range of geographic 

areas, industries, and sectors.253

Commenters said that an exclusion for venture capital funds would promote the safety 

and soundness of banking entities.254 One commenter said the exclusion would allow banks to 

diversify and to compete with non-banking entities.255 Commenters also said that the proposed 

exclusion allows banking entities to make investments indirectly through a fund structure that 

they could make directly256 and incorporates criteria and activity restrictions that address any 

concerns about safety and soundness or evasion.257

Several commenters supported defining a qualifying venture capital fund by reference to 

Rule 203(l)-1 as proposed.258 These commenters also said the rule should not incorporate 

additional criteria as discussed in the preamble to the 2020 proposal, such as additional 

limitations on revenues or qualifying investments.259 These commenters said additional criteria 

are unnecessary to ensure that the fund is a bona fide venture capital fund and could 

unnecessarily limit the scope of qualifying venture capital funds.260 On the other hand, one 

 252 Id. 

253 FSF and SIFMA.

254 FSF; SIFMA; and Goldman Sachs.

255 SIFMA.

256 NVCA.

257 FSF and SIFMA.

258 SIFMA; NVCA; FSF; and ABA.

259 SIFMA; NVCA; FSF; and ABA.

260 Id.
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commenter said the rule should include additional criteria to ensure qualifying venture capital 

funds serve the public interest and do not cause the harms at which section 13 of the Bank 

Holding Company Act was directed.261 One commenter argued defining venture capital fund by 

reference to Rule 203(l)-1 would be too narrow because it would exclude shares of emerging 

growth companies (EGCs) from being classified as qualifying investments and would not reflect 

certain companies that operate as venture investors and are exempt from having to register as an 

investment company but may not meet the technical definition of a venture capital fund under 

Rule 203(l)-1 (e.g., startup incubators).262 

While supporting an exclusion for qualifying venture capital funds generally, a few 

commenters recommended revisions to the proposed exclusion.263 Some commenters proposed 

changes to the requirement that the fund not engage in any activity that would constitute 

proprietary trading, under § __.3(b)(1)(i), as if it were a banking entity.264 One of these 

commenters said qualifying venture capital funds should be permitted to engage in permitted 

proprietary trading consistent with §§ __.4, __.5, and __.6 of the implementing regulations.265 

Another commenter said the definition of proprietary trading for funds should be the same as the 

definition that applies to the banking entity and that having two definitions is not reasonable or 

cost-effective.266

 261 Better Markets. 

262 CCMC.

263 FSF and SIFMA.

264 FSF and SIFMA.

265 FSF.

266 SIFMA.
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Commenters also supported changes to the requirement that the banking entity’s 

investment in and relationship with qualifying venture capital funds must comply with § __.14 of 

the implementing regulations. One commenter recommended eliminating the requirement that 

would apply § __.14 to a banking entity’s relationship with a venture capital fund.267 This 

commenter said that other proposed conditions adequately address bailout and safety and 

soundness concerns.268 Other commenters said the agencies should clarify that § __.14 does not 

apply to a banking entity that simply invests in a qualifying venture capital fund (as opposed to a 

banking entity that sponsors or advises the fund).269

Other commenters did not support the proposed exclusion for qualifying venture capital 

funds.270 One of these commenters said if the agencies do adopt an exclusion for qualifying 

venture capital funds, the exclusion must include additional requirements to ensure that excluded 

venture capital funds serve the public interest and do not cause the harms at which section 619 of 

the Dodd-Frank Act was directed. Specifically, this commenter said the rule should: (1) restrict 

all fund investments to “qualifying investments” or at least very significantly restrict investments 

in non-qualifying investments (e.g., limit them to no more than five percent of the fund’s 

aggregate capital), (2) impose a minimum securities holding period and portfolio company 

revenue limitation of $35 million (or a similarly appropriate and low figure) to ensure the fund is 

truly focused on medium-to-long term venture (as opposed to growth stage) investments, and (3) 

 267 SIFMA.

268 Id.

269 NVCA and ABA.

270 Better Markets and Data Boiler. Another commenter said an exemption for venture capital 

funds was not supported by the 2020 proposal and not permitted under the law. Occupy. 
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quantitatively limit the use of leverage as a key means for distinguishing excluded venture 

capital funds from statutorily prohibited activities involving private equity funds.271

Final Exclusion

The final rule adopts the proposed exclusion for qualifying venture capital funds with one 

clarifying change. The exclusion for qualifying venture capital funds will be available to an 

issuer that: 

• Is a venture capital fund as defined in Rule 203(l)-1; and

• Does not engage in any activity that would constitute proprietary trading, under §

__.3(b)(1)(i), as if it were a banking entity. 272

With respect to any banking entity that acts as sponsor, investment adviser, or commodity 

trading advisor to the issuer, and that relies on the exclusion to sponsor or acquire an ownership 

interest in the qualifying venture capital fund, the banking entity will be required to: 

• Provide in writing to any prospective and actual investor the disclosures required 

under § __.11(a)(8), as if the issuer were a covered fund;

• Ensure that the activities of the issuer are consistent with the safety and soundness 

standards that are substantially similar to those that would apply if the banking entity 

engaged in the activities directly; and 

• Comply with the restrictions imposed in § __.14 (except the banking entity may 

acquire and retain any ownership interest in the issuer), as if the issuer were a covered 

fund.273

 271 Better Markets.

272 Final rule § __.10(c)(16)(i).

273 Final rule § __.10(c)(16)(ii).
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Like the 2020 proposal, a banking entity that relies on the exclusion may not, directly or 

indirectly, guarantee, assume, or otherwise insure the obligations or performance of the issuer. 274

 Finally, like the 2020 proposal, the final rule requires a banking entity’s ownership 

interest in or relationship with a qualifying venture capital fund to: 

• Comply with the limitations imposed in § __.15 of the implementing regulations, as if 

the issuer were a covered fund; and

• Be conducted in compliance with and subject to applicable banking laws and 

regulations, including applicable safety and soundness standards.275 

The agencies believe the exclusion for qualifying venture capital funds will support 

capital formation, job creation, and economic growth, particularly with respect to small 

businesses and start-up companies. These banking entity investments in qualifying venture 

capital funds can benefit the broader financial system by improving the flow of financing to 

small businesses and start-ups. The agencies expect that the new exclusion for qualifying 

venture capital funds will provide banking entities with an additional avenue for providing 

funding to smaller businesses, which can help to support job creation and economic growth. 

As described further below, the requirements of the exclusion, including the SEC’s 

definition of venture capital fund in Rule 203(l)-1, address the concerns the agencies expressed 

in the preamble to the 2013 rule that the activities and risk profiles of venture capital funds are 

not readily distinguishable from those of funds that section 13 of the BHC Act was intended to 

capture. Accordingly, the agencies determined these requirements will give effect to the 

 274 Final rule § __.10(c)(16)(iii).

275 Final rule § __.10(c)(16)(iv).
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language and purpose of section 13 of the BHC Act without allowing banking entities to evade 

the requirements of section 13. 

An exclusion for qualifying venture capital funds is permitted by the statutory language 

of section 13 of the BHC Act. As the agencies discussed in the preamble to the 2013 final rule, 

the language, structure, and purpose of section 13 of the BHC Act authorize the agencies to 

adopt a tailored definition of “covered fund” that focuses on vehicles used for purposes that were 

the target of the funds prohibition.276 The agencies do not believe the fact that Congress 

expressly distinguished venture capital funds from other types of private funds in other contexts 

is dispositive. In this context, the agencies do not believe that the differences in how the terms 

private equity fund and venture capital fund are used in the Dodd-Frank Act prohibit this 

exclusion. Rather, the text of section 619 and the Dodd-Frank Act as a whole indicate that 

venture capital funds were not the intended target of the funds prohibition. The plain language 

of the statutory prohibition applies to hedge funds and private equity funds.277 This language is 

silent with respect to venture capital funds. In Title IV of the Dodd-Frank Act, Congress 

mandated specific treatment for venture capital funds for purposes of the registration 

requirements under the Investment Advisers Act of 1940 (“Advisers Act”).

278 This provision 

suggests that Congress knew how to accord specific treatment for venture capital funds. Yet, 

Congress did not list venture capital funds among the types of funds that were restricted under 

section 13.279 That Congress did not intend to prohibit venture capital fund investments is 

 276 79 FR 5671. 

277 12 U.S.C. 1851(a)(1)(B).

278 15 U.S.C. 80b-3(l).
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further supported by the legislative history of section 13, in which several Members of Congress 

specifically addressed venture capital funds in the context of the funds prohibition.280

Like the 2020 proposal, the final rule incorporates the definition of venture capital fund 

from Rule 203(l)-1. Most commenters accepted or supported the proposed approach to 

incorporate the definition of venture capital fund in Rule 203(l)-1.

281 For the reasons discussed 

 279 In the preamble to the 2013 final rule, the agencies cited to Congressional reports related to 

Title IV that characterized venture capital funds as “a subset of private investment funds 

specializing in long-term equity investment in small or start-up businesses.” 79 FR 5704 

(quoting S. Rep. No. 111-176 (2010)). However, there is no indication in the statutory text itself 

that Congress intended to treat venture capital funds identically to private equity funds. 

Moreover, the agencies did not address the difference in terminology that Congress used in 

section 402 of the Dodd-Frank Act (“private funds”) and section 619 (“hedge funds” and 

“private equity funds”). The difference between these two terms—specifically, the broader term 

“private funds” used in Title IV—may indicate why Congress found it necessary to exclude 

venture capital explicitly in section 407 but not in section 619. 

280 See 156 Cong. Rec. E1295 (daily ed. July 13, 2010) (statement of Rep. Eshoo) (“the purpose 

of the Volcker Rule is to eliminate risk-taking activities by banks and their affiliates while at the 

same time preserving safe, sound investment activities that serve the public interest...Venture 

capital funds do not pose the same risk to the health of the financial system. They promote the 

public interest by funding growing companies critical to spurring innovation, job creation, and 

economic competitiveness. I expect the regulators to use the broad authority in the Volcker Rule 

wisely and clarify that funds...such as venture capital funds, are not captured under the Volcker 

Rule and fall outside the definition of ‘private equity.’”); 156 Cong. Rec. S5905 (daily ed. July 

15, 2010) (statement of Sen. Dodd) (confirming “the purpose of the Volcker rule is to eliminate 

excessive risk taking activities by banks and their affiliates while at the same time preserving 

safe, sound investment activities that serve the public interest” and stating “properly conducted 

venture capital investment will not cause the harms at which the Volcker rule is directed. In the 

event that properly conducted venture capital investment is excessively restricted by the 

provisions of section 619, I would expect the appropriate Federal regulators to exempt it using 

their authority under section 619[d][1](J)...”); and 156 Cong. Rec. S6242 (daily ed. July 26, 

2010) (statement of Sen. Scott Brown) (“One other area of remaining uncertainty that has been 

left to the regulators is the treatment of bank investments in venture capital funds. Regulators 

should carefully consider whether banks that focus overwhelmingly on lending to and investing 

in start-up technology companies should be captured by one-size-fits-all restrictions under the 

Volcker rule. I believe they should not be. Venture capital investments help entrepreneurs get 

the financing they need to create new jobs. Unfairly restricting this type of capital formation is 

the last thing we should be doing in this economy.”). 

281 SIFMA; NVCA; FSF; ABA; and Goldman Sachs.
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in the 2020 proposal,282 the agencies believe this definition accurately identifies venture capital 

funds and addresses the concerns the agencies identified in declining to adopt an exclusion for 

venture capital funds in the 2013 rule. 

The SEC has defined “venture capital fund” as any private fund283 that: 

• Represents to investors and potential investors that it pursues a venture capital 

strategy;

• Immediately after the acquisition of any asset, other than qualifying investments or 

short-term holdings, holds no more than 20 percent of the amount of the fund’s 

aggregate capital contributions and uncalled committed capital in assets (other than 

short-term holdings) that are not qualifying investments, valued at cost or fair value, 

consistently applied by the fund;

• Does not borrow, issue debt obligations, provide guarantees or otherwise incur 

leverage, in excess of 15 percent of the private fund’s aggregate capital contributions 

and uncalled committed capital, and any such borrowing, indebtedness, guarantee or 

leverage is for a non-renewable term of no longer than 120 calendar days, except that 

any guarantee by the private fund of a qualifying portfolio company’s obligations up 

to the amount of the value of the private fund’s investment in the qualifying portfolio 

company is not subject to the 120 calendar day limit;

• Only issues securities the terms of which do not provide a holder with any right, 

except in extraordinary circumstances, to withdraw, redeem or require the repurchase 

 282 85 FR 12135-12136.

283 For purposes of 17 CFR 275.203(l)-1, “private fund” is defined as “an issuer that would be 

an investment company, as defined in section 3 of the Investment Company Act, but for section 

3(c)(1) or 3(c)(7) of that Act.” 15 U.S.C. 80b-2(a)(29).
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of such securities but may entitle holders to receive distributions made to all holders 

pro rata; and

• Is not registered under section 8 of the Investment Company Act, and has not elected 

to be treated as a business development company pursuant to section 54 of that 

Act.284

“Qualifying investment” is defined in the SEC’s regulation to be: (1) an equity security 

issued by a qualifying portfolio company that has been acquired directly by the private fund from 

the qualifying portfolio company; (2) any equity security issued by a qualifying portfolio 

company in exchange for an equity security issued by the qualifying portfolio company 

described in (1); or (3) any equity security issued by a company of which a qualifying portfolio 

company is a majority-owned subsidiary, as defined in section 2(a)(24) of the Investment 

Company Act, or a predecessor, and is acquired by the private fund in exchange for an equity 

security described in (1) or (2).285

“Qualifying portfolio company,” in turn, is defined in the SEC’s regulation to be a 

company that: (1) at the time of any investment by the private fund, is not reporting or foreign 

traded and does not control, is not controlled by or under common control with another 

company, directly or indirectly, that is reporting or foreign traded; (2) does not borrow or issue 

debt obligations in connection with the private fund’s investment in such company and distribute 

to the private fund the proceeds of such borrowing or issuance in exchange for the private fund’s 

investment; and (3) is not an investment company, a private fund, an issuer that would be an 

investment company but for the exemption provided by 17 CFR 270.3a–7, or a commodity 

 284 17 CFR 275.203(l)–1(a).

285 17 CFR 275.203(l)–1(c)(3).
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pool.286 The SEC explained that the definitions of “qualifying investment” and “qualifying 

portfolio company” reflect the typical characteristics of investments made by venture capital 

funds and that these definitions work together to cabin the definition of venture capital fund to 

only the funds that Congress understood to be venture capital funds during the passage of the 

Dodd-Frank Act.287

In the preamble to the regulation adopting this definition of venture capital fund, the SEC 

explained that the definition’s criteria distinguish venture capital funds from other types of funds, 

including private equity funds and hedge funds. For example, the SEC explained that it 

understood the criteria for “qualifying portfolio companies” to be characteristic of issuers of 

portfolio securities held by venture capital funds and, taken together, would operate to exclude 

most private equity funds and hedge funds from the venture capital fund definition.288 The SEC 

also explained that the criteria for “qualifying investments” under the SEC’s regulation would 

help to differentiate venture capital funds from other types of private funds, such as leveraged 

buyout funds.289 The SEC further explained that its regulation’s restriction on the amount of 

borrowing, debt obligations, guarantees or other incurrence of leverage was appropriate to 

 286 17 CFR 275.203(l)–1(c)(4).

287 See Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers With Less 

Than $150 Million in Assets Under Management, and Foreign Private Advisers, 76 FR 39646, 

39657 (Jul. 6, 2011).

288 76 FR 39656.

289 See, e.g., 76 FR 39653 (explaining that a limitation on secondary market purchases of a 

qualifying portfolio company’s shares would recognize “the critical role this condition played in 

differentiating venture capital funds from other types of private funds”).
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differentiate venture capital funds from other types of private funds that may engage in trading 

strategies that use financial leverage and may contribute to systemic risk.290

This definition of venture capital fund helps to distinguish the investment activities of 

venture capital funds from those of hedge funds and private equity funds, which was one of the 

agencies’ primary concerns in declining to adopt an exclusion for venture capital funds in the 

2013 rule. Further, this definition includes criteria reflecting the characteristics of venture 

capital funds that the agencies believe may pose less potential risk to a banking entity sponsoring 

or investing in venture capital funds and to the financial system—specifically, the smaller role of 

leverage financing and a lesser degree of interconnectedness with the public markets.291 These 

characteristics help to address the concern expressed in the preamble to the 2013 rule that the 

activities and risk profiles for banking entities regarding sponsorship of, and investment in, 

venture capital fund activities are not readily distinguishable from those funds that section 13 of 

the BHC Act was intended to capture. 

One commenter said requiring that a fund satisfy the requirements of Rule 203(l)-1

would have the effect of making the exclusion too narrow. This commenter said the exclusion 

for qualifying venture capital funds should permit investments in EGCs and, more generally, 

should “reflect the evolving nature of the venture capital industry and not rely solely on the 

existing SEC definition.”292 The final rule does not modify the requirement that a qualifying 

venture capital fund must satisfy the requirements of Rule 203(l)-1. These requirements focus 

 290 76 FR 39662. See also 76 FR 39657 (“We proposed these elements of the qualifying 

portfolio company definition because of the focus on leverage in the Dodd-Frank Act as a 

potential contributor to systemic risk as discussed by the Senate Committee report, and the 

testimony before Congress that stressed the lack of leverage in venture capital investing.”).

291 76 FR 39662.

292 CCMC.
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the exclusion on the types of less mature and start-up portfolio companies that characterize 

traditional venture capital activities. At the same time, the definition of qualifying venture 

capital fund does not preclude investments in EGCs because a qualifying venture capital fund 

could make investments in EGCs within the 20 percent limit for non-qualifying investments. 

Because the requirement that a qualifying venture capital fund must satisfy the requirements of 

Rule 203(l)-1 does not preclude investments in EGCs and helps to distinguish qualifying venture 

capital funds from the type of funds that section 13 of the BHC Act was intended to restrict, the 

agencies have determined to adopt the requirement that a qualifying venture capital fund must be 

a venture capital fund as defined in Rule 203(l)-1.

The final rule adopts the requirement that a qualifying venture capital fund may not 

engage in any activity that would constitute proprietary trading under § __.3(b)(1)(i), as if the 

issuer were a banking entity.293 As described in the 2020 proposal, this requirement helps to 

promote the specific purposes of section 13 of the BHC Act.294 The agencies are not adopting

any changes to this requirement, as recommended by some commenters. The agencies are not 

expressly incorporating the permitted activities in §§ __.4, __.5, and __.6 of the implementing 

regulations into the text of the qualifying venture capital fund exclusion. The exclusion for 

qualifying venture capital funds is intended to allow banking entities to share the risks of 

otherwise permissible long-term venture capital activities. Accordingly, the agencies would not 

expect that a qualifying venture capital fund would be formed for the purpose of engaging, or in 

the ordinary course would be engaged, in the activities permitted under §§ __.4, __.5, and __.6 of 

the implementing regulations. Moreover, such activities could reflect a purpose other than 

 293 Final rule § __.10(c)(16)(i)(B).

294 85 FR 12136.
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making long-term venture capital investments. Nevertheless, to the extent that a qualifying 

venture capital fund seeks to engage in any of those activities as an exemption from the 

prohibition on engaging in proprietary trading, as defined in § __.3(b)(1)(i) of the final rule, and 

does so in compliance with the requirements and conditions of those permitted activities, then 

the final rule would not preclude such activities.295 Similarly, with respect to the exclusions 

from the definition of proprietary trading in § __.3(d) of the implementing regulations, the 

agencies note that that the trading activities identified in § __.3(d) are by definition not deemed 

to be proprietary trading, such that the performance by an qualifying fund of those activities 

would not be inconsistent with the final qualifying venture capital fund exclusion.296

The final rule does not define proprietary trading by reference to the prong of paragraph 

__.3(b)(1) that would apply to the banking entity, as recommended by some commenters, 

because the agencies do not believe this change would be effective or simplify the exclusion. 

Unlike some banking entities, venture capital funds (that are not themselves banking entities) are 

not subject to the market risk capital rule, and thus there is generally no need to evaluate a 

venture capital fund’s investments under the market risk capital framework. Moreover, applying 

 295 As the agencies noted in the discussion of the final credit fund exclusion, compliance with 

certain requirements and conditions in __.4, __.5, and __.6 of the implementing regulations may 

be inapt and/or highly impractical in the context of a qualifying venture capital fund, particularly 

given the activity restrictions contained in § __.10(c)(16). For example, the exemptions for 

underwriting and market making-related activities in __.4 require that a banking entity relying on 

such exemptions, among other things, be licensed or registered to engage in the applicable 

activity in accordance with applicable law. Moreover, to the extent that a qualifying venture 

capital fund is a banking entity with significant trading assets and liabilities (i.e., because it, 

together with its affiliates and subsidiaries, has trading assets and liabilities that equal or exceeds 

$20 billion over the four previous calendar quarters), it also would be required to maintain a 

separate compliance program specific to those exemptions.

296 Similarly, and consistent with the discussion of the final credit fund exclusion, trading 

activity that satisfies the 60-day rebuttable presumption in § __.3(b)(4) would be presumed not to 

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the prong that would apply to the relevant banking entity could result in one venture capital fund 

becoming subject to both prongs. The agencies believe this would complicate evaluation of a 

qualifying venture capital fund’s eligibility for the exclusion, both for banking entities and the 

agencies. The agencies do not agree with one commenter’s argument that requiring funds 

sponsored by banking entities that are subject to the market risk capital rule test to apply the 

short-term intent test for purposes of the covered funds provisions would introduce unnecessary 

complexity and compliance costs for these banking entities. As the agencies described in the 

preamble to the 2019 final rule, the Federal banking agencies’ market risk capital rule297

incorporates the same short-term intent standard as the short-term intent test in § __.3(b)(1)(i).298 

Therefore, market risk capital rule covered banking entities continue to apply the short-term 

intent standard as part of their compliance with the market risk capital rule. Similar processes 

may be employed to apply the short-term intent standard to qualifying venture capital funds. 

The final rule adopts the requirement that a banking entity that serves as a sponsor, 

investment adviser, or commodity trading advisor to a qualifying venture capital fund may not 

rely on the exclusion for qualifying venture capital funds unless it provides the disclosures 

required under § __.11(a)(8) to prospective and actual investors in the fund. This requirement 

promotes one of the purposes of section 13 of the BHC Act, which is to prevent banking entities 

from bailing out funds that they sponsor or advise. The final rule also adopts the requirement 

that a banking entity that serves as a sponsor, investment adviser, or commodity trading advisor 

to a qualifying venture capital fund must ensure the activities of the qualifying venture capital 

fund are consistent with safety and soundness standards that are substantially similar to those that 

 297 See 12 CFR part 3, subpart F; part 217, subpart F; part 324, subpart F.

298 84 FR 61986.
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would apply if the banking entity engaged in the activity directly. Therefore, a banking entity 

may not rely on this exclusion to sponsor or invest in an investment fund that exposes the 

banking entity to the type of high-risk trading and investment activities that the covered fund 

provisions of section 13 of the BHC Act were intended to restrict. 

In the final rule, the requirement that the banking entity must comply with § __.14 of the 

implementing regulations is moved to § __.10(c)(16)(ii). This change clarifies that this 

requirement applies to a banking entity that acts as sponsor, investment adviser, or commodity 

trading adviser to the qualifying venture capital fund and does not apply to a banking entity that 

merely invests in a qualifying venture capital fund.

The final rule does not eliminate the requirement that a banking entity’s investment in or 

relationship with a qualifying venture capital fund must comply with § __.14 of the 

implementing regulations, as recommended by one commenter. The agencies do not agree that 

applying the requirements of § __.14 is duplicative of the requirement that the banking entity not 

directly or indirectly guarantee, assume, or otherwise insure the obligations or performance of 

the issuer. In addition to prohibiting guarantees, § __.14 also prohibits other types of 

transactions that function as extensions of credit or that could raise the type of bail-out concerns 

that section 13 of the BHC Act was intended to address. The agencies also do not agree that 

applying the requirements of § __.14 is duplicative of the requirement that the banking entity’s 

investment in and relationships with the qualifying venture capital fund must comply with the 

backstop provisions in § __.15. The backstop provisions in § __.15 address high-risk assets and 

high-risk trading strategies, and material conflicts of interest, but do not address extensions of 

credit that may not entail a “substantial financial loss” to the banking entity. The agencies do not 

expect that applying § __.14 to a banking entity that sponsors or advises a qualifying venture 
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capital fund will unduly interfere with the effectiveness of the exclusion. The final rule 

incorporates revisions to § __.14 that will improve banking entities’ ability to enter into certain 

ordinary course transactions with sponsored and advised funds.299 The agencies expect these 

changes will mitigate concerns that applying the requirements of § __.14 to qualifying venture 

capital funds will limit the exclusion’s utility.300 

The final rule adopts the requirement that the banking entity must not guarantee, assume, 

or otherwise insure the obligations or performance of a qualifying venture capital fund.301 The 

final rule also adopts the requirements that a banking entity’s ownership in or relationship with a 

qualifying venture capital fund must comply with the limitations in § __.15 of the implementing 

regulations, as if the issuer were a covered fund, and be conducted in compliance with, and 

subject to, applicable banking laws and regulations, including applicable safety and soundness 

standards.302 These requirements promote several of the purposes of section 13 of the BHC Act. 

The requirement that the banking entity not guarantee, assume, or otherwise ensure the 

obligations or performance of a qualifying venture capital fund promotes the purpose of 

preventing banking entities from bailing out the fund. The requirements that a banking entity’s 

ownership in or relationship with a qualifying venture capital fund must comply with the 

limitations in § __.15 of the implementing regulations, as if the issuer were a covered fund, and 

 299 See infra, Section IV.D (Limitations on Relationships with a Covered Fund).

300 The commenter that recommended eliminating the requirement that the banking entity’s 

investment in or relationship with a qualifying venture capital fund said that doing so would 

“limit the utility and related benefits of the qualifying venture capital fund exclusion, regardless 

of the proposed new exceptions to Super 23A.” SIFMA. However, the commenter did not 

provide any examples or further explain how the utility of the exclusion would be impacted. 

301 Final rule § __.10(c)(16)(iii).

302 Final rule § __.10(c)(16)(iv). 
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be conducted in compliance with, and subject to, applicable banking laws and regulations, 

including applicable safety and soundness standards, prevent a qualifying venture capital fund 

from being used to expose a banking entity to the type of high-risk trading and investment 

activities that the covered fund provisions of section 13 of the BHC Act were intended to restrict. 

To the extent a fund would expose a banking entity to a high-risk assets or a high-risk trading 

strategy, the fund would not be a qualifying venture capital fund. Therefore, prior to making an 

investment in a qualifying venture capital fund, a banking entity would need to ensure that the 

fund’s investment mandate and strategy would satisfy the requirements of § __.15. In addition, a 

banking entity would need to monitor the activities of a qualifying venture capital fund to ensure 

it satisfies these requirements on an ongoing basis. 

The agencies do not believe that any additional conditions to the exclusion for qualifying 

venture capital funds are necessary. One commenter said that the exclusion should (1) restrict all 

fund investments to “qualifying investments” or at least very significantly restrict investments in 

non-qualifying investments (e.g., limit them to no more than five percent of the fund’s aggregate 

capital), (2) impose a minimum securities holding period and portfolio company revenue 

limitation of $35 million (or a similarly appropriate and low figure) to ensure the fund is truly 

focused on medium-to-long term venture (as opposed to growth stage) investments, and (3) 

quantitatively limit the use of leverage as a key means for distinguishing excluded venture 

capital funds from statutorily prohibited activities involving private equity funds.303 The 

agencies have determined not to impose any additional criteria for the reasons discussed below. 

First, the agencies decline to limit a qualifying venture capital fund’s non-qualifying 

investments to five percent or less of total assets. The agencies agree with commenters that it is 

 303 Better Markets.
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necessary to provide some amount of flexibility for a venture capital fund to make investments 

that deviate from the typical form of venture capital investment activity. For example, the 

agencies understand that certain common venture capital fund activities, such as secondary 

acquisition of portfolio company shares from founders, are not qualifying investments under 

Rule 203(l)-1. The agencies agree with commenters, as well as with the rationale the SEC 

provided in the 2011 adopting release, that said providing flexibility for this type of nonqualifying investment is consistent with the overall goal of identifying funds engaged in a 

venture capital strategy. In making this determination, the agencies find it significant that the 

SEC considered this issue as part of its 2011 rulemaking and concluded that a 20 percent bucket 

for non-qualifying investments was appropriate.304 Moreover, all activities of a qualifying 

venture capital fund, including any investments that would be non-qualifying investments under 

Rule 203(l)-1, will be subject to the other requirements in § __.10(c)(16), including the 

requirement that the fund not engage in proprietary trading and not result in a material exposure 

by the banking entity to a high-risk asset or high-risk trading strategy. 

The agencies also decline to impose additional requirements, such as a minimum 

securities holding period or a portfolio company revenue limitation. The agencies believe a 

minimum securities holding period is unnecessary in light of the requirements that the fund (1) 

represent to investors and potential investors that it pursues a venture capital strategy305 and (2) 

not engage in any activity that would constitute proprietary trading under § __.3(b)(1)(i), as if it 

were a banking entity.306

 304 76 FR 39683. 

305 17 CFR 275.203(l)-(1)(a)(1).

306 Final rule § __.10(c)(16)(i)(B).
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The agencies also considered whether to include a portfolio company revenue limitation, 

as discussed in the preamble to the 2020 proposal. Most commenters did not support imposing a 

revenue limitation, while one commenter supported imposing a limitation of $35 million. After 

considering all comments received, the agencies determined that a revenue limit could 

unnecessarily disadvantage certain companies because the revenues of startups can vary greatly 

based on industry and geography. The agencies determined it would be unnecessarily restrictive

to create a revenue limit that could limit funding to otherwise eligible portfolio companies. 

Again, the agencies found it significant that the SEC expressly considered this issue as part of 

the 2011 rulemaking and determined that any “single factor test could ignore the complexities of 

doing business in different industries or regions” and “could inadvertently restrict venture capital 

funds from funding otherwise promising young small companies.”307 In addition, the definition 

of “qualifying portfolio company” in the SEC’s rule incorporates appropriate standards that 

distinguish newer ventures from more established companies. In particular, a “qualifying 

portfolio company” may not be “reporting or foreign traded” and may not control, be controlled 

by or under common control with another company that is reporting or foreign traded.308 A 

“reporting or foreign traded” company for these purposes means a company that is subject to the 

reporting requirements under section 13 or 15(d) of the Securities Exchange Act of 1934 or 

having a security listed or traded on any exchange or organized market operating in a foreign 

jurisdiction.309 In addition to publicly offered companies, this definition excludes issuers if they 

have more than $10 million in total assets and a class of equity securities, such as common stock, 

 307 76 FR 39649.

308 17 CFR 275.203(l)-1(c)(4). 

309 17 CFR § 275.203(l)-1(c)(5).
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that is held of record by either 2,000 or more persons or 500 or more persons who are not 

accredited investors.

310 In adopting the “reporting or foreign traded” requirement of Rule 203(l)-

1, the SEC explained that it found “a key consideration by Congress” was that venture capital 

funds “are less connected with the public markets and may involve less potential systemic 

risk.”311 This condition that qualifying portfolio companies not be capitalized by the public 

markets serves to limit the type of companies in which a qualifying venture capital fund may 

invest.

Finally, the agencies determined it is unnecessary to include an additional quantitative 

limit on the use of leverage because the exclusion incorporates a leverage limit. Specifically, 

Rule 203(l)-1 provides that a venture capital fund may not borrow or otherwise incur leverage in 

excess of 15 percent of the fund’s aggregate capital contributions and uncalled capital 

commitments, and then only on a short-term basis. Because the exclusion already incorporates a 

limit on leverage for a qualifying venture capital fund, it is not necessary for the final rule to 

incorporate an additional limit on leverage. 

ii. Long-Term Investment Funds

In the preamble to the 2020 proposal, the agencies asked whether the final rule should 

include an exclusion for long-term investment funds. In the preamble, the agencies asked if an 

exclusion should be provided for issuers (1) that make long-term investments that a banking 

entity could make directly, (2) that hold themselves out as entities or arrangements that make 

investments that they intend to hold for a set minimum time period, such as two years, (3) whose 

relevant offering and governing documents reflect a long-term investment strategy, and (4) that 

 310 15 U.S.C. 78l(g).

311 76 FR 39656. 
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meet all other requirements of the proposed qualifying venture capital fund exclusion (other than 

that the issuers would be venture capital funds as defined in Rule 203(l)-1. 

Several commenters supported an exclusion for long-term investment funds.312 Many of 

these commenters said an exclusion for qualifying long-term investment funds would help to 

close gaps in the availability of financing that exist under the implementing regulations while 

promoting and protecting the safety and soundness of the banking entity and the financial 

stability of the U.S.313 These commenters said the exclusion would allow banking entities to 

diversify their assets and income streams, thereby reducing the overall risk of their assets and 

operations and increasing their resiliency against failure.314 Several of these commenters

supported an exclusion for long-term investment funds because they said it would allow banking 

 312 Gonzalez et al.; Crapo; FSF; SIFMA; CCMC; CCMR; IIB; Goldman Sachs; AIC; and ABA. 

One commenter said the final rule should exclude an issuer with the following characteristics: (1) 

its investment strategy or business purpose is to invest in assets in which a financial holding 

company would be permitted to invest directly; (2) it holds itself out to investors as acquiring 

and holding long-term assets for at least two years; (3) it does not engage in activities that would 

constitute impermissible proprietary trading (as defined in the implementing regulations) if 

conducted directly by a banking entity; and (4) if it is sponsored by a banking entity, (A) the 

sponsoring banking entity and its affiliates cannot, directly or indirectly, guarantee, assume or 

otherwise insure its obligations, (B) it must comply with the disclosure obligations under §

__.11(a)(8) of the rule and (C) the sponsoring banking entity must comply with the limitations 

imposed by § __.14 (except that the banking entity may acquire and retain any ownership interest 

in the issuer) and § __.15, as if the vehicle were a covered fund. The commenter said these 

conditions would adequately address concerns regarding evasion, promote long-term capital 

formation, and exclude certain entities that are inadvertently captured by the definition of 

“covered fund” such as certain incubators. Goldman Sachs.

313 SIFMA; AIC; and CCMR. One commenter said an exclusion for long-term investment funds 

is necessary because the proposed exclusion for qualifying venture capital funds would not 

address incubators and other issuers that do not hold themselves out as pursuing a venture capital 

strategy. Goldman Sachs. Two commenters said excluding long-term investment funds would 

provide certainty for banking entities that hold interests in “inadvertent” or “accidental” 

investment companies. SIFMA and Goldman Sachs. 

314 Id.
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entities to do indirectly through a fund structure the same activities they may conduct directly.315 

Some commenters said long-term investment vehicles do not engage in short-term proprietary 

trading or the high-risk activities that section 619’s backstop provisions are intended to 

address.316

One commenter said the rule should not establish an exclusion for long-term investment 

vehicles because section 619 of the Dodd-Frank Act was put in place to reorient banks away 

from risky speculative activities and toward responsible lending to businesses and households.317

The final rule does not include an exclusion for long-term investment funds. After 

reviewing all comments received, the agencies determined that it remains difficult to distinguish 

effectively such funds from the type of funds that section 13 of the BHC Act was designed to 

restrict. A general exclusion for long-term investment funds would be too broad of an approach 

for addressing specific types of issuers, such as inadvertent investment companies and incubators 

that do not hold themselves out as engaging in a venture capital strategy, as described by some 

commenters. An exclusion based primarily on the length of time that an issuer holds its 

investments could be overbroad because it could also permit funds that are engaged in the type of 

investment activity that section 13 of the BHC Act was designed to restrict. Moreover, the 

agencies believe the exclusions for credit funds and qualifying venture capital funds will 

improve banking entities’ ability to provide long-term financing through certain fund structures 

in a manner that is consistent with the statute.

 315 FSF; CCMR; AIC; CCMC; and SIFMA. 

316 ABA and CCMC. 

317 Robert Rutowski.
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3. Family Wealth Management Vehicles

The agencies are adopting an exclusion from the definition of “covered fund” under § 

__.10(b) of the rule for any entity that acts as a “family wealth management vehicle.” This 

exclusion is available to an entity that is not, and does not hold itself out as being, an entity or 

arrangement that raises money from investors primarily for the purpose of investing in securities 

for resale or other disposition or otherwise trading in securities. For family wealth management 

vehicles that are trusts, the grantor(s) must be family customers.318 For non-trust family wealth 

management vehicles, family customers must own a majority of the voting interests (directly or 

indirectly) as well as a majority of interests in the entity. Ownership of non-trust family wealth 

management vehicles is generally limited to family customers and up to five closely related 

persons of the family customers.319 However, there is a de minimis ownership allowance that 

permits one or more entities, including a banking entity, that are not family customers or closely 

related persons, to acquire or retain, as principal, up to an aggregate 0.5 percent of the family 

wealth management vehicle’s outstanding ownership interests for the purpose of and to the 

 318 Under § __.10(c)(17)(iii)(B) of the final rule, a “family customer” is a “family client,” as 

defined in Rule 202(a)(11)(G)-1(d)(4) of the Advisers Act (17 CFR 275.202(a)(11)(G)-1(d)(4)); 

or any natural person who is a father-in-law, mother-in-law, brother-in-law, sister-in-law, son-inlaw or daughter-in-law of a family client, or a spouse or spousal equivalent of any of the 

foregoing. All terms defined in Rule 202(a)(11)(G)-1 of the Advisers Act (17 CFR 

275.202(a)(11)(G)-1) have the same meaning in the family wealth management vehicle 

exclusion.

319 Under § __.10(c)(17)(iii)(A) of the final rule, “closely related person” means “a natural 

person (including the estate and estate planning vehicles of such person) who has longstanding 

business or personal relationships with any family customer.” 
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extent necessary for establishing corporate separateness or addressing bankruptcy, insolvency, or 

similar concerns.320 

In addition, a banking entity may rely on the exclusion only if the banking entity: (1) 

provides bona fide trust, fiduciary, investment advisory, or commodity trading advisory services 

to the entity; (2) does not, directly or indirectly, guarantee, assume, or otherwise insure the 

obligations or performance of such entity; (3) complies with the disclosure obligations under §

__.11(a)(8), as if such entity were a covered fund, provided that the content may be modified to 

prevent the disclosure from being misleading and the manner of disclosure may be modified to 

accommodate the specific circumstances of the entity; (4) does not acquire or retain, as principal, 

an ownership interest in the entity, other than up to an aggregate 0.5 percent of the family wealth 

management vehicle’s outstanding ownership interests for the purpose of and to the extent 

necessary for establishing corporate separateness or addressing bankruptcy, insolvency, or 

similar concerns; (5) complies with the requirements of §§ __.14(b) and __.15, as if such entity 

were a covered fund; and (6) except for riskless principal transactions as defined in §

__.10(d)(11),321 complies with the requirements of 12 CFR 223.15(a), as if such banking entity 

and its affiliates were a member bank and the entity were an affiliate thereof.322

 320 This 0.5 percent ownership interest represents the aggregate amount of a family wealth 

management vehicle’s ownership interests that may be acquired or retained by all entities that are 

neither a family customer nor a closely related person.

321 “Riskless principal transaction” means a transaction in which a banking entity, after 

receiving an order to buy (or sell) a security from a customer, purchases (or sells) the security in 

the secondary market for its own account to offset a contemporaneous sale to (or purchase from) 

the customer. Final rule § __.10(d)(11). The allowance for riskless principal transactions in the 

final rule does not affect the independent application of the Board’s Regulation W (12 CFR Part 

223).

322 Final rule § __.10(c)(17)(ii).
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In the 2020 proposal, the agencies requested comment on whether to exclude family 

wealth management vehicles from the definition of “covered fund.”323 Several commenters 

supported this exclusion stating, generally, that it would reduce uncertainty for banking entities 

about the permissibility of providing traditional banking, investment management, and trust and 

estate planning services to family wealth management vehicle clients.324 As discussed below, 

other commenters opposed the exclusion or recommended revisions to it.325 

The agencies believe that the exclusion for family wealth management vehicles will 

appropriately allow banking entities to structure services or transactions for customers, or to 

otherwise provide traditional customer-facing banking and asset management services, through a 

vehicle, even though such a vehicle may rely on section 3(c)(1) or 3(c)(7) of the Investment 

Company Act or would otherwise be a covered fund under the implementing regulations.326 The 

agencies believe the exclusion for family wealth management vehicles will effectively tailor the 

definition of covered fund by permitting banking entities to continue to provide traditional 

banking and asset management services that do not involve the types of risks section 13 of the 

BHC Act was designed to address. As the agencies noted in the preamble to the 2013 rule, 

section 13 and the implementing regulations were designed in part to permit banking entities to 

 323 85 FR 12120.

324 See, e.g., Goldman Sachs; FSF; CCMR; IAA; ABA; BPI; PNC; and SIFMA.

325 See, e.g., Better Markets, Data Boiler; SIFMA; BPI; ABA.

326 Several commenters supported the exclusion, with two stating that many family wealth 

management vehicles do not rely on the exclusions in 3(c)(1) and (c)(7) of the Investment 

Company Act and are not covered funds under the implementing regulations. See ABA and 

PNC. Banking entities that sponsor or invest in family wealth management vehicles that are not 

subject to the covered funds provisions under section 13 of the BHC Act or the implementing 

regulations would not need to rely on this exclusion. 
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continue to provide client-oriented financial services, including asset management services.327 

Furthermore, the agencies believe that the provisions of the exclusion will work together to

sufficiently reduce the likelihood that these vehicles could be used to evade the requirements of

section 13 or the implementing regulations.

One of the commenters that opposed the exclusion expressed concern with the agencies 

adding an exclusion from the definition of “covered fund” that they believed would only benefit 

a few wealthy families.328 Banking entities may provide asset management services to families 

through a trust structure. The agencies believe that banking entities should have flexibility to 

offer such asset management services to families through a fund structure subject to appropriate 

limits. As noted above, the agencies believe the exclusion for family wealth management 

vehicles will effectively tailor the definition of covered fund by permitting banking entities to 

continue to provide traditional banking and asset management services that do not involve the 

types of risks section 13 was designed to address.

The agencies continue to believe that the exclusion for family wealth management 

vehicles is consistent with section 13(d)(1)(D), which permits banking entities to engage in 

transactions on behalf of customers, when those transactions would otherwise be prohibited 

under section 13.329 The exclusion will similarly allow banking entities to provide traditional 

 327 See 79 FR 5541 (describing the 2013 rule as “permitting banking entities to continue to 

provide, and to manage and limit the risks associated with providing, client-oriented financial 

services that are critical to capital generation for businesses of all sizes, households and 

individuals, and that facilitate liquid markets. These client-oriented financial services, which 

include underwriting, market making, and asset management services, are important to the U.S. 

financial markets and the participants in those markets.”).

328 See Better Markets.

329 12 U.S.C. § 1851(d)(1)(D).
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services to customers through vehicles used to manage the wealth and other assets of those 

customers and their families. 

Another commenter suggested that, rather than providing an exclusion for family wealth 

management vehicles through a rulemaking, the agencies should instead provide no-action relief 

on a case-by-case basis.330 The agencies do not believe that a case-by case approach would 

further the aims of section 13 or the implementing regulations. The agencies believe that a caseby-case approach would be unnecessarily burdensome and difficult to administer. This approach 

would also unnecessarily deviate from the agencies’ treatment of other excluded entities under 

the implementing regulations and hinder transparency and consistency. 

The agencies believe that the adopted exclusion for a family wealth management vehicle 

will appropriately distinguish it from the type of entity that the covered funds provisions of 

section 13 of the BHC Act were intended to capture. The exclusion requires that a family wealth 

management vehicle not raise money from investors primarily for the purpose of investing in 

securities for resale or other disposition or otherwise trading in securities. This aspect of the 

exclusion will help to differentiate family wealth management vehicles from covered funds, 

which raise money from investors for this purpose. 

In addition, the family wealth management vehicle exclusion contains ownership limits 

designed to ensure that the vehicle is used to manage the wealth and other assets of customers 

and their families. One such limit is the definition of “family customer.” As proposed, the 

definition of “family customer” is based on the definition of “family client” in rule 

202(a)(11)(G)-1(d)(4) under the Advisers Act (the family office rule), and also incorporates 

certain in-laws and their spouses and spousal equivalents. Several commenters supported this 

 330 Data Boiler.
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approach,331 however, one commenter suggested that the agencies exclude in-laws, their spouses 

and their spousal equivalents from the definition of “family customer.”332 The agencies believe 

that in-laws, their spouses and spousal equivalents share the same close familial relations as 

others included in the definition of “family client.” Furthermore, the agencies believe that the 

final rule’s definition of “family customer” reflects the types of relationships typically present in 

family wealth management vehicles.333 Reflecting those relationships prevents unnecessary 

constraints on the utility of the exclusion and will allow banking entities to provide traditional 

banking services to these clients. 

Another ownership limit designed to ensure that a family wealth management vehicle is 

used to manage the wealth and other assets of customers and their families is the requirement

that a majority of the interests in the entity are owned by family customers.334 The inclusion of 

this limit in the final rule is a modification from the 2020 proposal which only required family 

customers to own a majority of the voting interests (directly or indirectly) in the entity. One 

commenter suggested this modification to ensure that the exclusion is not used to evade the 

intent of section 13 and the implementing regulations.335 The agencies believe this modification 

is an appropriate means of ensuring that the exclusion is used by banking entities that are 

providing services to family wealth management vehicles, rather than to hedge funds or private 

equity funds. 

 331 See, e.g., SIFMA; BPI; and ABA.

332 See Better Markets.

333 See, e.g., SIFMA; BPI; and ABA. 

334 Final rule § __.10(c)(17)(i)(B)(2).

335 See ABA.
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Another commenter suggested additional ownership limits for family wealth management 

vehicles, including limits on the vehicle’s ability to restructure, to prevent evasion of the 

prohibitions of section 13 and the implementing regulations.336 However, as discussed above, 

the agencies believe that the requirements of the exclusion, along with the conditions a banking 

entity must meet in order to rely on it, will help to ensure that banking entities will not be able to 

use family wealth management vehicles as a means to evade section 13 and the implementing 

regulations. 

Another ownership limit designed to ensure that a family wealth management vehicle is 

used to manage the wealth and other assets of customers and their families is the requirement

that only up to five closely related persons of family customers may hold ownership interests in 

the vehicle.337 The agencies proposed to permit three closely related persons to hold ownership 

interests. Several commenters supported allowing a finite number of closely related persons of 

family customers to hold ownership interests.338 However, some commenters suggested that the 

proposed limit of three closely related persons did not reflect the typical manner in which family 

wealth management vehicles are constituted and would unnecessarily constrain the availability 

of the exclusion.339 These commenters recommended that the agencies modify the proposed rule 

to allow for up to ten closely related persons to invest in family wealth management vehicles.340 

One of these commenters stated that increasing the number of closely related persons would 

allow banking entities to provide traditional wealth management and estate planning services to 

 336 See Data Boiler.

337 Final rule § __.10(c)(17)(i)(B)(3).

338 See, e.g., BPI; SIFMA; PNC; and ABA. 

339 See, e.g., BPI; SIFMA; ABA; and PNC. 

340 See, e.g., SIFMA; BPI; ABA; and PNC.
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family wealth management vehicles and that the other conditions imposed by the proposed rule 

would keep such vehicles from evading the covered fund provisions of the implementing 

regulations.341 The commenter further noted that a limit of ten closely related persons would 

align the exclusion with the numerical limitation of unaffiliated owners provided for in the joint 

venture exclusion.342 

The final rule will allow up to five closely related persons to hold ownership interests in a 

family wealth management vehicle. Commenters indicated that many family wealth 

management vehicles currently include more than three closely related persons.343 The agencies 

believe that the final rule will more closely align the exclusion with the current composition of 

family wealth management vehicles, thereby increasing the utility of the exclusion without 

allowing such a large number of non-family customer owners to suggest the entity is in reality a 

hedge fund or private equity fund. Additionally, the agencies believe that requiring family 

customers to own a majority of the interests in the family wealth management vehicle will serve 

as an additional safeguard against evasion of the provisions of section 13 of the BHC Act.

As proposed, the final rule’s definition of “closely related person” is “a natural person 

(including the estate and estate planning vehicles of such person) who has longstanding business 

or personal relationships with any family customer.”344 One commenter suggested that the 

definition of “closely related person” should include only persons with personal relationships 

 341 See SIFMA.

342 See SIFMA.

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

344 Final rule § __.10(c)(17)(iii)(A).
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with family customers and not also business relationships.345 The agencies believe that it is not 

practical or worthwhile to exclude business relationships from the definition of “closely related 

person” because it would require banking entities to engage in an assessment of relationships that 

are likely to include elements common in both personal and business relationships. The agencies 

also believe that requiring these relationships to be “longstanding” will help ensure that they are 

bona fide established relationships and not simply related to the planned investment activities 

through the family wealth management vehicle. 

In a change to the 2020 proposal, the final rule permits any entity, or entities—not only 

banking entities—to acquire or retain, as principal, up to an aggregate 0.5 percent of the entity’s 

outstanding ownership interests, for the purpose of and to the extent necessary for establishing 

corporate separateness or addressing bankruptcy, insolvency, or similar concerns.346 Some 

commenters requested that the agencies include this modification because often, family wealth 

management vehicles use unaffiliated third parties—such as third-party trustees or similar 

service providers—when structuring family wealth management vehicles.347 The agencies 

believe that permitting de minimis ownership by non-banking entity third parties is appropriate 

and in some cases necessary to reflect the typical structure of family wealth management 

vehicles. The de minimis ownership provision recognizes that ownership by an entity other than 

a family customer or closely related person may be necessary under certain circumstances – such 

as establishing corporate separateness or addressing bankruptcy, insolvency, or similar matters. 

Whether the entity that owns a de minimis amount is a banking entity or some other third party 

 345 See, e.g., Better Markets.

346 Final rule § __.10(c)(17)(i)(C). 

347 See, e.g., SIFMA and BPI.
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does not raise any concerns that are not sufficiently addressed by the aggregate ownership limit 

and the narrow circumstances in which such entities may take an ownership interest. The 

agencies recognize that without this modification, family wealth management vehicles may be 

forced to engage in less effective and/or efficient means of structuring and organization because 

the exclusion would limit the vehicle’s access to some customary service providers that have 

traditionally taken small ownership interests for structuring purposes. The agencies are therefore 

expanding the types of entities that may acquire or retain the de minimis ownership interest to 

include any third party. However, the aggregate de minimis amount and the purpose for which it 

may be owned is unchanged from the 2020 proposal. 

As stated above, under the final rule, a banking entity may only rely on the exclusion 

with respect to a family wealth management vehicle if the banking entity meets certain 

conditions.348 The agencies believe that, collectively, the conditions of the exclusion will help to 

ensure that family wealth management vehicles are used for client-oriented financial services 

provided on arms-length, market terms, and to prevent evasion of the requirements of section 13 

of the BHC Act and the implementing regulations. In addition, these conditions are based on 

existing conditions in other provisions of the implementing regulations,349 which the agencies 

believe will facilitate banking entities’ compliance with the exclusion.

 348 Final rule § __.10(c)(17)(ii).

349 See implementing regulations §§ __.11(a)(5) (imposing, as a condition of the exemption for 

organizing and offering a covered fund, that a banking entity and its affiliates do not, directly or 

indirectly, guarantee, assume, or otherwise insure the obligations or performance of the covered 

fund or of any covered fund in which such covered fund invests); __.11(a)(8) (imposing, as a 

condition of the exemption for organizing and offering a covered fund, that the banking entity 

provide certain disclosures to any prospective and actual investor in the covered fund); 

__.10(c)(2)(ii) (allowing, as a condition of the exclusion from the covered fund definition for 

wholly-owned subsidiaries, for the holding of up to 0.5 percent of outstanding ownership 
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As proposed, the agencies are not applying § __.14(a), which applies section 23A of the 

Federal Reserve Act to banking entities’ relationships with covered funds, to family wealth 

management vehicles because the agencies understand that the application of § __.14(a) to 

family wealth management vehicles could prohibit banking entities from providing the full range 

of banking and asset management services to customers using these vehicles.350 The agencies 

are, however, applying §§ __.14(b) and ___.15 to family wealth management vehicles, as 

proposed, because the agencies continue to believe that it will help ensure that banking entities 

and their affiliates’ exposure to risk remains appropriately limited. 

The agencies are also adopting a prohibition, with modifications described below, on 

banking entity purchases of low-quality assets from family wealth management vehicles that 

would be prohibited under Regulation W concerning transactions with affiliates (12 CFR 

223.15(a))—as if such banking entity were a member bank and the entity were an affiliate 

thereof—to prevent banking entities from “bailing out” family wealth management vehicles.351 

Regulation W (12 CFR 223.15(a)) provides that a member bank may not purchase a low-quality 

asset from an affiliate unless, pursuant to an independent credit evaluation, the member bank had 

committed itself to purchase the asset before the time the asset was acquired by the affiliate.352 

Several commenters requested clarification that the exclusion permits banking entities to engage 

 

interests by a third party for limited purposes); and __.14(b) (subjecting certain transactions with 

covered funds to section 23B of the Federal Reserve Act).

350 See SIFMA (stating that it agreed with the agencies’ approach of not applying § __.14 to 

relationships between banking entities and family wealth management vehicles because doing so 

would prevent banking entities from making ordinary extensions of credit and entering into a 

number of other transactions with family wealth management vehicles that are critical to the 

banking entity providing traditional asset management and estate planning services).

351 Final rule § __.10(c)(17)(ii)(F). 

352 12 CFR 223.15(a).
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in riskless principal transactions to purchase assets—including low quality assets for purposes of 

section 223.15 of the Board’s Regulation W—from family wealth management vehicles.353 

Commenters stated that the need for such asset purchases may arise as a result of a family 

customer’s preferences and that permitting the banking entities to engage in such purchases may 

facilitate the family customer’s sale of the asset.354 Commenters stated that allowing these 

transactions would pose minimal market or credit risk to a banking entity because the banking 

entity would purchase and sell the same asset contemporaneously.355 Furthermore, one 

commenter stated that without clarity on the permissiveness of riskless principal transactions, 

family wealth management vehicles would be forced to obtain the services of a third-party 

service provider to sell low quality assets, which would increase costs and operational 

complexity of the family wealth management vehicles without furthering the aims of section 13 

of the BHC Act or the implementing regulations.356

The agencies believe that permitting a banking entity to engage in riskless principal 

transactions that involve the purchase of low-quality assets from a family wealth management 

vehicle is unlikely to pose a substantive risk of evading section 13 of the BHC Act. In a riskless 

principal transaction, the riskless principal (the banking entity) buys and sells the same security 

contemporaneously, and the asset risk passes promptly from the customer (family wealth 

management vehicle, in this context) through the riskless principal to a third-party.357 The 

agencies are adopting the condition that banking entities and their affiliates comply with the 

 353 See, e.g., BPI and SIFMA. 

354 See, e.g., BPI and SIFMA.

355 See, e.g., SIFMA and BPI.

356 See SIFMA. 

357 See 67 FR 76597.
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requirements of 12 CFR 223.15(a), as if such banking entity and its affiliates were a member 

bank and the entity were an affiliate. However, in a change from the 2020 proposal and in 

response to the concerns raised by commenters, the condition will explicitly exclude from those

requirements transactions that meet the definition of riskless principal transactions as defined in 

§ __.10(d)(11). The definition of riskless principal transactions adopted in § __.10(d)(11) is 

similar to the definition adopted in the Board’s Regulation W, as this definition is appropriately 

narrow and generally familiar to banking entities.358 The agencies expect that, together, the 

adopted criteria for the family wealth management vehicle exclusion will prevent a banking 

entity from being able to bail out such entities in periods of financial stress or otherwise expose 

the banking entity to the types of risks that the covered fund provisions of section 13 were 

intended to address.

Several commenters requested that the agencies remove the condition that banking 

entities and their affiliates comply with the disclosure obligations under § __.11(a)(8) of the final 

rule, as if the vehicle were a covered fund, because such disclosures would not apply to a vehicle 

that a banking entity was not organizing and offering pursuant to § __.11(a) of the final rule and 

therefore would be confusing.359 In particular, these commenters stated that the required 

disclosure under § __.11(a)(8) concerning the banking entity’s “ownership interests” in the fund 

and referencing the fund’s “offering documents” may create confusion in circumstances where 

the banking entity does not own an interest in the family wealth management vehicle, or where 

such vehicles do not have offering documents. Also, commenters requested confirmation from 

the agencies that banking entities would be permitted to (i) modify the required disclosures to 

 358 12 CFR 223.3(ee). 

359 See, e.g., ABA and PNC.
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reflect the specific circumstances of their relationship with, and the particular structure of, their 

family wealth management vehicle clients; and (ii) satisfy the written disclosure requirement by 

means other than including such disclosures in the governing document(s) of the family wealth 

management vehicle(s).360

The agencies are adopting the condition that banking entities and their affiliates comply 

with the disclosure obligations under § __.11(a)(8) of the final rule with respect to family wealth 

management vehicles. However, in a change from the 2020 proposal and in response to the 

concerns raised by commenters, the condition will explicitly permit banking entities and their 

affiliates to modify the content of such disclosures to prevent the disclosure from being 

misleading and also permit banking entities to modify the manner of disclosure to accommodate 

the specific circumstances of the entity.361 The obligations under § __.11(a)(8) of the final rule 

apply in connection with the exemption for organizing and offering covered funds, which would 

typically require the preparation and distribution of offering documents. The agencies, however, 

understand that many family wealth management vehicles may not have offering documents. 

The agencies have an interest in providing family wealth management vehicle customers with 

the substance of the disclosure, rather than a concern with the specific wording of the disclosure 

or with the document in which the disclosure is provided. Accordingly, the agencies have 

provided that the content of the disclosure may be modified to prevent the disclosure from being 

 360 See, e.g., BPI. 

361 In the 2020 proposal, the agencies had indicated that for purposes of the proposed exclusion, 

a banking entity could satisfy these written disclosure obligations in a number of ways and could 

modify the specific wording of the disclosures in § __.11(a)(8) to accurately reflect the specific 

circumstances of the family wealth management vehicle.
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misleading and the manner of disclosure may be modified to accommodate the specific 

circumstances of the family wealth management vehicle. 

For example, § __.11(a)(8) requires disclosure that an investor “should read the fund 

offering documents before investing in the covered fund.” In order to accurately reflect the 

specific circumstances of a family wealth management vehicle for which there are no offering 

documents, the modified provision will allow the banking entity to revise this disclosure to 

reference the appropriate disclosure documents, if any, provided in connection with the vehicle. 

Similarly, the agencies understand the specific wording of the disclosures in § __.11(a)(8) of the 

rule may need to be modified to accurately reflect the specific circumstances of the banking 

entity’s relationship with the family wealth management vehicle. For example, a banking entity 

that holds no ownership interest in the family wealth management vehicle may modify the 

disclosure required in § __.11(a)(8)(i)(A) to reflect its lack of ownership. Moreover, §

__.11(a)(8) requires that the banking entity provide these disclosures, “such as through 

disclosure in the . . . offering documents.” The agencies expect that a banking entity could 

satisfy these disclosure delivery obligations in a number of ways, such as by including them in 

the family wealth management vehicle’s governing documents, in account opening materials or 

in supplementary materials (e.g., a separate disclosure document provided by the banking entity 

solely for purposes of complying with this exclusion and providing the required disclosures). 

4. Customer Facilitation Vehicles

The agencies are adopting an exclusion from the definition of “covered fund” under § 

__.10(b) of the rule for any issuer that acts as a “customer facilitation vehicle.” The customer 

facilitation vehicle exclusion will, as proposed, be available for any issuer that is formed by or at 

the request of a customer of the banking entity for the purpose of providing such customer 
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(which may include one or more affiliates of such customer) with exposure to a transaction, 

investment strategy, or other service provided by the banking entity.362 

A banking entity may only rely on the exclusion with respect to an issuer provided that: 

(1) all of the ownership interests of the issuer are owned by the customer (which may include 

one or more of its affiliates) for whom the issuer was created;363 and (2) the banking entity and 

its affiliates: (i) maintain documentation outlining how the banking entity intends to facilitate the 

customer’s exposure to such transaction, investment strategy, or service; (ii) do not, directly or 

indirectly, guarantee, assume, or otherwise insure the obligations or performance of such issuer; 

(iii) comply with the disclosure obligations under § __.11(a)(8), as if such issuer were a covered 

fund, provided that the content may be modified to prevent the disclosure from being misleading 

and the manner of disclosure may be modified to accommodate the specific circumstances of the 

issuer; (iv) do not acquire or retain, as principal, an ownership interest in the issuer, other than up 

to an aggregate 0.5 percent of the issuer’s outstanding ownership interests for the purpose of and 

to the extent necessary for establishing corporate separateness or addressing bankruptcy, 

insolvency, or similar concerns; (v) comply with the requirements of §§ __.14(b) and __.15, as if 

such issuer were a covered fund; and (vi) except for riskless principal transactions as defined in §

__.10(d)(11), comply with the requirements of 12 CFR 223.15(a), as if such banking entity and 

its affiliates were a member bank and the entity were an affiliate thereof.364

 362 Final rule § __.10(c)(18)(i).

363 Notwithstanding this condition, up to an aggregate 0.5 percent of the issuer’s outstanding 

ownership interests may be acquired or retained by one or more entities that are not customers if 

the ownership interest is acquired or retained by such parties for the purpose of and to the extent 

necessary for establishing corporate separateness or addressing bankruptcy, insolvency, or 

similar concerns. Final rule § __.10(c)(18)(ii)(B).

364 Final rule § __.10(c)(18)(ii).
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The agencies continue to believe that this exclusion will appropriately allow banking 

entities to structure certain types of services or transactions for customers, or to otherwise 

provide traditional customer-facing banking and asset management services, through a vehicle, 

even though such a vehicle may rely on section 3(c)(1) or 3(c)(7) of the Investment Company 

Act or would otherwise be a covered fund under the final rule. Most commenters that addressed 

this exclusion were supportive,365 stating that it would provide banking entities with greater 

flexibility to meet client needs and objectives.366 Some commenters found the exclusion’s 

conditions to be reasonable and sufficient.367 However, two commenters recommended that the 

agencies impose additional limitations on the exclusion.368 One of these commenters argued that 

the exclusion would permit, and possibly encourage, banking entities to increase their risk 

exposures through the use of customer facilitation vehicles, and the agencies should minimize 

such risk exposures and promote risk monitoring and management.369 

The agencies continue to believe that these vehicles do not expose banking entities to the 

types of risks that section 13 of the BHC Act was intended to restrict, and that this exclusion is 

consistent with section 13(d)(1)(D), which permits banking entities to engage in transactions on 

behalf of customers, when such transactions would otherwise be prohibited under section 13. 

The agencies have elsewhere tailored the 2013 rule to allow banking entities to meet their 

 365 See, e.g., SIFMA; BPI; ABA; Credit Suisse; FSF; Goldman Sachs; and IAA.

366 See, e.g., SIFMA; BPI; ABA; and Goldman Sachs.

367 See, e.g., SIFMA; FSF; and SAF.

368 See Better Markets and Data Boiler. 

369 See Better Markets.
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customers’ needs.370 This exclusion will similarly allow banking entities to provide customeroriented financial services through a vehicle when that vehicle’s purpose is to facilitate a 

customer’s exposure to those services.371 As stated in the 2020 proposal, the agencies do not 

believe that section 13 of the BHC Act was intended to interfere unnecessarily with the ability of 

banking entities to provide services to their customers simply because the customer may prefer to 

receive those services through a vehicle or through a transaction with a vehicle instead of 

directly with the banking entity.372 Some commenters agreed, stating that customer facilitation 

vehicles would not expose banking entities to the types of risks that section 13 was intended to 

prohibit or limit, particularly given that such vehicles will be subject to a number of conditions, 

as discussed below.373 

 370 For example, the agencies in 2019 amended the exemption for risk-mitigating hedging 

activities to allow banking entities to acquire or retain an ownership interest in a covered fund as 

a risk-mitigating hedge when acting as an intermediary on behalf of a customer that is not itself a 

banking entity to facilitate the exposure by the customer to the profits and losses of the covered 

fund. See 2019 amendments § __.13(a)(1)(ii). See also 2019 amendments § __.3(d)(11)

(excluding from the definition of “proprietary trading” the entering into of customer-driven 

swaps or customer-driven security-based swaps and matched swaps or security-based swaps 

under certain conditions).

371 This exclusion does not require that the customer relationship be pre-existing. In other 

words, the exclusion will be available for an issuer that is formed for the purpose of facilitating 

the exposure of a customer of the banking entity where the customer relationship begins only in 

connection with the formation of that issuer. The agencies took a similar approach to this 

question in describing the exemption for activities related to organizing and offering a covered 

fund under § __.11(a) of the 2013 rule. See 79 FR 5716. The agencies indicated that section 

13(d)(1)(G), under which the exemption under § __.11(a) was adopted, did not explicitly require 

that the customer relationship be pre-existing. Similarly, section 13(d)(1)(D) does not explicitly 

require a pre-existing customer relationship.

372 85 FR 12120.

373 See SIFMA and ABA.
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The exclusion will, as proposed, require that the vehicle be formed by or at the request of 

the customer.374 One commenter suggested that the agencies remove this requirement, arguing 

that it would inhibit a banking entity’s ability to provide customers with services in a timely 

manner.375 However, the agencies continue to believe that this requirement is an important 

component of the exclusion because it helps differentiate customer facilitation vehicles from 

covered funds that are organized and offered by the banking entity. As stated in the 2020

proposal, the requirement will not preclude a banking entity from marketing its customer 

facilitation vehicle services or discussing with its customers prior to the formation of such 

vehicles the potential benefits of structuring such services through a vehicle.376

As in the 2020 proposal, the agencies are not specifying the types of transaction, 

investment strategy or other service that a customer facilitation vehicle may be formed to 

facilitate.377 One commenter recommended specifying that the exclusion only allow vehicles to 

be formed for extensions of intraday credit, and payment, clearing, and settlement services, and 

only for purposes of operational efficiency.378 Another commenter argued that attempting to 

specify may prevent banking entities from being able to appropriately respond to a customer’s 

requests.379 The agencies continue to believe that providing flexibility enhances the utility of 

this exclusion. Specifically, the agencies note that the purpose of this exclusion is to allow 

 374 Final rule § __.10(c)(18)(i). 

375 SIFMA (stating that requiring a banking entity to wait for a customer to request formation 

would delay the banking entity’s ability to provide services to the customer without any 

corresponding regulatory benefit).

376 85 FR 12120.

377 Final rule § __.10(c)(18)(i). 

378 See Data Boiler.

379 See SIFMA.
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banking entities to provide customer-oriented financial services through vehicles, providing 

customers with exposure to a transaction, investment strategy, or other service that the banking 

entity may provide to such customers directly. Limiting the type of transaction, investment 

strategy, or service for which the customer facilitation vehicle may be formed would interfere 

with this purpose. Accordingly, the agencies are adopting this requirement as proposed.

Under the final rule, similar to the 2020 proposal, a banking entity will be able to rely on 

the customer facilitation vehicle exclusion only under certain conditions, as stated above.380 

Commenters supported most of the conditions, stating that the exclusion imposes reasonable 

conditions that provide safeguards.381 Commenters also suggested modifications to certain 

conditions, as discussed below.382 The agencies are adopting the conditions, largely as proposed. 

However, the agencies are modifying the conditions that relate to de minimis ownership of the 

vehicle, the requirements of 12 CFR 223.15(a), and the disclosure obligations under §

__.11(a)(8), as discussed below. 

As proposed, the exclusion would have permitted banking entities and their affiliates to 

acquire or retain, as principal, an ownership interest in the issuer up to 0.5 percent of the issuer’s 

outstanding ownership interests, for the purpose of and to the extent necessary for establishing 

corporate separateness or addressing bankruptcy, insolvency, or similar concerns.383 Similar to 

their request for family wealth management vehicles, commenters suggested that the agencies 

specifically allow any party that is unaffiliated with the customer, rather than only the banking 

 380 Final rule § __.10(c)(18)(ii).

381 See, e.g., SIFMA; FSF; and SAF.

382 See, e.g., SIFMA; BPI; and FSF.

383 See 2020 proposed rule §__.10(c)(18)(ii)(B)(4). 
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entities and their affiliates, to own this de minimis interest.384 For the same reasons as discussed 

above with respect to family wealth management vehicles, the agencies are modifying the de 

minimis ownership provision such that up to an aggregate 0.5 percent of the issuer’s outstanding 

ownership interests may be acquired or retained by one or more entities that are not customers if 

the ownership interest is acquired or retained by such parties for the purpose of and to the extent 

necessary for establishing corporate separateness or addressing bankruptcy, insolvency, or 

similar concerns.385 

The agencies are adopting, with modifications, the condition for a banking entity to 

comply with the requirements of 12 CFR 223.15(a), as if such banking entity were a member 

bank and the issuer were an affiliate thereof.386 As discussed above, several commenters 

recommended that the agencies clarify that the family wealth management vehicle exclusion 

permits banking entities to engage in riskless principal transactions to purchase assets—

including low quality assets for purposes of section 223.15 of the Board’s Regulation W—from 

family wealth management vehicles.387 One such commenter also suggested that, for purposes 

of consistency, the agencies should similarly clarify that banking entities are permitted to engage 

in such riskless principal transactions with customer facilitation vehicles.388 

 384 See SIFMA; BPI; and FSF.

385 Final rule § __.10(c)(18)(ii)(B). 

386 Final rule § __.10(c)(18)(ii)(C)(6). 12 CFR 223.15(a) provides that a member bank may not 

purchase a low-quality asset from an affiliate unless, pursuant to an independent credit 

evaluation, the member bank had committed itself to purchase the asset before the time the asset 

was acquired by the affiliate. 12 CFR 223.15(a).

387 See, e.g., BPI and SIFMA. See supra, Section IV.C.3 (Family Wealth Management 

Vehicles).

388 See BPI. 
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The purpose of the proposed requirement that a customer facilitation vehicle must 

comply with 12 CFR 223.15(a) was the same for both the family wealth management vehicle and 

the customer facilitation vehicle exclusions—to help ensure that the exclusions do not allow 

banking entities to “bail out” either vehicle.389 For the same reasons discussed above with 

respect to family wealth management vehicles, the agencies have modified the requirement to 

exclude from the requirements of 12 CFR 223.15(a) transactions that meet the definition of 

riskless principal transactions as defined in § __.10(d)(11).

390 Similar to the agencies’ approach 

with respect to family wealth management vehicles, the agencies expect that, together, the 

adopted criteria for this exclusion will prevent a banking entity from being able to bail out 

customer facilitation vehicles in periods of financial stress or otherwise expose the banking 

entity to the types of risks that the covered fund provisions of section 13 of the BHC Act were 

intended to address.

The agencies are modifying the condition that the banking entity and its affiliates comply 

with the disclosure obligations under § __.11(a)(8), as if such issuer were a covered fund, to 

provide clarification that the content of the disclosure may be modified to prevent the disclosure 

from being misleading and the manner of disclosure may be modified to accommodate the 

specific circumstances of the issuer.391 Commenters requested that the agencies provide such 

clarification in the context of family wealth management vehicles.392 Although the agencies did 

not receive any comments with respect to this condition in the context of this exclusion, the 

 389 See 85 FR 12120.

390 Final rule § __.10(c)(18)(ii)(C)(6). 

391 Final rule § __.10(c)(18)(ii)(C)(3). 

392 See supra, Section IV.C.3 (Family Wealth Management Vehicles).
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agencies are similarly modifying this condition under this exclusion. The agencies believe that 

these disclosures will provide important information to the customers for whom these vehicles 

will be used to provide services – whether they are family customers under the family wealth 

management vehicle exclusion or other customers under this exclusion. The agencies’ treatment 

of this condition for family wealth management vehicles, as described above, will similarly 

apply to this condition for customer facilitation vehicles.393 

The agencies are adopting, as proposed, the condition that all of the ownership interests 

of the issuer are owned by the customer (which may include one or more of the customer’s 

affiliates) for whom the issuer was created (other than a de minimis interest that may be held by 

others, as discussed above).394 The agencies continue to believe that this condition is appropriate 

to prevent banking entities from using this exclusion for customer facilitation vehicles to evade 

the restrictions of section 13 of the BHC Act. To help track compliance, a banking entity and its 

affiliates will, as proposed, have to maintain documentation outlining how the banking entity 

intends to facilitate the customer’s exposure to a transaction, investment strategy, or service.395 

The agencies are also adopting, as proposed, the condition that the banking entity and its 

affiliates do not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or 

performance of such issuer.396 The agencies continue to believe that this condition is appropriate 

and consistent with the goal of preventing banking entities from bailing out their customer 

 393 Id.

394 Final rule §§ __.10(c)(18)(ii)(A)–(B).

395 Final rule § __.10(c)(18)(ii)(C)(1). 

396 Final rule § __.10(c)(18)(ii)(C)(2). 
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facilitation vehicles. Commenters generally agreed, supporting the condition as one that is 

reasonable and appropriate in addressing the agencies’ potential evasion concerns.397

Finally, the agencies are adopting, as proposed, the condition that the banking entity and 

its affiliates comply with the requirements of §§ __.14(b) and __.15, as if such issuer were a 

covered fund.398 The agencies requested comment in the 2020 proposal whether this exclusion 

should also require that the banking entity and its affiliates comply with the requirements of all 

of § __.14. One commenter argued that requiring compliance with the requirements of all of § 

__.14 would eliminate the utility of this exclusion.399 The same commenter supported the 

condition, as proposed, stating that requiring compliance with only § __.14(b), which would 

apply the requirements in section 23B of the Federal Reserve Act, and the application of the 

prudential backstops under § __.15 would serve as adequate safeguards to avoid the risk of 

bailout or other evasion concerns.

400 The agencies continue to believe that this condition will 

help ensure that banking entities and their affiliates’ exposure to risk remains appropriately 

limited. 

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

help to ensure that customer facilitation vehicles are used for customer-oriented financial 

services provided on arms-length, market terms, and to prevent evasion of the requirements of 

 397 See, e.g., SIFMA; FSF; and Data Boiler.

398 Final rule § __.10(c)(18)(ii)(C)(5). 

399 See FSF (stating that if banking entities were required to comply with all of § __.14, they 

would not be able to enter into swaps and other covered transactions with the customer 

facilitation vehicle for their clients, many of whom seek such transactions through the use of 

such vehicles).

400 See FSF.
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section 13 of the BHC Act and the final rule. The agencies also continue to believe that the 

adopted conditions will be consistent with the purposes of section 13.

As in the 2020 proposal, the agencies will not apply § __.14(a) to customer facilitation 

vehicles because the agencies understand that this would prohibit banking entities from 

providing the full range of banking and asset management services to customers using these 

vehicles. Commenters generally supported this approach,401 and one noted that applying §

__.14(a) to these vehicles would undo any practical utility of the exclusion.402 

D. Limitations on Relationships with a Covered Fund

In the 2020 proposal, the agencies proposed to amend the regulations implementing 

section 13(f)(1) of the BHC Act to permit banking entities to engage in a limited set of covered 

transactions with covered funds for which the banking entity directly or indirectly serves as 

investment manager, investment adviser, or sponsor, or that the banking entity organizes and 

offers pursuant to section 13(d)(1)(G) of the BHC Act (such funds, related covered funds).403

Section 13(f)(1) of the BHC Act generally prohibits a banking entity from entering into a 

transaction with a related covered fund that would be a covered transaction as defined in section 

23A of the Federal Reserve Act as if the banking entity was a member bank and the covered fund 

was an affiliate.

404 The 2020 proposal would have amended the application of section 13(f)(1) of 

 401 See, e.g., SIFMA and BPI. 

402 See SIFMA.

403 See 2020 proposal § __.14(a)(2), (3); 85 FR 12143–12146.

404 12 U.S.C. 1851(f)(1); see also 12 U.S.C. 371c. Section 13(f)(3) of the BHC Act also 

provides an exemption for prime brokerage transactions between a banking entity and a covered 

fund in which a covered fund managed, sponsored, or advised by that banking entity has taken an 

ownership interest. 12 U.S.C. 1851(f)(3). In addition, section 13(f)(2) subjects any transaction 

permitted under section 13(f) (including a permitted prime brokerage transaction) between a 
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the BHC Act in limited circumstances, by allowing a banking entity to enter into certain covered 

transactions with a related covered fund that would be permissible without limit for a state 

member bank to enter into with an affiliate under section 23A of the Federal Reserve Act. In 

addition, the 2020 proposal would have allowed a banking entity to enter into short-term 

extensions of credit with, and purchase assets from, a related covered fund in connection with 

payment, clearing, and settlement activities. The agencies invited comment on the past 

interpretation of section 13(f)(1) of the BHC Act,405 and the proposed amendments to the 

regulations implementing section 13(f)(1).406 

As described in the 2020 proposal, the agencies believe the statutory rulemaking 

authority under paragraph (d)(1)(J) of section 13 of the BHC Act permits the agencies to 

determine that banking entities may enter into covered transactions with related covered funds 

that would otherwise be prohibited by section 13(f)(1) of the BHC Act, provided that the 

rulemaking complies with applicable statutory requirements.407 This interpretation of the 

agencies’ rulemaking authority is supported both by the inclusion of other covered transactions 

within the permitted activities listed in paragraph (d)(1) of section 13 and by the manner in 

which section 13(f)(1) of the BHC Act is incorporated in the list of permitted activities in 

paragraph (d)(1), as described below.

 

banking entity and covered fund to section 23B of the Federal Reserve Act. 12 U.S.C. 

1851(f)(2); see 12 U.S.C. 371c–1.

405 In the preamble to the 2013 rule, the agencies noted that “[s]ection 13(f) of the BHC Act 

does not incorporate or reference the exemptions contained in section 23A of the FR Act or the 

Board’s Regulation W.” 79 FR 5746.

406 85 FR 12145-46.

407 12 U.S.C. 1851(b)(2), (d)(1)(J), (d)(2).
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Section 23A of the Federal Reserve Act limits the aggregate amount of covered 

transactions between a member bank and its affiliates, while section 13(f)(1) of the BHC Act 

generally prohibits covered transactions between a banking entity and a related covered fund, 

with no minimum amount of permissible covered transactions.408 Despite the general 

prohibition on certain covered transactions in section 13(f)(1), section 13 also authorizes a 

banking entity to own an interest in a related covered fund, which would be a “covered 

transaction” for purposes of section 23A of the Federal Reserve Act.409 In addition to this 

apparent conflict between paragraphs 13(d) and (f) with respect to covered fund ownership, there 

are other elements of these paragraphs that introduce ambiguity about the interpretation of the 

term “covered transaction” as used in section 13(f) of the BHC Act. For example, despite the 

general prohibition on covered funds, another part of section 13 permits a bank entity “to acquire 

or retain an ownership interest in a covered fund in accordance with the requirements of section 

 408 12 U.S.C. 371c, 12 U.S.C. 1851(f)(1). The term “covered transaction” is defined in section 

23A of the Federal Reserve Act to mean, with respect to an affiliate of a member bank, (1) a loan 

or extension of credit to the affiliate, including a purchase of assets subject to an agreement to 

repurchase; (2) a purchase of or an investment in securities issued by the affiliate; (3) a purchase 

of assets from the affiliate, except such purchase of real and personal property as may be 

specifically exempted by the Board by order or regulation; (4) the acceptance of securities or 

other debt obligations issued by the affiliate as collateral security for a loan or extension of credit 

to any person or company; (5) the issuance of a guarantee, acceptance, or letter of credit, 

including an endorsement or standby letter of credit, on behalf of an affiliate; (6) a transaction 

with an affiliate that involves the borrowing or lending of securities, to the extent that the 

transaction causes a member bank or a subsidiary to have credit exposure to the affiliate; or (7) a 

derivative transaction, as defined in paragraph (3) of section 5200(b) of the Revised Statutes of 

the United States (12 U.S.C. 84(b)), with an affiliate, to the extent that the transaction causes a 

member bank or a subsidiary to have credit exposure to the affiliate. See 12 U.S.C. 371c(b)(7), 

as amended by Pub. L. 111.203, section 608 (July 21, 2010). Section 13(f) of the BHC Act does 

not alter the applicability of section 23A of the Federal Reserve Act and the Board’s Regulation 

W to covered transactions between insured depository institutions and their affiliates.

409 12 U.S.C. 1851(d)(1)(G); (d)(4).
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13.”410 In the preamble to the 2013 rule, the agencies specifically interpreted section 13 to allow 

such investments noting that a contrary interpretation would make the specific language that 

permits covered transactions between a banking entity and a related covered fund “mere 

surplusage.”411 The statute also prohibits a banking entity that organizes or offers a hedge fund 

or private equity fund from directly or indirectly guaranteeing, assuming, or otherwise insuring 

the obligations or performance of the fund (or of any hedge fund or private equity fund in which 

such hedge fund or private equity fund invests).412 To the extent that section 13(f) prohibits all 

covered transactions between a banking entity and a related covered fund, however, the 

independent prohibition on guarantees in section 13(d)(1)(G)(v) would seem to be unnecessary 

and redundant.413 

Although the agencies previously expressed doubt about their ability to permit banking 

entities to enter into covered transactions with related covered funds pursuant to their authority 

under section 13(d)(1)(J) of the BHC Act,414 the activities permitted pursuant to paragraph (d) 

specifically contemplate allowing a banking entity to enter into certain covered transactions with 

related funds.415 The exceptions in section 13(f)(1) are also expressly incorporated into the 

statutory list of permitted activities, specifically in section 13(d)(1)(G)(iv).416 By virtue of the 

conflict between paragraphs (d) and (f) of section 13, and the inclusion of specific covered 

 410 79 FR 5746.

411 Id.

412 12 U.S.C. 1851(d)(1)(G)(v).

413 See 12 U.S.C. 371c(b)(7)(E); 12 CFR 223.3(h)(4). 

414 See 76 FR 68912 n.313.

415 12 U.S.C. 1851(d)(1)(G); (d)(4).

416 12 U.S.C. 1851(d)(1)(G)(iv).
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transactions within the permitted activities in paragraph (d) of section 13, the agencies continue 

to believe that the authority granted pursuant to paragraph (d)(1)(J) to determine that other 

activities are not prohibited by the statute authorizes the agencies to exercise rulemaking 

authority to determine that banking entities may enter into covered transactions with related 

covered funds that would otherwise be prohibited by section 13(f)(1) of the BHC Act, provided 

that the rulemaking complies with applicable statutory requirements.417

Several commenters expressed support for the proposed amendments to the regulations 

implementing section 13(f)(1) of the BHC Act that would have permitted a banking entity to 

engage in a limited set of covered transactions with a related covered fund.

418 Some commenters 

recommended that the agencies clarify whether a banking entity may enter into exempt 

transactions with a related covered fund in the circumstance where such transactions would be 

exempt from section 23A of the Federal Reserve Act only if a bank entered into such 

transactions with a securities affiliate.419 A few commenters also recommended that the agencies 

adopt a new exclusion allowing a banking entity to offer other types of extensions of credit to a 

related covered fund, including extensions of credit in the ordinary course of business.420 Other 

commenters recommended that the agencies clarify that section 13(f)(1) does not apply outside 

of the United States.421 The commenters noted that such an approach would limit the 

extraterritorial effect of section 13(f)(1), and would better align section 13(f)(1) with the manner 

in which section 23A of the Federal Reserve Act applies outside of the United States.

 417 12 U.S.C. 1851(b)(2), (d)(1)(J), (d)(2).

418 See, e.g., ABA; BPI; CBA; Data Boiler; EBF; FSF; IIB; PNC; and SIFMA.

419 ABA; BPI; FSF; and SIFMA.

420 BPI and PNC.

421 CBA; EBF; and IIB.
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As discussed below, the final rule adopts the proposed amendments from the 2020 

proposal with minor modifications. The agencies believe that, under certain circumstances, it is 

appropriate to permit banking entities to enter into certain covered transactions with related 

covered funds, in the manner described in the amendments to § __.14 of the implementing 

regulations. Consistent with the 2020 proposal, these amendments do not modify the definition 

of “covered transaction” but instead authorize banking entities to engage in limited transactions

with related covered funds. Any transactions permitted by these revisions must still meet the 

eligibility requirements for the particular transaction, and the banking entity must also comply 

with certain conflict of interest, high-risk, and safety and soundness restrictions with respect to 

such transactions. The agencies are also expressly providing that a banking entity may enter into 

certain riskless principal transactions with a related covered fund, as described below.

Exempt Transactions under Section 23A and the Board’s Regulation W; Riskless 

Principal Transactions

The final rule adopts the amendments to the regulations implementing section 13(f)(1) of 

the BHC Act to permit banking entities to enter into exempt transactions permitted under section 

23A and the Board’s Regulation W. Specifically, the final rule permits a banking entity to 

engage in certain covered transactions with a related covered fund that would be exempt from 

the quantitative limits, collateral requirements, and low-quality asset prohibition under section 

23A of the Federal Reserve Act, including certain transactions that would be exempt pursuant to 

section 223.42 of the Board’s Regulation W.422

Section 23A of the Federal Reserve Act is designed to protect against a depository 

institution suffering losses in transactions with affiliates, and to limit the ability of a depository 

 422 See 12 U.S.C. 371c(d); 12 CFR 223.42.
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institution to transfer to its affiliates the “subsidy” arising from the depository institution’s access 

to the Federal safety net.423 Nevertheless, a member bank may enter into certain “exempt” 

covered transactions set forth in section 23A of the Federal Reserve Act and the Board’s 

Regulation W, without regard to the quantitative limits, collateral requirements, and low-quality 

asset prohibition of section 23A and the Board’s Regulation W, provided such transactions meet 

the criteria specified in Regulation W.

424

Under the Board’s Regulation W, a member bank may enter into certain exempt covered 

transactions only with a securities affiliate. Specifically, under these exempt covered 

transactions, a member bank may enter into transactions to purchase marketable securities, to 

purchase municipal securities, and to enter into riskless principal transactions only with a 

securities affiliate.

425 In permitting such transactions under Regulation W, the Board previously 

concluded that the condition that such transactions were permissible only with a securities 

affiliate was an important consideration that helped justify the exemption, noting that securities 

affiliates generally must be registered as broker-dealers, and are therefore subject to SEC 

supervision and examination, and are required to keep detailed records concerning each 

securities transaction.426 

The exempt transactions specified in section 23A of the Federal Reserve Act and 

Regulation W are structured in a manner so as not to present the same concerns about a 

depository institution suffering losses or transferring the subsidy arising from the depository 

 423 For a brief background on section 23A of the Federal Reserve Act, see Transactions Between 

Member Banks and Their Affiliates, 67 FR 76560-765561 (December 12, 2002).

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

425 12 CFR 223.42(f), (g), (m).

426 67 FR 76591 (December 12, 2002); see 67 FR 76593, 76597. 
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institution’s access to the Federal safety net. The agencies believe that the same rationale that 

supports the exemptions in section 23A of the Federal Reserve Act and the Board’s Regulation 

W also supports exempting such transactions from the prohibition on covered transactions 

between a banking entity and related covered funds under section 13(f)(1) of the BHC Act, 

provided that such transactions are subject to the same requirements and conditions specified in 

Regulation W. In particular, the agencies note that these exemptions generally do not present 

significant risks of loss and serve important public policy objectives.427

Several commenters recommended that the agencies clarify whether a banking entity may 

enter into certain transactions with a related covered fund that would be permissible under the 

Board’s Regulation W if entered into between a bank and a securities affiliate, even if the 

covered fund would not meet the eligibility criteria to be a “securities affiliate” under the 

Board’s Regulation W.428 As noted above, Regulation W imposes various conditions and 

requirements on transactions that a bank enters into with its affiliates, and permits a bank to enter 

into transactions involving the purchase of marketable securities, the purchase of municipal 

securities, and riskless principal transactions only with an affiliate that is a “securities affiliate” 

as defined in Regulation W. With respect to purchases of marketable securities and municipal 

securities, the final rule follows the approach adopted in Regulation W, and permits a banking 

 427 For example, intraday extensions of credit are exempt covered transactions under section 

23A of the Federal Reserve Act. The Board previously has noted that “[i]ntraday overdrafts and 

other forms of intraday credit generally are not used as a means of funding or otherwise 

providing financial support for an affiliate. Rather, these credit extensions typically facilitate the 

settlement of transactions between an affiliate and its customers when there are mismatches 

between the timing of funds sent and received during the business day.” 67 FR 76596.

428 ABA; BPI; FSF; and SIFMA. Under the Board’s Regulation W, a “securities affiliate” is 

defined as “[a]n affiliate of the member bank that is registered with the Securities and Exchange 

Commission as a broker or dealer; or... [a]ny other securities broker or dealer affiliate of a 

member bank that is approved by the Board.” 12 CFR 223.3(gg).
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entity to enter into such covered transactions with a related covered fund only if those 

transactions would meet all of the eligibility criteria to qualify as exempt transactions under 

Regulation W, including the requirement that the related covered fund meets the requirements to 

be a securities affiliate.

429 As noted above, the exempt transactions specified in Regulation W 

include various limits and conditions that both limit the risks of such transactions and allow the 

Federal banking agencies to monitor compliance. Generally, the final rule retains the eligibility 

criteria for exempt covered transactions defined in Regulation W. The agencies believe that 

these conditions serve important policies, and appropriately limit the scope of the exempt 

transactions permissible under the implementing regulations. 

The final rule permits banking entities to enter into riskless principal transactions with a 

related covered fund, including in circumstances where the covered fund is not a “securities 

affiliate.”430 In a riskless principal transaction, the riskless principal (the banking entity) buys 

and sells the same security contemporaneously, and the asset risk passes promptly from the 

affiliate (the related covered fund) through the riskless principal to a third party.431 In permitting 

such transactions under Regulation W, the Board previously found that there was no regulatory 

benefit to subjecting riskless principal transactions to section 23A of the Federal Reserve Act, 

because such transactions closely resemble securities brokerage transactions, and these 

 429 In addition to requiring that an affiliate be a securities affiliate, the exemptions under 

Regulation W permitting a bank to purchase marketable securities or municipal securities in 

certain circumstances require the bank to retain records about the underlying transaction. See 12 

CFR 223.42(f)(6), (g)(3)(iii)(B).

430 Cf. 12 CFR 223.42(m).

431 See 67 FR 76597.
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transactions do not allow the affiliate to transfer risk to the affiliate acting as a riskless 

principal.

432 

Although the 2020 proposal would have permitted a banking entity to enter into a riskless 

principal transaction with a covered fund provided it met the criteria in Regulation W, the final 

rule adopts a standalone exception to differentiate riskless principal transactions specifically 

from other transactions that would be exempt transactions under the Board’s Regulation W.433 

In connection with permitting banking entities to enter into riskless principal transactions with 

related covered funds in a separate exception from Super 23A, the agencies are defining riskless 

principal transactions in § __.10 of the regulations. The definition of riskless principal

transactions adopted in the final rule is similar to the definition adopted in the Board’s 

Regulation W, as this definition is appropriately narrow and generally familiar to banking 

entities.

434 

In addition, and as discussed in more detail below, banking entities may separately rely 

on the independent exception for acquisitions of assets in connection with payment, clearing, and 

settlement services. The agencies expect that in many instances, subject to other applicable laws 

and regulations, a banking entity may be able to engage in acquisitions of assets in connection 

with payment, clearing, and settlement services, without relying on the exception permitting 

banking entities to enter into covered transactions with their related covered funds that would be 

exempt under Regulation W.

 432 Id.

433 12 CFR 223.42.

434 See 12 CFR 223.3(ee).
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Short-Term Extensions of Credit and Acquisitions of Assets in Connection with Payment, 

Clearing, and Settlement Services

The final rule adopts the proposed amendments in the 2020 proposal that would have 

permitted a banking entity to provide short-term extensions of credit to, and purchase assets 

from, a related covered fund, subject to appropriate limits. Under the final rule, each short-term 

extension of credit or purchase of assets must be made in the ordinary course of business in 

connection with payment transactions; securities, derivatives, or futures clearing; or settlement 

services. In addition, each extension of credit must be required to be repaid, sold, or terminated 

no later than five business days after it was originated. Additionally, the proposed five business 

day criterion is consistent with the Federal banking agencies’ capital rules and would generally 

limit banking entities to transactions with normal settlement periods, which have lower risk of 

delayed settlement or failure, when providing short-term extensions of credit.435 Each short-term 

extension of credit must also meet the same requirements applicable to intraday extensions of 

credit under section 223.42(l)(1)(i) and (ii) of the Board’s Regulation W (as if the extension of 

credit was an intraday extension of credit, regardless of the duration of the extension of credit). 

 435 See 78 FR 62110 (October 11, 2013). While the Federal banking agencies require firms to 

track and monitor the credit risk exposure for transactions involving securities, foreign exchange 

instruments, and commodities that have a risk of delayed settlement, this requirement does not 

apply to other types of transactions which may be used in providing a short-term extension of 

credit (e.g., repo-style transactions). Additionally, banking entities typically monitor credit 

extensions by counterparty, and not by transaction type. Thus, the final rule is consistent with 

the approach taken in the Federal banking agencies’ capital rule, without imposing an additional 

compliance burden without a corresponding benefit. See, e.g., 12 CFR 3.2; 217.2; 324.2 

(defining derivative contract to include unsettled securities with a contractual settlement or 

delivery lag that is longer than the lesser of the market standard for the particular instrument or 

five business days); 12 CFR 3.38(d); 217.38(d); 324.38(d) (noting that an institution must hold 

risk-based capital against any delivery-versus-payment or payment-versus-payment transaction 

with a normal settlement period if the counterparty has not made delivery within five business 

days after settlement).
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Under these requirements, the banking entity making a short-term extension would have to meet 

the same requirements as it would to engage in an intraday extension of credit under Regulation 

W (and as incorporated in the implementing regulations). Specifically, the banking entity would 

need to have policies and procedures to manage the credit exposure and must have no reason to 

believe that the related covered fund will have difficulty repaying the extension of credit in 

accordance with its terms. Finally, each extension of credit or purchase of assets permitted by 

these revisions must also comply with certain conflict of interest, high-risk, and safety and 

soundness restrictions, and must otherwise be permissible for the banking entity to enter into 

with the fund.

436

The agencies do not believe it would be appropriate to permit banking entities to enter 

into other covered transactions with a related covered fund, outside of the exceptions noted 

above. Although some commenters recommended expanding this exception to allow banking 

entities to enter into limited amounts of covered transactions with related covered funds, the 

agencies believe that permitting banking entities to engage in other covered transactions with 

related covered funds would potentially raise the concerns that paragraph 13(f)(1) was intended 

to address. 

 436 For example, an investment fund with respect to which a member bank or its affiliate is an 

investment adviser may be subject to additional restrictions under Section 23A of the Federal 

Reserve Act. See 12 U.S.C. 371c(b)(1)(D).
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The agencies also do not believe that it would be appropriate to limit the application of 

section 13(f)(1) to the United States as some commenters recommended, at this time. The 

agencies note that other amendments in the final rule (for example, amendments to the treatment 

of foreign excluded funds and foreign public funds) may help address some of the commenters’

concerns about the extraterritorial application of section 13(f)(1).

Impact of the Amendments on Safety and Soundness and U.S. Financial Stability

The agencies expect that the amendments in the final rule described above would 

generally promote and protect the safety and soundness of banking entities and U.S. financial 

stability. In comments previously submitted to the agencies, banking entities that sponsor or 

serve as the investment adviser to covered funds have argued that the inability to engage in any 

covered transactions with such funds, particularly those types of transactions that are expressly 

exempted under section 23A of the Federal Reserve Act and the Board’s Regulation W, has 

limited the services that they or their affiliates can provide. The commenters said that amending 

the regulations to permit limited covered transactions with related covered funds would not 

create any new incentives for the banking entity to financially support the related covered fund in 

times of stress and would not otherwise permit the banking entity to indirectly engage in 

proprietary trading through the related covered fund.437 For example, when a banking entity 

sponsors or advises a covered fund, the prohibition on covered transactions between the banking 

entity (and its affiliates) and the covered fund may limit the ability of the banking entity and its 

affiliates to provide other services, such as trade settlement services, to the covered fund. 

 437 See 85 FR 12144.
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As discussed below, the agencies believe that the exceptions in the final rule would 

generally promote and protect the safety and soundness of banking entities and U.S. financial 

stability by allowing banking entities to reduce operational risk. 

Currently, the restrictions under section 13(f)(1) of the BHC Act substantially limit the 

ability of a banking entity to both (1) organize and offer a covered fund, or act as an investment 

adviser to the covered fund, and (2) provide custody or other services to the fund. As a result, a 

third party is required to provide other necessary services for the fund’s operation, including 

payment, clearing, and settlement services that are generally provided by the fund’s custodian, 

even when the banking entity sponsor of the fund typically provides those services to other funds 

it sponsors. This is the case even when the third party may not offer the same quality of services 

available through an affiliate, or where the third party may charge more for the same services 

that could be provided by an affiliate. This increases the potential for problems at the third-party 

service provider (e.g., an operational failure or a disruption to normal functioning) to affect the 

banking entity or the fund, which were required to use the third-party service provider as a result 

of the restrictions under section 13(f)(1). Those problems may then spread among financial 

institutions or markets and thereby threaten the stability of the U.S. financial system. By 

amending § __.14(a), therefore, the final rule allows a banking entity to reduce both operational 

risk and interconnectedness to other financial institutions by directly providing a broader array of 

services to a fund it organizes and offers, or advises. The agencies believe that reducing these 

risks will promote and protect the safety and soundness of banking entities.438

 438 The agencies believe that the same rationales that supported exempting certain covered 

transactions in section 23A of the Federal Reserve Act and the Board’s Regulation W also 

support permitting a banking entity to engage in those exempt covered transactions with a related 
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The final rule also would promote and protect U.S. financial stability by reducing 

interconnectedness among firms. The provision of custodial services among depository 

institutions in the United States is highly concentrated, with the four largest providers, all of 

which remain subject to the Volcker Rule, holding more than 85 percent of custodial assets. 

Requiring a banking entity that organizes and offers a covered fund to use a third party to 

provide these services could increase the interconnections between these firms and the risk that 

distress at one banking entity would be spread to the others. The authorized covered transactions 

would permit banking entities to provide a more comprehensive suite of services to related 

covered funds, reducing interconnectedness by reducing the need to rely on third parties to 

provide such services. 

The final rule also retains important limits on the transactions that a banking entity may 

enter into with a related covered fund, including limitations that apply to transactions within the 

new exceptions in the regulations implementing § __.14(a). As specified in the statute, such 

activities are permissible only “to the extent permitted by any other provision of Federal or state 

law, and subject to the limitations under section 13(d)(2) of the BHC Act and any restrictions or 

limitations that the appropriate Federal banking agencies, the Securities and Exchange 

Commission, and the Commodity Futures Trading Commission, may determine...”439 Section 

13(d)(2) of the BHC Act also imposes additional restrictions on any activities authorized 

 

covered fund, subject to the same terms and conditions as applicable under section 23A and 

Regulation W.

439 12 U.S.C. 1851(d)(1).
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pursuant to section (d)(1), including those activities authorized by rulemaking pursuant to section 

(d)(1)(J).440 

Sections __.14(b) and __.14(c) of the regulations implementing section 13 of the BHC 

Act both generally require that a banking entity may enter into certain transactions specified in 

section 23B of the Federal Reserve Act (including “covered transactions” as defined in section 

23A of the Federal Reserve Act) with related covered funds only on terms and under 

circumstances that are substantially the same (or at least as favorable) as to the banking entity as 

those prevailing at the time for comparable transactions with or involving other nonaffiliated 

companies, or in the absence of comparable transactions, on terms and under circumstances that 

the banking entity in good faith would offer to, or would apply to, nonaffiliated companies.441

The agencies therefore have determined that the amendments to § __.14(a) of the final 

rule, in the manner described above, would promote and protect both the safety and soundness of 

banking entities, and U.S. financial stability.

E. Ownership Interest

1. Definition of “ownership interest”

The 2013 rule defines an “ownership interest” in a covered fund to mean any equity, 

partnership, or other similar interest. Some banking entities have expressed concern about the 

inclusion of the term “other similar interest” in the definition of “ownership interest,” and have 

indicated that the definition of this term could lead to the inclusion of debt instruments that have 

standard covenants within the definition of ownership interest. Under the 2013 rule, “other 

similar interest” is defined as an interest that: 

 440 12 U.S.C. 1851(d)(2); see also 2013 rule §§ __.7 and __.15.

441 12 U.S.C. 1851(f)(2); see 12 U.S.C. 371c–1(a)(1).
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• Has the right to participate in the selection or removal of a general partner, managing 

member, member of the board of directors or trustees, investment manager, 

investment adviser, or commodity trading advisor of the covered fund (excluding the 

rights of a creditor to exercise remedies upon the occurrence of an event of default or 

an acceleration event); 

• Has the right under the terms of the interest to receive a share of the income, gains or 

profits of the covered fund; 

• Has the right to receive the underlying assets of the covered fund after all other 

interests have been redeemed and/or paid in full (excluding the rights of a creditor to 

exercise remedies upon the occurrence of an event of default or an acceleration 

event); 

• Has the right to receive all or a portion of excess spread (the positive difference, if 

any, between the aggregate interest payments received from the underlying assets of 

the covered fund and the aggregate interest paid to the holders of other outstanding 

interests); 

• Provides under the terms of the interest that the amounts payable by the covered fund 

with respect to the interest could be reduced based on losses arising from the 

underlying assets of the covered fund, such as allocation of losses, write-downs or 

charge-offs of the outstanding principal balance, or reductions in the amount of 

interest due and payable on the interest; 

• Receives income on a pass-through basis from the covered fund, or has a rate of 

return that is determined by reference to the performance of the underlying assets of 

the covered fund; or 
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• Any synthetic right to have, receive, or be allocated any of the rights above.442

This definition focuses on the attributes of the interest and whether it provides a banking 

entity with economic exposure to the profits and losses of the covered fund, rather than its form. 

Under the 2013 rule, a debt interest in a covered fund can be an ownership interest if it has the 

same characteristics as an equity or other ownership interest (e.g., provides the holder with 

certain voting rights; the right or ability to share in the covered fund’s profits or losses; or the 

ability, directly or pursuant to a contract or synthetic interest, to earn a return based on the 

performance of the fund’s underlying holdings or investments). 

In the 2018 proposal, the agencies requested comment on all aspects of the 2013 rule’s 

application to securitization transactions, including the definition of ownership interest. 

Specifically, the agencies asked whether there were any modifications that should be made to the 

2013 rule’s definition of ownership interest.443 Among other things, the agencies requested 

comments on whether they should modify § __.10(d)(6)(i)(A) to provide that the “rights of a 

creditor to exercise remedies upon the occurrence of an event of default or an acceleration event” 

include the right to participate in the removal of an investment manager for cause, or to nominate 

or vote on a nominated replacement manager upon an investment manager’s resignation or

removal.444

A number of comments received on the 2018 proposal supported the agencies’ suggestion 

to modify § __.10(d)(6)(i)(A) and to expressly permit creditors to participate in the removal of an 

investment manager for cause, or to nominate or vote on a nominated replacement manager upon 

 442 2013 rule § __.10(d)(6)(i).

443 83 FR 33481.

444 Id.
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an investment manager’s resignation or removal without causing an interest to become an 

ownership interest.445 However, a few of these commenters on the 2018 proposal noted that this 

modification would not address all issues with the condition as banks sometimes have 

contractual rights to participate in the selection or removal of a general partner, managing 

member or member of the board of directors or trustees of a borrower that are not limited to the 

exercise of a remedy upon an event of default or other default event.446 Therefore, these 

commenters proposed eliminating the “other similar interest” clause from the definition 

altogether or, alternatively, replacing the definition of ownership interest with the definition of

“voting securities” from the Board’s Regulation Y. 

A number of commenters on the 2018 proposal argued that debt interests issued by 

covered funds and loans to third-party covered funds not advised or managed by a banking entity 

should be excluded from the definition of ownership interest.447 Other commenters suggested 

reducing the scope of the definition of ownership interest to apply only to equity and equity-like 

interests that are commonly understood to indicate a bona fide ownership interest in a covered 

fund.448 One other commenter asked the agencies to clarify conditions under the “other similar 

interest” clause.449 Specifically, the commenter asked the agencies to clarify whether the right to 

receive all or a portion of the spread extends to using the excess spread or any debt repaid from 

collections on underlying assets of a special purpose entity to pay principal or interest that is 

otherwise owed is not an ownership interest. Another commenter asked the agencies not to 

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

446 See SFIG.

447 See, e.g., Capital One et al. and BPI.

448 See, e.g., ABA and CAE.

449 See SFIG.
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modify the definition of ownership interest as, the commenter argued, there is nothing under 

section 13 of the BHC Act that limits or restricts the ability of a banking entity or nonbank 

financial company to sell or securitize loans in a manner permitted by law.450

In response to comments received on the 2018 proposal and in order to provide clarity 

about the types of interests that would be considered within the scope of the definition of 

ownership interest, the 2020 proposal would have amended the parenthetical in 

§ __.10(d)(6)(i)(A) to specify that creditors’ remedies upon the occurrence of an event of default 

or an acceleration event, which include, for example, the right to participate in the removal of an 

investment manager for cause or to nominate or vote on a nominated replacement manager upon 

an occurrence of an event of default, would not be considered an ownership interest for this 

reason alone.451 The 2020 proposal also sought comment on whether it would be appropriate to 

further allow for an interest to confer the right to participate in any removal of an investment 

manager for cause, or to nominate or vote on a nominated replacement manager upon an 

investment manager’s resignation or removal, whether or not an event of default or an 

acceleration event has occurred, without that interest being deemed an ownership interest. Such 

additional “for cause” termination events may include the insolvency of the investment manager, 

the breach by the investment manager of certain representations or warranties, or the occurrence 

of a “key person” event or a change in control with respect to the investment manager. 

Commenters on the 2020 proposal generally supported the proposed amendment to the 

definition of ownership interest to specify that creditors’ remedies upon the occurrence of an 

 450 See Data Boiler.

451 The definition of “ownership interest” in the implementing regulations is independent from 

the definition of “voting securities” in the Board’s Regulation Y.
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event of default or an acceleration event include the right to participate in the removal of an 

investment manager for cause or to nominate or vote on a nominated replacement manager upon 

an occurrence of an event of default. In the view of these commenters, the proposed clarification 

would appropriately recognize that the ability of a holder to vote on removal or appointment of 

managers for cause is not a right limited to equity holders. However, many of these commenters 

asserted that creditors’ rights are also provided to debt holders in circumstances other than an 

event of default or acceleration. These commenters therefore recommended the proposed 

amendments be expanded to include additional for cause events that are independent of an event 

of default or acceleration, such as the insolvency of the investment manager or breach of the 

investment management or collateral management agreement.452 

In light of comments received on the 2020 proposal, the agencies recognize that it is 

customary for debt holders to hold certain rights to participate in the removal or replacement of 

an investment manager for cause that may be triggered by events other than default or 

acceleration events. The agencies believe that debt interests that include the rights of a creditor 

to participate in the for-cause removal or replacement of an investment manager under certain 

circumstances do not necessarily constitute the type of interest Section 13 of the BHC Act is 

intended to capture as an ownership interest. The agencies are therefore finalizing, with certain 

modifications, the amendments to § __.10(d)(6)(i)(A) in order to provide clarity about the types 

of creditor rights that may attach to an interest without that interest being deemed an ownership 

interest. The agencies have modified the scope of the definition of ownership interest in the final 

rule to allow for certain additional rights of creditors that are not triggered exclusively by an 

event of default or acceleration to attach to a debt interest without such interests being deemed 

 452 See, e.g., SIFMA.
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ownership interests. In addition to such rights arising under events of default or acceleration, 

under the final rule, the definition of ownership interest does not include rights of a creditor to 

participate in the removal or replacement of an investment manager for cause in connection with:

1) the bankruptcy, insolvency, conservatorship or receivership of the investment 

manager;

2) the breach by the investment manager of any material provision of the covered fund’s 

transaction agreements applicable to the investment manager;

3) the breach by the investment manager of material representations or warranties;

4) the occurrence of an act that constitutes fraud or criminal activity in the performance 

of the investment manager’s obligations under the covered fund’s transaction 

agreements;

5) the indictment of the investment manager for a criminal offense, or the indictment of 

any officer, member, partner or other principal of the investment manager for a 

criminal offense materially related to his or her investment management activities;

6) a change in control with respect to the investment manager;

7) the loss, separation or incapacitation of an individual critical to the operation of the 

investment manager or primarily responsible for the management of the covered 

fund’s assets; or

8) other similar events that constitute “cause” for removal of an investment manager, 

provided that such events are not solely related to the performance of the covered 

fund or to the investment manager’s exercise of investment discretion under the 

covered fund’s transaction agreements.
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The 2020 proposal also would have provided a safe harbor from the definition of 

ownership interest, as suggested by some commenters to the 2018 proposal.453 The safe harbor 

was intended to address concerns of commenters to the 2018 proposal that some ordinary debt 

interests could be construed as an ownership interest. The 2020 proposal, therefore, would have 

provided that any senior loan or other senior debt interest that meets all of the following 

characteristics would not be considered to be an ownership interest: 

(1) The holders of such interest do not receive any profits of the covered fund but may 

only receive: (i) interest payments which are not dependent on the performance of the 

covered fund; and (ii) fixed principal payments on or before a maturity date (which 

may include prepayment premiums intended solely to reflect, and compensate holders 

of the interest for, foregone income resulting from an early prepayment); 

(2) The entitlement to payments on the interest is absolute and may not be reduced 

because of the losses arising from the covered fund, such as allocation of losses, writedowns or charge-offs of the outstanding principal balance, or reductions in the 

principal and interest payable; and 

(3) The holders of the interest are not entitled to receive the underlying assets of the 

covered fund after all other interests have been redeemed and/or paid in full (excluding 

the rights of a creditor to exercise remedies upon the occurrence of an event of default 

or an acceleration event). 

Commenters on the 2020 proposal generally supported the proposed safe harbor from the 

definition of ownership interest for certain senior loans or senior debt interests that do not have 

 453 See SFIG.
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equity‐like characteristics.454 However, certain commenters also requested that the agencies 

clarify that the safe harbor is available to senior loans and senior debt interests where repayment 

of principal may vary as a result of acceleration or amortization provisions.455 Additionally, 

certain commenters also requested that the agencies clarify that the reference to senior loans or 

senior debt interests in the proposed safe harbor includes all exposures that would meet the 

definition of “investment grade” found in 12 CFR part 1 and implementing guidelines, as long as 

such exposures comply with the proposed conditions.456

The agencies intended for the proposed conditions of the safe harbor to provide clarity 

and predictability to banking entities by enabling them to determine more readily whether an 

interest would be an ownership interest under the regulations implementing section 13 of the 

BHC Act. After considering comments received, the agencies have included the conditions from 

the 2020 proposal for the safe harbor with a modification to § __.10(d)(6)(ii)(B)(1)(ii). The 

modification requires that the senior loan or senior debt interest involves, among other things, 

repayment of a fixed principal amount, on or before a maturity date, in a contractuallydetermined manner (which may include prepayment premiums intended solely to reflect, and 

compensate holders of the interest for, forgone income resulting from an early prepayment). The 

agencies believe this modification will provide additional clarity that the safe harbor is available 

to senior loan and senior debt interests where contractual principal payments vary over the life of 

a senior loan or senior debt interest for reasons such as amortization and acceleration provided 

that the total amount of principal required to be repaid over the life of the instrument does not 

 454 See, e.g., SIFMA; BPI; LSTA; Mortgage Bankers Association; and PNC.

455 See SIFMA.

456 See, e.g., LSTA and SFA.
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change. The agencies believe this modification to the safe harbor under the final rule will ensure 

that debt interests that do not have equity-like characteristics are not considered ownership 

interests. Additionally, the agencies believe that the conditions are rigorous enough to prevent 

banking entities from evading the prohibition on acquiring or retaining an ownership interest in a 

covered fund. 

Further, in response to certain commenters’ request that the agencies clarify that the 

reference to senior loans or senior debt interests in the proposed safe harbor includes all 

exposures that would meet the definition of “investment grade” found in 12 CFR part 1 and 

implementing guidelines, the agencies have determined that such a provision would be 

inappropriate for purposes of the safe harbor conditions in the final rule. Unlike the safe harbor 

provisions in the final rule regarding ownership interests, such a provision would not ensure that 

debt interests that have equity-like characteristics are treated as ownership interests for purposes 

of subpart C of the final rule.

In response to the 2020 proposal, one commenter requested that the agencies modify the 

condition in § __.10(d)(6)(i)(B) of the implementing regulations and § __.10(d)(6)(ii)(B)(1) of 

the 2020 proposal, which states that an interest that has the right to receive a share of the income, 

gains or profits of the covered fund is considered an ownership interest, to clarify that the 

condition would not include amounts payable to securitization noteholders in accordance with a 

contractual priority of payments, commonly referred to as a “waterfall,” so long as such amounts 

are limited to fixed principal and interest determined on a fixed or typical index floating rate 

basis.457 Specifically, the commenter suggested a modification to this condition to clarify that 

the term “profit” is intended to mean “net profits” out of concern for the potential ambiguity of 

 457 See SFA.
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how the condition would apply to amounts received by securitization noteholders in accordance 

with the securitization’s waterfall of payment. Another commenter disagreed with any revision 

to the 2020 proposed rule that would only cover as an ownership interest an interest which has 

the right to receive a share of the “net” income, gains or profits of the covered fund.458 The final 

rule does not modify § __.10(d)(6)(i)(B) of the implementing regulations or § 

__.10(d)(6)(ii)(B)(1) of the 2020 proposal. However, the agencies clarify that a debt interest in a 

covered fund would not be considered an ownership interest solely because the interest is entitled 

to receive an allocation of collections from the covered fund’s underlying financial assets in 

accordance with a contractual priority of payments.

2. Fund Limits and Covered Fund Deduction

The 2020 proposal included amendments to the implementing regulations to better align 

the manner in which a banking entity calculates the aggregate fund limit and covered fund 

deduction with the manner in which it calculates the per fund limit, as it relates to investments by 

employees of the banking entity. Specifically, consistent with how investments by employees 

and directors are treated generally under the existing rule of construction in § __.12(b)(1)(iv), the 

2020 proposal would have modified §§ __.12(c) and __.12(d) to require attribution of amounts 

paid by an employee or director to acquire a restricted profit interest only when the banking 

entity has financed the acquisition. 

The 2013 rule excludes from the definition of ownership interest certain restricted profit 

interests.459 To be excluded from the definition of ownership interest, the restricted profit 

 458 See Data Boiler.

459 2013 rule § __.10(d)(6)(ii). Under the 2013 rule, the exclusion from the definition of 

ownership interest is limited to restricted profit interests held by an entity, employee, or former 
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interest must also meet various other conditions, including that any amounts invested in the 

covered fund – including amounts paid by the entity, an employee of the entity, or former 

employee of the entity – are within the applicable limits under § __.12 of the 2013 rule.460

Under § __.12 of the 2013 rule, different calculation methodologies apply for purposes of 

calculating compliance with the per fund limit, the aggregate fund limit, and the covered fund 

deduction.461 For purposes of calculating a banking entity’s compliance with the aggregate fund 

limit and the covered fund deduction, the banking entity must include any amounts paid by the 

banking entity or an employee in connection with obtaining a restricted profit interest in the 

covered fund. 462 

The agencies did not receive comments on the proposed change in the treatment of 

restricted profit interests. Several commenters recommended that the agencies eliminate the per 

fund limit, the aggregate fund limit, and the covered fund deduction with respect to any 

 

employee in a covered fund for which the entity or employee serves as investment manager, 

investment adviser, commodity trading advisor, or other service provider. As noted in the 

preamble to the 2013 rule, the term “restricted profit interest” was used to avoid any confusion 

from using the term “carried interest,” which is used in other contexts. The proposed rule would 

focus on the treatment of restricted profit interests for purposes of calculating compliance with 

the aggregate fund limit and covered fund deduction but would not address in any way the 

treatment of such profit interests under other laws, including under Federal income tax law. See 

79 FR 5706, n.2091.

460 2013 rule § __.10(d)(6)(ii)(C).

461 2013 rule § __.12(b)(1)(iv). As noted in the preamble to the 2013 rule, the attribution to a 

banking entity of ownership interests acquired by an employee or director using financing 

provided by the banking entity ensures that funding provided by the banking entity to acquire 

ownership interests in the fund, whether provided directly or indirectly, is counted against the per 

fund limit and aggregate fund limit. See 79 FR 5733.

462 2013 rule § __.10(d)(6)(C); §§ __.12(c)(1), (d). See also 12 U.S.C. 1851(d)(1)(G).
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ownership interest held by a banking entity in any covered fund, if that interest is held pursuant 

to underwriting and market making activities.463

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

agencies continue to believe that it is appropriate for a banking entity to count amounts invested 

by the banking entity (or its affiliates) to acquire restricted profit interests in a fund organized 

and offered by the banking entity for purposes of the aggregate fund limit and covered fund

deduction. However, the agencies believe attribution of employee and director ownership of 

restricted profit interests to a banking entity may not be necessary in the circumstance when a 

banking entity does not finance, directly or indirectly, the employee’s or director’s acquisition of 

a restricted profit interest in a covered fund organized or offered by the banking entity. The final 

rule amends the implementing regulations to limit the attribution of an employee’s or director’s 

restricted profit interest in a covered fund organized or offered by the banking entity to only 

those circumstances in which the banking entity has directly or indirectly financed the 

acquisition of the restricted profit interest. The agencies expect that this amendment will 

simplify a banking entity’s compliance with the aggregate fund limit and covered fund deduction 

provisions of the rule, and more fully recognize that employees and directors may use their own 

resources, not provided by the banking entity, to invest in ownership interests or restricted profit 

interests in a covered fund they advise (for example, to align their personal financial interests 

with those of other investors in the covered fund).

The final rule does not adopt the recommendation from commenters that the agencies 

should eliminate the per fund limit, aggregate fund limit, or covered fund deduction 

requirements. The 2019 amendments adopted several changes to simplify the covered fund 

 463 BPI; FSF; IIB; and SIFMA.
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compliance requirements for banking entities that engage in market making or underwriting with 

respect to a third-party covered fund. Specifically, the 2019 amendments eliminated the 

aggregate fund limit and capital deduction requirements for the value of ownership interests in 

third-party funds acquired or retained in connection with permissible market making or 

underwriting activities (i.e., covered funds that the banking entity does not advise or organize 

and offer pursuant to § __.11(a) or (b) of the implementing regulations). In discussing this 

change in the preamble to the 2019 amendments, the agencies noted that the amendments to the 

treatment of ownership interests in third-party funds were intended to better align the compliance 

requirements for underwriting and market making involving covered funds with the risks that 

those activities entail.464 The compliance challenges associated with underwriting and market 

making in ownership interests in covered funds is particularly acute with respect to third-party 

covered funds. As discussed in the preamble to the 2019 amendments, “a banking entity can 

more readily determine whether a fund is a covered fund if the banking entity advises or 

organizes and offers the fund.” 465 While section 13 of the BHC Act provides the agencies 

greater flexibility to adopt changes in the treatment of ownership interests in third-party funds, it

prescribes specific requirements that apply to funds that the banking entity advises, or organizes 

and offers. Specifically, section 13 provides that a banking entity must not acquire or retain an 

ownership interest in a fund organized and offered by the banking entity except for a de minimis

investment subject to and in compliance with paragraph (d)(4) of section 13 of the BHC Act.466 

Therefore, the final rule does not adopt the change recommended by commenters to modify the 

 464 See 84 FR 62017.

465 Id.

466 12 U.S.C. 1851(d)(1)(G)(iii).
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treatment of ownership interests in related covered funds that are held by a banking entity in 

connection with market making and underwriting activities.

F. Parallel Investments

The 2020 proposal included a new rule of construction in § __.12(b) clarifying that 

banking entities are not required to treat investments alongside covered funds as investments in 

covered funds if certain conditions are met.467 As explained in the 2020 proposal, this rule of 

construction was meant to provide clarity in light of a discrepancy between the preamble to the 

2013 rule and the text of the implementing regulations. 

The implementing regulations require that a banking entity hold no more than three 

percent of the total ownership interests of a covered fund that the banking entity organizes and 

offers pursuant to § __.11.468 Section __.12(b)(1)(i) of the implementing regulations requires 

that, for purposes of this ownership limitation, “the amount and value of a banking entity’s 

permitted investment in any single covered fund shall include any ownership interest held under 

§ __.12 directly by the banking entity, including any affiliate of the banking entity.”469 Section 

__.12(b) also includes several other rules of construction that address circumstances under which 

an investment in a covered fund would be attributed to a banking entity. 

The 2011 notice of proposed rulemaking included a proposed provision that would have 

required attribution of certain direct investments by a banking entity alongside, or otherwise in 

 467 See 85 FR 12149.

468 See id. at 12148; implementing regulations § __.12.

469 See implementing regulations § __.12(b)(1)(i).
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parallel with, a covered fund.470 The agencies declined to adopt this provision in the 2013 rule 

after considering the language of the statute as well as commenters’ views on that provision.471 

The 2013 rule restricts a banking entity’s investment in a covered fund organized and 

offered pursuant to § __.11 to three percent of the total number or value of the outstanding 

ownership interests of the fund. That regulatory requirement is consistent with section 13(d)(4) 

of the BHC Act, which limits the size of investments by a banking entity in a hedge fund or 

private equity fund.472 Neither section 13(d)(4) of the BHC Act nor the text of the implementing 

regulations requires a banking entity to treat an otherwise permissible investment the banking 

entity makes alongside a covered fund as an investment in the covered fund. The text of the 

2013 rule does not impose any quantitative limits on any investments by banking entities made 

alongside, or otherwise in parallel with, covered funds.473 However, in the preamble to the 2013 

rule, the agencies discussed the potential for evasion of the per fund limit and aggregate fund 

limit and stated that “if a banking entity makes investments side by side in substantially the same 

positions as the covered fund, then the value of such investments shall be included for purposes 

of determining the value of the banking entity’s investment in the covered fund.”474 The 

agencies also stated that “a banking entity that sponsors the covered fund should not itself make 

 470 Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and 

Relationships With, Hedge Funds and Private Equity Funds, 76 FR 68846, 68951–52 (Nov. 7, 

2011).

471 In declining to adopt this parallel investment provision, the agencies noted that banking 

entities rely on a number of investment authorities and structures to make investments and meet 

the needs of their clients. 79 FR 5734.

472 12 U.S.C. 1851(d)(4).

473 Any investment by the banking entity would need to comply with the proprietary trading 

restrictions in Subpart B of the implementing regulations.

474 79 FR 5734.
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any additional side by side co-investment with the covered fund in a privately negotiated 

investment unless the value of such co-investment is less than 3% of the value of the total 

amount co-invested by other investors in such investment.”475

The 2020 proposal included a new rule of construction to address investments made by 

banking entities alongside covered funds. This proposed rule of construction was intended to 

clarify in the rule text that banking entities are not required to treat a direct investment by a 

banking entity alongside a covered fund as an investment in the covered fund if certain 

conditions are met. Specifically, proposed § __.12(b)(5) provided that:

(1) A banking entity shall not be required to include in the calculation of the investment 

limits under § __.12(a)(2) any investment the banking entity makes alongside a 

covered fund as long as the investment is made in compliance with applicable laws 

and regulations, including applicable safety and soundness standards.

(2) A banking entity shall not be restricted under § __.12 in the amount of any 

investment the banking entity makes alongside a covered fund as long as the 

investment is made in compliance with applicable laws and regulations, including 

applicable safety and soundness standards.476

In the preamble to the 2020 proposal, the agencies recognized that banking entities rely 

on a number of investment authorities and structures to make investments and meet the needs of 

their clients and shareholders.

477 The agencies indicated that the proposed rule of construction 

would provide clarity to banking entities so that they may make such investments for the benefit 

 475 See id.

476 See 85 FR 12149.

477 Id. See also 79 FR 5734.
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of their clients and shareholders, provided that those investments comply with applicable laws 

and regulations.478 The preamble to the 2020 proposal went on to note several restrictions that 

may apply to a banking entity’s investment alongside a covered fund. For example, a banking 

entity may not engage in prohibited proprietary trading alongside a covered fund. Likewise, a 

banking entity must have authority to make any investment alongside a covered fund under 

applicable banking and other laws and regulations and must ensure that the investment complies 

with applicable safety and soundness standards. For example, national banks are restricted in 

their ability to make direct equity investments under 12 U.S.C. 24(Seventh) and 12 CFR part 1. 

In addition, a banking entity that invests alongside a covered fund that the banking entity 

organizes and offers under the asset management exemption in § __.11 would need to comply 

with all the conditions of that exemption, which, among other things, prohibits the banking entity 

from guaranteeing, assuming, or otherwise insuring the obligations or performance of the 

covered fund. Thus, a banking entity would not be permitted to make a direct investment 

alongside a covered fund that the banking entity organizes and offers for the purpose of 

artificially maintaining or increasing the value of the fund’s positions. Likewise, the banking 

entity would also need to ensure that any direct investment alongside an organized and offered 

covered fund does not cause the sponsoring banking entity’s permitted organizing and offering 

activities to violate the prudential backstops under § __.15.479

 478 85 FR 12149.

479 See id. In particular, to the extent the investment would result in a material conflict of 

interest between the banking entity and its clients, for example because the banking entity may 

exit the position at a different time or on different terms than the covered fund, the banking entity 

would be required to provide timely and effective disclosure in accordance with § __.15(b) prior 

to making the investments. Id.
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Most commenters that addressed the proposed rule of construction supported adopting 

the proposed revision.480 Commenters stated that the rule of construction was consistent with 

section 13 of the BHC Act, would not increase the types of risks that section 13 of the BHC Act 

was meant to address, and would not raise concerns about evading section 13 of the BHC Act.481 

Commenters noted that banking entities would need to hold their investments in a manner 

consistent with relevant authorities and the associated risk management and other prudential and 

regulatory limits and controls, including stringent capital requirements, for these types of 

investments.482 Some commenters also requested that the agencies permit employees and 

directors of a banking entity that sponsors a covered fund to invest directly in that covered fund, 

regardless of whether the employees or directors provide services to the covered fund on behalf 

of their banking entity employer.483 The agencies received one comment opposing the proposed 

rule of construction.484 This commenter characterized the proposed rule of construction as 

permitting proprietary trading at arm’s length but without a limit on the ownership interest that a 

banking entity may hold and stated that parallel investments should be subject to the limitations 

that would apply to direct investments in covered funds.485

 480 See FSF; SIFMA; BPI; IIB; Goldman Sachs; PNC; and ABA.

481 See FSF; SIFMA; and BPI.

482 See FSF; SIFMA; and BPI.

483 See ABA and PNC

484 See Data Boiler.

485 See id.
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After carefully considering the comments received, the agencies are adopting the rule of 

construction in § __.12(b)(5), as proposed.486 As described above and in the 2020 proposal, this 

rule of construction is consistent with the text of section 13 of the BHC Act, which does not 

prohibit a banking entity from making otherwise permissible investments directly when doing so 

alongside a covered fund. This rule of construction will also reduce compliance burden by 

clarifying that a banking entity is not required under § __.12 of the final rule to attribute to the 

banking entity direct investments made alongside a covered fund for purposes of the de minimis

investment limitation. In response to the commenter who opposed the rule of construction,

487 the 

agencies note that the rule of construction is consistent with section 13 of the BHC Act and each 

investment by a banking entity must comply with laws and regulations, including any applicable 

safety and soundness standards. 

As discussed in the preamble to the 2020 proposal, the rule of construction will not 

prohibit a banking entity from having investment policies, arrangements or agreements to invest 

alongside a covered fund in all or substantially all of the investments made by the covered fund 

or to fund all or any portion of the investment opportunities made available by the covered fund 

to other investors. Accordingly, a banking entity could market a covered fund it organizes and 

offers pursuant to § __.11 on the basis of the banking entity’s expectation that it would invest in 

 486 Final rule § __.12(b)(5). These kinds of investments could be, for example, parallel 

investments or co-investments. For these purposes, “parallel investments” generally refers to a 

series of investments that are made side-by-side with a covered fund, and “co-investments” 

generally refers to a specific investment opportunity that is made available to third-parties when 

the general partner or investment manager for the covered fund determines that the covered fund 

does not have sufficient capital available to make the entire investment in the target portfolio 

company or determines that it would not be suitable for the covered fund to take the entire 

available investment.

487 See Data Boiler.
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parallel with the covered fund in some or all of the same investments, or the expectation that the 

banking entity would fund one or more co-investment opportunities made available by the 

covered fund. However, as discussed in the preamble to the 2020 proposal, the agencies would 

expect that any such investment policies, arrangements or agreements would ensure that the 

banking entity has the ability to evaluate each investment on a case-by-case basis to confirm that 

the banking entity does not make any investment unless the investment complies with applicable 

laws and regulations, including any applicable safety and soundness standards. The agencies 

believe that this would further ensure that the banking entity is not exposed to the types of risks 

that section 13 of the BHC Act was intended to address.

As discussed earlier and in the preamble to the 2020 proposal, the agencies recognize that 

the 2011 proposed rule would have required a banking entity to apply the per fund limit and 

aggregate fund limit to a direct investment alongside a covered fund when, among other things, a 

banking entity is contractually obligated to make such investment alongside a covered fund. The 

agencies continue to believe that such a prohibition is not necessary given the agencies’ 

expectation that a banking entity would retain the ability to evaluate each investment on a caseby-case basis to confirm that the banking entity does not make any investment unless the 

investment complies with applicable laws and regulations, including any applicable safety and 

soundness standards. 

The 2013 rule imposes certain attribution rules and eligibility requirements for 

investments by directors and employees of a banking entity in covered funds organized and 

offered by the banking entity. Specifically, § __.12(b)(1)(iv) of the 2013 rule requires attribution 

of an investment by a director or employee of a banking entity who acquires an ownership 

interest in his or her personal capacity in a covered fund sponsored by the banking entity if the 
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banking entity, directly or indirectly, extends financing for the purpose of enabling the director 

or employee to acquire the ownership interest in the fund and the financing is used to acquire 

such ownership interest in the covered fund. Section __.11(a)(7) prohibits investments by any 

director or employee of the banking entity (or an affiliate thereof) in the covered fund, other than 

any director or employee who is directly engaged in providing investment advisory, commodity 

trading advisory, or other services to the covered fund at the time the director or employee makes 

the investment.

As discussed in the preamble to the 2020 proposal, the agencies recognize that directors 

and employees of banking entities may participate in investments alongside a covered fund, for 

example on an ad hoc basis or as part of a compensation arrangement. Consistent with the 

agencies’ rule of construction regarding direct investments by banking entities alongside a 

covered fund, the agencies would expect that any direct investments (whether a series of parallel 

investments or a co-investment) by a director or employee of a banking entity (or an affiliate 

thereof) made alongside a covered fund in compliance with applicable laws and regulations 

would not be treated as an investment by the director or employee in the covered fund. 

Accordingly, such a direct investment would not be attributed to the banking entity as an 

investment in the covered fund, regardless of whether the banking entity arranged the transaction 

on behalf of the director or employee or provided financing for the investment.488 Similarly, the 

requirements under § __.11(a)(7) limiting the directors and employees that are eligible to invest 

in a covered fund organized and offered by the banking entity to those that are directly engaged 

 488 See 2013 rule § __.12(b)(1)(iv) (requiring attribution of an investment by a director or 

employee in a covered fund organized and offered by the banking entity, where the banking 

entity, directly or indirectly, extends financing for the purpose of enabling the director or 

employee to acquire the ownership interest in the covered fund and the financing is used to 

acquire such ownership interest in the covered fund) (emphasis added).
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in providing specified services to the covered fund would not apply to any such direct

investment.489

With respect to investments in a covered fund, the agencies decline to permit an 

employee or director of a banking entity that organizes and offers a covered fund to make 

investments in that covered fund if the director or employee does not provide services to the 

covered fund on behalf of the banking entity, as requested by some commenters.490 The 

restriction on these types of director and employee investments is required by the statute.491

G. Technical Amendments

The agencies proposed five sets of clarifying technical edits to the implementing 

regulations. Specifically, the agencies proposed to (1) amend § __.12(b)(1)(ii) to add a comma 

after the words “SEC-regulated business development companies” in both places where that 

phrase is used; (2) amend § __.12(b)(4)(i) to replace the phrase “ownership interest of the master 

fund” with the phrase “ownership interest in the master fund”; (3) amend § __.12(b)(4)(ii) to 

replace the phrase “ownership interest of the fund” with the phrase “ownership interest in the 

fund;” (4) amend §§ __.10(c)(3)(i) and __.10(c)(10)(i) to replace the word “comprised” with the 

word “composed;” and (5) amend § __.10(c)(8)(iv)(A) to replace the word “of” in the phrase 

“contractual rights of other assets” with the word “or.”

 489 See 2013 rule § __.11(a)(7) (prohibiting investments by any director or employee of the 

banking entity (or an affiliate thereof) in a covered fund organized and offered by the banking 

entity, other than any director or employee who is directly engaged in providing investment 

advisory, commodity trading advisory, or other services to the covered fund at the time the 

director or employee makes the investment) (emphasis added).

490 See ABA and PNC.

491 See 12 U.S.C. 1851(d)(1)(G)(vii).
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The agencies did not receive comment on these provisions and are adopting the technical 

amendments as proposed.

V. Administrative Law Matters

A. Use of Plain Language

Section 722 of the Gramm-Leach-Bliley Act492 requires the Federal banking agencies to 

use plain language in all proposed and final rules published after January 1, 2000. The Federal 

banking agencies sought to present the proposed rule in a simple and straightforward manner and 

did not receive any comments on plain language.

B. Paperwork Reduction Act

Certain provisions of the final rule contain “collection of information” requirements 

within the meaning of the Paperwork Reduction Act (PRA) of 1995 (44 U.S.C. 3501-3521). In 

accordance with the requirements of the PRA, the agencies may not conduct or sponsor, and a 

respondent is not required to respond to, an information collection unless it displays a currently 

valid Office of Management and Budget (OMB) control number. The agencies reviewed the 

final rule and determined that the final rule creates new recordkeeping requirements and revises 

certain disclosure requirements that have been previously cleared under various OMB control 

numbers. The agencies did not receive any specific comments on the PRA. The agencies are 

extending for three years, with revision, these information collections. The information 

collection requirements contained in this final rule have been submitted by the OCC and FDIC to 

OMB for review and approval under section 3507(d) of the PRA (44 U.S.C. 3507(d)) and section 

1320.11 of the OMB’s implementing regulations (5 CFR 1320). The Board reviewed the final 

rule under the authority delegated to the Board by OMB. The Board will submit information 

 492 Pub. L. 106-102, section 722, 113 Stat. 1338, 1471 (1999).
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collection burden estimates to OMB, and the submission will include burden for Federal 

Reserve-supervised institutions, as well as burden for OCC-, FDIC-, SEC-, and CFTC-supervised 

institutions under a holding company. The OCC and the FDIC will take burden for banking 

entities that are not under a holding company.

Abstract

Section 13 of the BHC Act generally prohibits any banking entity from engaging in 

proprietary trading or from acquiring or retaining an ownership interest in, sponsoring, or having 

certain relationships with a covered fund, subject to certain exemptions. The exemptions allow 

certain types of permissible trading and asset management activities. 

Current Actions

The final rule contains requirements subject to the PRA, and the changes relative to the 

implementing regulations are discussed herein. The new recordkeeping requirements are found 

in section _.10(c)(18)(ii)(C)(1) and the modified disclosure requirements are found in section 

_.11(a)(8)(i). The modified information collection requirements would implement section 13 of 

the BHC Act. The respondents are for-profit financial institutions, including small businesses. A 

covered entity must retain these records for a period that is no less than 5 years in a form that 

allows it to promptly produce such records to the relevant agency on request.

Recordkeeping Requirements

Section _.10(c)(18)(ii)(C)(1) requires a banking entity relying on the exclusion from the 

covered fund definition for customer facilitation vehicles to maintain documentation outlining 

how the banking entity intends to facilitate the customer’s exposure to a transaction, investment 

strategy, or service. The agencies estimate that the new recordkeeping requirement will be 

incurred once a year with an average hour per response of 10 hours.
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Disclosure Requirements

Section _.11(a)(8)(i), which requires banking entities that organize and offer covered 

funds to make certain disclosures to investors in such funds, is being expanded to also apply to 

banking entities relying on exclusions for credit funds, venture capital funds, family wealth 

management vehicles, or customer facilitation vehicles. The agencies estimate that the current 

average hours per response of 0.1 will increase to 0.5.

Revision, With Extension, of the Following Information Collections

Estimated average hours per response:

Reporting

Section _.4(c)(3)(i)—0.25 hours for an average of 20 times per year.

Section _.12(e)—20 hours (Initial set-up 50 hours) for an average of 10 times per year.

Section _.20(d)—41 hours (Initial set-up 125 hours) quarterly.

Section _.20(i)—20 hours.

Recordkeeping

Section _.3(d)(3)—1 hour (Initial set-up 3 hours).

Section _.4(b)(3)(i)(A)—2 hours quarterly.

Section _.4(c)(3)(i)—0.25 hours for an average of 40 times per year.

Section _.5(c)—40 hours (Initial setup 80 hours).

Section _.10(c)(18)(ii)(C)(1)—10 hours.

Section _.11(a)(2)—10 hours.

Section _.20(b)—265 hours (Initial set-up 795 hours).

Section _.20(c)—100 hours (Initial set-up 300 hours).

Section _.20(d)- 10 hours.
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Section _.20(e)—200 hours.

Section _.20(f)(1)—8 hours.

Section _.20(f)(2)—40 hours (Initial set-up 100 hours).

Disclosure

Section _.11(a)(8)(i)—0.5 hours for an average of 26 times per year.

OCC

Title of Information Collection: Reporting, Recordkeeping, and Disclosure Requirements 

Associated with Restrictions on Proprietary Trading and Certain Relationships with Hedge 

Funds and Private Equity Funds.

Frequency: Annual, quarterly, and event driven.

Affected Public: Businesses or other for-profit.

Respondents: National banks, state member banks, state nonmember banks, and state and federal 

savings associations.

OMB control number: 1557-0309.

Estimated number of respondents: 39.

Revisions estimated annual burden: 302 hours.

Estimated annual burden hours: 20,410 hours (3,681 hour for initial set-up and 16,729 hours for 

ongoing).

Board

Title of Information Collection: Reporting, Recordkeeping, and Disclosure Requirements 

Associated with Regulation VV.

Frequency: Annual, quarterly, and event driven.

Affected Public: Businesses or other for-profit.
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Respondents: State member banks, bank holding companies, savings and loan holding 

companies, foreign banking organizations, U.S. State branches or agencies of foreign banks, and 

other holding companies that control an insured depository institution and any subsidiary of the 

foregoing other than a subsidiary for which the OCC, FDIC, CFTC, or SEC is the primary 

financial regulatory agency. The Board will take burden for all institutions under a holding 

company including:

• OCC-supervised institutions,

• FDIC-supervised institutions,

• Banking entities for which the CFTC is the primary financial regulatory agency, as 

defined in section 2(12)(C) of the Dodd-Frank Act, and

• Banking entities for which the SEC is the primary financial regulatory agency, as defined 

in section 2(12)(B) of the Dodd-Frank Act.

Legal authorization and confidentiality: This information collection is authorized by section 13 

of the BHC Act (12 U.S.C. 1851(b)(2) and 12 U.S.C. 1851(e)(1)). The information collection is 

required in order for covered entities to obtain the benefit of engaging in certain types of 

proprietary trading or investing in, sponsoring, or having certain relationships with a hedge fund 

or private equity fund, under the restrictions set forth in section 13 and the final rule. If a 

respondent considers the information to be trade secrets and/or privileged, such information 

could be withheld from the public under the authority of the Freedom of Information Act (5 

U.S.C. 552(b)(4)). Additionally, to the extent that such information may be contained in an 

examination report, such information could also be withheld from the public (5 U.S.C. 552 

(b)(8)).

Agency form number: FR VV.
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OMB control number: 7100-0360.

Estimated number of respondents: 255.

Revisions estimated annual burden: 7,880 hours.

Estimated annual burden hours: 36,112 hours (4,381 hour for initial set-up and 31,731 hours for 

ongoing).

FDIC

Title of Information Collection: Volcker Rule Restrictions on Proprietary Trading and 

Relationships with Hedge Funds and Private Equity Funds.

Frequency: Annual, quarterly, and event driven.

Affected Public: Businesses or other for-profit.

Respondents: State nonmember banks, state savings associations, and certain subsidiaries of 

those entities.

OMB control number: 3064-0184.

Estimated number of respondents: 10.

Revisions estimated annual burden: 175 hours.

Estimated annual burden hours: 3,288 hours (1,759 hours for initial set-up and 1,529 hours for 

ongoing).

C. Regulatory Flexibility Act Analysis

The Regulatory Flexibility Act (RFA)493 requires an agency to either provide a regulatory 

flexibility analysis with a final rule or certify that the final rule will not have a significant 

economic impact on a substantial number of small entities. The U.S. Small Business 

Administration (SBA) establishes size standards that define which entities are small businesses 

 493 5 U.S.C. 601 et seq.
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for purposes of the RFA.494 Except as otherwise specified below, the size standard to be 

considered a small business for banking entities subject to the final rule is $600 million or less in 

consolidated assets.495 

Board

The Board has considered the potential impact of the final rule on small entities in 

accordance with section 603 of the RFA. Based on the Board’s analysis, and for the reasons 

stated below, the Board certifies that the final rule will not have a significant economic impact 

on a substantial of number of small entities. 

The Board invited comment on all aspects of its analysis related to the requirements of 

the RFA in connection with the 2020 proposal. In particular, the Board requested that 

commenters describe the nature of any impact on small entities and provide empirical data to 

illustrate and support the extent of the impact. The Board did not receive any comments related 

to this issue.

As discussed in the Supplementary Information, the agencies are adopting revisions to 

the regulations implementing section 13 of the BHC Act in order to improve and streamline the 

regulations by modifying and clarifying requirements related to the covered fund provisions.496 

Certain of the exclusions from the covered fund definition included in the final rule contain 

recordkeeping and disclosure requirements that would apply to banking entities relying on the 

 494 U.S. SBA, Table of Small Business Size Standards Matched to North American Industry 

Classification System Codes, available at https://www.sba.gov/document/support--table-sizestandards.

495 See id. Pursuant to SBA regulations, the asset size of a concern includes the assets of the 

concern whose size is at issue and all of its domestic and foreign affiliates. 13 CFR 121.103(6). 

496 The agencies are explicitly authorized under section 13(b)(2) of the BHC Act to adopt rules 

implementing section 13. 12 U.S.C. 1851(b)(2).
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exclusion. For example, the exclusion for customer facilitation vehicles requires a banking 

entity relying on the exclusion to maintain documentation outlining how the banking entity 

intends to facilitate the customer’s exposure to a transaction, investment strategy, or service. 

The final rule is expected to reduce regulatory burden on banking entities, and the Board does 

not expect these recordkeeping requirements to result in a significant economic impact. 

The Board’s rule generally applies to state-chartered banks that are members of the 

Federal Reserve System, bank holding companies, and foreign banking organizations and 

nonbank financial companies supervised by the Board (collectively, “Board-regulated entities”). 

However, section 203 of the Economic Growth, Regulatory Relief, and Consumer Protection Act 

(EGRRCPA),497 which was enacted on May 24, 2018, amended section 13 of the BHC Act by 

narrowing the definition of banking entity to exclude certain community banks.498 The Board is 

not aware of any Board-regulated entities that meet the SBA’s definition of “small entity” that 

are subject to section 13 of the BHC Act and its implementing regulations following the 

enactment of EGRRCPA. Furthermore, to the extent that any Board-regulated entities that meet 

the definition of “small entity” are or become subject to section 13 of the BHC Act and its 

implementing regulations, the Board does not expect the total number of such entities to be 

substantial. Accordingly, the Board’s final rule is not expected to have a significant economic 

impact on a substantial number of small entities.

OCC

 497 Pub. L. 115–174 (May 24, 2018).

498 Under EGRRCPA, a community bank and its affiliates are generally excluded from the 

definition of banking entity, and thus section 13 of the BHC Act, if the bank and all companies 

that control the bank have total consolidated assets equal to $10 billion or less and trading assets 

and liabilities equal to five percent or less of total consolidated assets.
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The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., requires an agency, in 

connection with a final rule, to prepare a Final Regulatory Flexibility Analysis describing the 

impact of the rule on small entities (defined by the Small Business Administration (SBA) for 

purposes of the RFA to include commercial banks and savings institutions with total assets of 

$600 million or less and trust companies with total assets of $41.5 million or less) or to certify 

that the final rule would not have a significant economic impact on a substantial number of small 

entities. The OCC currently supervises approximately 745 small entities.

499 Under the 

EGRRCPA, banking entities with total consolidated assets of $10 billion or less generally are not

“banking entities” within the scope of section 13 of the BHC Act if their trading assets and 

trading liabilities do not exceed five percent of their total consolidated assets. In addition, 

section 13 of the BHC Act generally excludes certain institutions that function only in a trust or 

fiduciary capacity from the definition of “banking entity. As a result, no OCC-supervised small 

entities are subject to section 13 of the BHC Act. Thus, the final rule will not impact any OCCsupervised small entities. Therefore, the OCC certifies that the final rule will not have a 

significant impact on a substantial number of OCC-supervised small entities.

FDIC

The RFA generally requires that, in connection with a final rulemaking, an agency 

prepare and make available for public comment a final regulatory flexibility analysis describing 

 499 The OCC bases its estimate of the number of small entities on the SBA’s size thresholds for 

commercial banks and savings institutions, and trust companies, which are $600 million and 

$41.5 million, respectively. Consistent with the General Principles of Affiliation, 13 CFR 

121.103(a), the OCC counts the assets of affiliated financial institutions when determining if the 

OCC should classify an OCC-supervised institution as a small entity. The OCC uses December 

31, 2019, to determine size because a “financial institution’s assets are determined by averaging 

the assets reported on its four quarterly financial statements for the preceding year.” See

footnote 8 of the SBA’s Table of Size Standards.
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the impact of the final rule on small entities.500 However, a regulatory flexibility analysis is not 

required if the agency certifies that the final rule will not have a significant economic impact on 

a substantial number of small entities. The SBA has defined “small entities” to include banking 

organizations with total assets of less than or equal to $600 million that are independently owned 

and operated or owned by a holding company with less than or equal to $600 million in total 

assets.501 Generally, the FDIC considers a significant effect to be a quantified effect in excess of 

five percent of total annual salaries and benefits per institution, or 2.5 percent of total noninterest 

expenses. The FDIC believes that effects in excess of these thresholds typically represent 

significant effects for FDIC-supervised institutions. For the reasons described below and under 

section 605(b) of the RFA, the FDIC certifies that this final rule will not have a significant 

economic impact on a substantial number of small entities.

As of December 31, 2019, the FDIC supervised 3,344 depository institutions,502 of which 

2,581 were considered small entities for the purposes of RFA.503 The Economic Growth, 

Regulatory Relief, and Consumer Protection Act excluded entities from the requirements of 

section 13 of the BHC Act that do not have and are not controlled by a company that has total 

assets of more than $10 billion or trading assets and liabilities comprising more than five percent 

 500 5 U.S.C. 601 et seq.

501 The SBA defines a small banking organization as having $600 million or less in assets, 

where an organization’s “assets are determined by averaging the assets reported on its four 

quarterly financial statements for the preceding year.” See 13 CFR 121.201 (as amended by 84 

FR 34261, effective August 19, 2019). In its determination, the “SBA counts the receipts, 

employees, or other measure of size of the concern whose size is at issue and all of its domestic 

and foreign affiliates.” See 13 CFR 121.103. Following these regulations, the FDIC uses a 

covered entity’s affiliated and acquired assets, averaged over the preceding four quarters, to 

determine whether the covered entity is “small” for the purposes of RFA.

502 FDIC-supervised institutions are set forth in 12 U.S.C. 1813(q)(2).

503 FDIC Call Report data, December 31, 2019.
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of total consolidated assets.504 Only one small, FDIC-supervised institution is subject to section 

13 of the BHC Act, because its trading assets and liabilities exceed five percent of total 

consolidated assets.505

Section 13 of the BHC Act generally prohibits any banking entity from engaging in 

proprietary trading or from acquiring or retaining an ownership interest in, sponsoring, or having 

certain relationships with a covered fund. As previously discussed, the final rule modifies

existing definitions and exclusions and introduces new exclusions to the implementing 

regulations. The final rule permits covered entities to engage in additional activities with respect 

to covered funds, including acquiring or retaining an ownership interest in, sponsoring, or having 

certain relationships with covered funds, subject to certain restrictions.

This final rule excludes certain types of investment funds from the definition of a 

“covered fund” for the purposes of section 13 of the BHC Act. Investments in funds that are 

affected by this final rule could be reported as deductions from capital on Call Report schedule 

RC-R Part 1 Lines 11 or 13 if the investments qualify as “investments in the capital of an 

unconsolidated financial institution” or as additional deductions on Lines 17 or 24 of schedule 

RC-R otherwise.506 The one affected small, FDIC-supervised institution did not report any such 

deductions over the past five years.507

 504 Public Law 115–174, May 24, 2018. https://www.congress.gov/bill/115th-congress/senatebill/ 2155.

505 FDIC Call Report data, December 2019.

506 See “Supervisory Guidance on the Capital Treatment of Certain Investments in Covered 

Funds.” FDIC FIL–50–2015: November 6, 2015. 

https://www.fdic.gov/news/news/financial/2015/fil15050a.pdf.

507 FDIC Call Report data, March 2015–December 2019.
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Based on this supporting information, the FDIC certifies that this final rule will not have 

a significant economic impact on a substantial number of small entities.

SEC

In the 2020 proposal, the SEC certified that, pursuant to 5 U.S.C. section 605(b), the 

2020 proposal would not, if adopted, have a significant economic impact on a substantial number 

of small entities. Although the SEC solicited written comments regarding this certification, no 

commenters responded to this request. 

As discussed in the Supplementary Information, the amendments clarify and simplify

compliance with the implementing regulations, refine the extraterritorial application of the 

section 13 of the BHC Act, and permit additional fund activities that do not present the risks that 

section 13 was intended to address.

The amendments will generally apply to banking entities, including certain SECregistered entities. These entities include bank-affiliated SEC-registered investment advisers, 

broker-dealers, and security-based swap dealers. Based on information in filings submitted by 

these entities, the SEC believes that there are no banking entity registered investment advisers or 

broker-dealers that are small entities for purposes of the RFA. For this reason, the SEC certifies

that the amendments will not have a significant economic impact on a substantial number of 

small entities.

CFTC
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Pursuant to 5 U.S.C. 605(b), the CFTC hereby certifies that the final rule will not have a 

significant economic impact on a substantial number of small entities for which the CFTC is the 

primary financial regulatory agency.

As discussed in this Supplementary Information, the final rule clarifies and simplifies 

compliance with the implementing regulations, refines the extraterritorial application of section 

13 of the BHC Act, and permits additional fund activities that do not present the risks that 

section 13 was intended to address. To reduce the extraterritorial impact of the implementing 

regulations, the final rule exempts the activities of certain funds that are organized outside of the 

United States and offered to foreign investors from certain restrictions of the implementing 

regulations. The final rule also revises several existing exclusions from the covered fund 

provisions, to provide clarity and simplify compliance with the requirements of the 

implementing regulations. The final rule adopts several new exclusions from the covered fund 

definition in order to more closely align the regulation with the purpose of the statute. Last, the 

final rule adopts revisions to the provisions that govern the relationship between a banking entity 

and a fund and the definition of ownership interest. 

The final rule will generally apply to banking entities, including certain CFTC-registered 

entities. These entities include bank-affiliated CFTC-registered swap dealers, futures 

commission merchants, commodity trading advisors and commodity pool operators.508 The 

CFTC has previously determined that swap dealers, futures commission merchants and 

commodity pool operators are not small entities for purposes of the RFA and, therefore, the 

 508 The final rule may also apply to other types of CFTC registrants that are banking entities, 

such as introducing brokers, but the CFTC believes it is unlikely that such other registrants will 

have significant activities that would implicate the final rule. See 79 FR 5808, 5813 (Jan. 31, 

2014) (CFTC version of 2013 final rule).
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requirements of the RFA do not apply to those entities.509 As for commodity trading advisors, 

the CFTC has found it appropriate to consider whether such registrants should be deemed small 

entities for purposes of the RFA on a case-by-case basis, in the context of the particular 

regulation at issue.510

In the context of the final rule, the CFTC believes it is unlikely that a substantial number 

of the commodity trading advisors that are potentially affected are small entities for purposes of 

the RFA. In this regard, the CFTC notes that only commodity trading advisors that are registered 

with the CFTC are covered by the implementing regulations, and generally those that are 

registered have larger businesses. Similarly, the final rule applies to only those commodity 

trading advisors that are affiliated with banks, which the CFTC expects are larger businesses. 

The CFTC requested that commenters address in particular whether any of these 

commodity trading advisors, or other CFTC registrants covered by the proposed revisions, are 

small entities for purposes of the RFA. The CFTC did not receive any public comments on this 

or any other aspect of the RFA as it relates to the rule.

Because the CFTC believes that there are not a substantial number of registered, banking 

entity-affiliated commodity trading advisors that are small entities for purposes of the RFA, and 

the other CFTC registrants that may be affected by the proposed revisions have been determined 

not to be small entities, the CFTC believes that the final rule will not have a significant economic 

 509 See Policy Statement and Establishment of Definitions of “Small Entities” for Purposes of 

the Regulatory Flexibility Act, 47 FR 18618 (Apr. 30, 1982) (futures commission merchants and 

commodity pool operators); Registration of Swap Dealers and Major Swap Participants, 77 FR 

2613, 2620 (Jan. 19, 2012) (swap dealers and major swap participants).

510 See Policy Statement and Establishment of Definitions of “Small Entities” for Purposes of 

the Regulatory Flexibility Act, 47 FR 18618, 18620 (Apr. 30, 1982).
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impact on a substantial number of small entities for which the CFTC is the primary financial 

regulatory agency.

D. Riegle Community Development and Regulatory Improvement Act

Section 302(a) of the Riegle Community Development and Regulatory Improvement Act 

of 1994 (RCDRIA)

511 requires that each Federal banking agency, in determining the effective 

date and administrative compliance requirements for new regulations that impose additional 

reporting, disclosure, or other requirements on insured depository institutions, consider, consistent 

with principles of safety and soundness and the public interest, any administrative burdens that 

such regulations would place on depository institutions, including small depository institutions,

and customers of depository institutions, as well as the benefits of such regulations. The agencies 

have considered comment on these matters in other parts of this Supplementary Information.

In addition, under section 302(b) of the RCDRIA, new regulations that impose additional 

reporting, disclosures, or other new requirements on insured depository institutions generally 

must take effect on the first day of a calendar quarter that begins on or after the date on which the 

regulations are published in final form.512 Therefore, the effective date for the Federal banking 

agencies is October 1, 2020, the first day of the calendar quarter.513

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

512 12 U.S.C. 4802(b).

513 Additionally, the Administrative Procedure Act generally requires that the effective date of a 

rule be no less than 30 days after publication in the Federal Register. 5 U.S.C. 553(d)(1). The 

effective date, October 1, 2020, will be more than 30 days after publication in the Federal 

Register.
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E. OCC Unfunded Mandates Reform Act

The OCC has analyzed the final rule under the factors in the Unfunded Mandates Reform 

Act of 1995 (UMRA). Under this analysis, the OCC considered whether the final rule includes a 

Federal mandate that may result in the expenditure by state, local, and tribal governments, in the 

aggregate, or by the private sector, of $100 million or more in any one year (adjusted annually 

for inflation). The UMRA does not apply to regulations that incorporate requirements 

specifically set forth in law. 

The final rule does not impose new mandates. Therefore, the OCC finds that the final 

rule does not trigger the UMRA cost threshold. Accordingly, the OCC has not prepared the 

written statement described in section 202 of the UMRA.

F. SEC Economic Analysis

G. Congressional Review Act

For the OCC, Board, FDIC, SEC, and CFTC, the Office of Information and Regulatory 

Affairs, pursuant to the Congressional Review Act, has designated this rule as a “major rule” as

defined by 5 U.S.C. § 804(2). 

List of Subjects 

12 CFR Part 44

Banks, Banking, Compensation, Credit, Derivatives, Government securities, Insurance, 

Investments, National banks, Penalties, Reporting and recordkeeping requirements, Risk, Risk 

retention, Securities, Trusts and trustees.

12 CFR Part 248
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Administrative practice and procedure, Banks, banking, Conflict of interests, Credit, 

Foreign banking, Government securities, Holding companies, Insurance, Insurance companies, 

Investments, Penalties, Reporting and recordkeeping requirements, Securities, State nonmember 

banks, State savings associations, Trusts and trustees

12 CFR Part 351

Banks, Banking, Capital, Compensation, Conflicts of interest, Credit, Derivatives, 

Government securities, Insurance, Insurance companies, Investments, Penalties, Reporting and 

recordkeeping requirements, Risk, Risk retention, Securities, Trusts and trustees

17 CFR Part 75

Banks, Banking, Compensation, Credit, Derivatives, Federal branches and agencies, 

Federal savings associations, Government securities, Hedge funds, Insurance, Investments, 

National banks, Penalties, Proprietary trading, Reporting and recordkeeping requirements, Risk, 

Risk retention, Securities, Swap dealers, Trusts and trustees, Volcker rule. 

17 CFR Part 255

Banks, Brokers, Dealers, Investment advisers, Recordkeeping, Reporting, Securities

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Chapter I

Authority and Issuance

For the reasons stated in the Common Preamble, the Office of the Comptroller of the Currency 

amends chapter I of Title 12, Code of Federal Regulations as follows:

PART 44 PROPRIETARY TRADING AND CERTAIN INTERESTS IN AND 

RELATIONSHIPS WITH COVERED FUNDS
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1. The authority citation for part 44 continues to read as follows: 

Authority: 7 U.S.C. 27 et seq., 12 U.S.C. 1, 24, 92a, 93a, 161, 1461, 1462a, 1463, 1464, 1467a, 

1813(q), 1818, 1851, 3101, 3102, 3108, 5412.

Subpart B — Proprietary Trading

2. Amend § 44.6 by adding paragraph (f) to read as follows:

§ 44.6. Other permitted proprietary trading activities.

* * * * *

(f) Permitted trading activities of qualifying foreign excluded funds. The prohibition contained 

in § 44.3(a) does not apply to the purchase or sale of a financial instrument by a qualifying 

foreign excluded fund. For purposes of this paragraph (f), a qualifying foreign excluded fund 

means a banking entity that: 

(1) Is organized or established outside the United States, and the ownership interests of which are 

offered and sold solely outside the United States;

(2)(i) Would be a covered fund if the entity were organized or established in the United States, or 

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

primarily for the purpose of investing in financial instruments for resale or other disposition or 

otherwise trading in financial instruments;

(3) Would not otherwise be a banking entity except by virtue of the acquisition or retention of an 

ownership interest in, sponsorship of, or relationship with the entity, by another banking entity 

that meets the following:

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

that is organized, under the laws of the United States or of any State; and
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(ii) The banking entity’s acquisition or retention of an ownership interest in or sponsorship of the 

fund meets the requirements for permitted covered fund activities and investments solely outside 

the United States, as provided in § 44.13(b);

(4) Is established and operated as part of a bona fide asset management business; and

(5) Is not operated in a manner that enables the banking entity that sponsors or controls the 

qualifying foreign excluded fund, or any of its affiliates, to evade the requirements of section 13 

of the BHC Act or this part.

Subpart C — Covered Funds Activities and Investments

3. Amend § 44.10 by:

a. Revising paragraph (c)(1);

b. Revising paragraph (c)(3)(i);

c. Revising paragraph (c)(8);

d. Revising paragraph (c)(10)(i);

e. Revising paragraph (c)(11)(i);

f. Adding paragraphs (c)(15), (16), (17), and (18); 

g. Revising paragraph (d)(6); and

h. Adding paragraph (d)(11).

The revisions and additions read as follows:

§ 44.10. Prohibition on acquiring or retaining an ownership interest in and having certain 

relationships with a covered fund.

* * * * *

(c) * * *
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(1) Foreign public funds. (i) Subject to paragraphs (c)(1)(ii) and (iii) of this section, an issuer 

that:

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

(B) Is authorized to offer and sell ownership interests, and such interests are offered and sold, 

through one or more public offerings. 

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

entity that is, located in or organized under the laws of the United States or of any State and any 

issuer for which such banking entity acts as sponsor, the sponsoring banking entity may not rely 

on the exemption in paragraph (c)(1)(i) of this section for such issuer unless more than 75 

percent of the ownership interests in the issuer are sold to persons other than:

(A) Such sponsoring banking entity;

(B) Such issuer; 

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

(D) Directors and senior executive officers as defined in § 225.71(c) of the Board’s Regulation Y 

(12 CFR 225.71(c)) of such entities.

(iii) For purposes of paragraph (c)(1)(i)(B) of this section, the term “public offering” means a 

distribution (as defined in § 44.4(a)(3)) of securities in any jurisdiction outside the United States 

to investors, including retail investors, provided that:

(A) The distribution is subject to substantive disclosure and retail investor protection laws or 

regulations;

(B) With respect to an issuer for which the banking entity serves as the investment manager, 

investment adviser, commodity trading advisor, commodity pool operator, or sponsor, the 
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distribution complies with all applicable requirements in the jurisdiction in which such 

distribution is being made;

(C) The distribution does not restrict availability to investors having a minimum level of net 

worth or net investment assets; and

(D) The issuer has filed or submitted, with the appropriate regulatory authority in such 

jurisdiction, offering disclosure documents that are publicly available.

* * * * *

(3) * * *

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

* * * * *

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

the conditions of this paragraph (c)(8) and the assets or holdings of which are composed solely 

of:

(A) Loans as defined in § 44.2(t);

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

holders of such securities and rights or other assets that are related or incidental to purchasing or 

otherwise acquiring and holding the loans, provided that each asset that is a security (other than 

special units of beneficial interest and collateral certificates meeting the requirements of 

paragraph (c)(8)(v) of this section) meets the requirements of paragraph (c)(8)(iii) of this section;

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

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

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

paragraph (c)(8)(v) of this section; and
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(E) Debt securities, other than asset-backed securities and convertible securities, provided that: 

(1) the aggregate value of such debt securities does not exceed five percent of the aggregate 

value of loans held under paragraph (c)(8)(i)(A) of this section, cash and cash equivalents held 

under paragraph (c)(8)(iii)(A), and debt securities held under this paragraph (c)(8)(i)(E); and

(2) the aggregate value of the loans, cash and cash equivalents, and debt securities for purposes 

of this paragraph is calculated at par value at the most recent time any such debt security is 

acquired, except that the issuing entity may instead determine the value of any such loan, cash 

equivalent, or debt security based on its fair market value if:

(i) the issuing entity is required to use the fair market value of such assets for purposes of 

calculating compliance with concentration limitations or other similar calculations under its 

transaction agreements, and 

(ii) the issuing entity’s valuation methodology values similarly situated assets consistently.

(ii) Impermissible assets. For purposes of this paragraph (c)(8), except as permitted under 

paragraph (c)(8)(i)(E) of this section, the assets or holdings of the issuing entity shall not include 

any of the following:

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

other than as permitted in paragraphs (c)(8)(iii), (iv), or (v) of this section;

(B) A derivative, other than a derivative that meets the requirements of paragraph (c)(8)(iv) of 

this section; or

(C) A commodity forward contract.

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

entity may hold securities, other than debt securities permitted under paragraph (c)(8)(i)(E), if 

those securities are:
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(A) Cash equivalents – which, for the purposes of this paragraph, means high quality, highly 

liquid investments whose maturity corresponds to the securitization’s expected or potential need 

for funds and whose currency corresponds to either the underlying loans or the asset-backed 

securities – for purposes of the rights and assets in paragraph (c)(8)(i)(B) of this section; or

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

the asset-backed securities.

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

or foreign exchange derivatives that satisfy all of the following conditions:

(A) The written terms of the derivatives directly relate to the loans, the asset-backed securities, 

the contractual rights or other assets described in paragraph (c)(8)(i)(B) of this section, or the 

debt securities described in paragraph (c)(8)(i)(E) of this section; and

(B) The derivatives reduce the interest rate and/or foreign exchange risks related to the loans, the 

asset-backed securities, the contractual rights or other assets described in paragraph (c)(8)(i)(B) 

of this section, or the debt securities described in paragraph (c)(8)(i)(E) of this section.

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

issuing entity may include collateral certificates and special units of beneficial interest issued by 

a special purpose vehicle, provided that:

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

certificate meets the requirements in this paragraph (c)(8);

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

transferring to the issuing entity for the loan securitization the economic risks and benefits of the 

assets that are permissible for loan securitizations under this paragraph (c)(8) and does not 

directly or indirectly transfer any interest in any other economic or financial exposure;
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(C) The special unit of beneficial interest or collateral certificate is created solely to satisfy legal 

requirements or otherwise facilitate the structuring of the loan securitization; and

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

certificate and the issuing entity are established under the direction of the same entity that 

initiated the loan securitization.

* * * * *

(10) Qualifying covered bonds—(i) Scope. An entity owning or holding a dynamic or fixed pool 

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

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

meet the conditions in paragraph (c)(8)(i) of this section.

* * * * *

(11) * * * 

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

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

Administration notice to proceed to qualify for a license as a small business investment 

company, which notice or license has not been revoked, or that has voluntarily surrendered its 

license to operate as a small business investment company in accordance with 13 CFR 107.1900 

and does not make any new investments (other than investments in cash equivalents, which, for 

the purposes of this paragraph, means high quality, highly liquid investments whose maturity 

corresponds to the issuer’s expected or potential need for funds and whose currency corresponds 

to the issuer’s assets) after such voluntary surrender; 

(ii) The business of which is to make investments that are:
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(A) Designed primarily to promote the public welfare, of the type permitted under paragraph 

(11) of section 5136 of the Revised Statutes of the United States (12 U.S.C. 24), including the 

welfare of low- and moderate-income communities or families (such as providing housing, 

services, or jobs) and including investments that qualify for consideration under the regulations 

implementing the Community Reinvestment Act (12 U.S.C. 2901 et seq.); or

(B) Qualified rehabilitation expenditures with respect to a qualified rehabilitated building or 

certified historic structure, as such terms are defined in section 47 of the Internal Revenue Code 

of 1986 or a similar State historic tax credit program;

(iii) That has elected to be regulated or is regulated as a rural business investment company, as 

described in 15 U.S.C. 80b-3(b)(8)(A) or (B), or that has terminated its participation as a rural 

business investment company in accordance with 7 CFR 4290.1900 and does not make any new 

investments (other than investments in cash equivalents, which, for the purposes of this 

paragraph, means high quality, highly liquid investments whose maturity corresponds to the 

issuer’s expected or potential need for funds and whose currency corresponds to the issuer’s 

assets) after such termination; or

(iv) That is a qualified opportunity fund, as defined in 26 U.S.C. 1400Z-2(d). 

* * * * *

(15) Credit funds. Subject to paragraphs (c)(15)(iii), (iv), and (v) of this section, an issuer that 

satisfies the asset and activity requirements of paragraphs (c)(15)(i) and (ii) of this section.

(i) Asset requirements. The issuer’s assets must be composed solely of:

(A) Loans as defined in § 44.2(t);

(B) Debt instruments, subject to paragraph (c)(15)(iv) of this section;
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(C) Rights and other assets that are related or incidental to acquiring, holding, servicing, or 

selling such loans or debt instruments, provided that:

(1) Each right or asset held under this paragraph (c)(15)(i)(C) that is a security is either: 

(i) A cash equivalent (which, for the purposes of this paragraph, means high quality, highly 

liquid investments whose maturity corresponds to the issuer’s expected or potential need for 

funds and whose currency corresponds to either the underlying loans or the debt instruments); 

(ii) A security received in lieu of debts previously contracted with respect to such loans or debt 

instruments; or 

(iii) An equity security (or right to acquire an equity security) received on customary terms in 

connection with such loans or debt instruments; and

(2) Rights or other assets held under this paragraph (c)(15)(i)(C) of this section may not include 

commodity forward contracts or any derivative; and

(D) Interest rate or foreign exchange derivatives, if:

(1) The written terms of the derivative directly relate to the loans, debt instruments, or other 

rights or assets described in paragraph (c)(15)(i)(C) of this section; and

(2) The derivative reduces the interest rate and/or foreign exchange risks related to the loans, 

debt instruments, or other rights or assets described in paragraph (c)(15)(i)(C) of this section.

(ii) Activity requirements. To be eligible for the exclusion of paragraph (c)(15) of this section, an 

issuer must:

(A) Not engage in any activity that would constitute proprietary trading under § 44.3(b)(l)(i), as 

if the issuer were a banking entity; and 

(B) Not issue asset-backed securities.
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(iii) Requirements for a sponsor, investment adviser, or commodity trading advisor. A banking 

entity that acts as a sponsor, investment adviser, or commodity trading advisor to an issuer that 

meets the conditions in paragraphs (c)(15)(i) and (ii) of this section may not rely on this 

exclusion unless the banking entity:

(A) Provides in writing to any prospective and actual investor in the issuer the disclosures 

required under § 44.11(a)(8) of this subpart, as if the issuer were a covered fund;

(B) Ensures that the activities of the issuer are consistent with safety and soundness standards 

that are substantially similar to those that would apply if the banking entity engaged in the 

activities directly; and

(C) Complies with the limitations imposed in § 44.14, as if the issuer were a covered fund, 

except the banking entity may acquire and retain any ownership interest in the issuer.

(iv) Additional Banking Entity Requirements. A banking entity may not rely on this exclusion 

with respect to an issuer that meets the conditions in paragraphs (c)(15)(i) and (ii) of this section 

unless:

(A) The banking entity does not, directly or indirectly, guarantee, assume, or otherwise insure the 

obligations or performance of the issuer or of any entity to which such issuer extends credit or in 

which such issuer invests; and

(B) Any assets the issuer holds pursuant to paragraphs (c)(15)(i)(B) or (i)(C)(1)(iii) of this 

section would be permissible for the banking entity to acquire and hold directly under applicable 

federal banking laws and regulations.

(v) Investment and Relationship Limits. A banking entity’s investment in, and relationship with, 

the issuer must:

(A) Comply with the limitations imposed in § 44.15, as if the issuer were a covered fund; and
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(B) Be conducted in compliance with, and subject to, applicable banking laws and regulations, 

including applicable safety and soundness standards.

(16) Qualifying venture capital funds. (i) Subject to paragraphs (c)(16)(ii) through (iv) of this 

section, an issuer that:

(A) Is a venture capital fund as defined in 17 CFR 275.203(l)-1; and

(B) Does not engage in any activity that would constitute proprietary trading under § 

44.3(b)(1)(i), as if the issuer were a banking entity.

(ii) A banking entity that acts as a sponsor, investment adviser, or commodity trading advisor to 

an issuer that meets the conditions in paragraph (c)(16)(i) of this section may not rely on this 

exclusion unless the banking entity:

(A) Provides in writing to any prospective and actual investor in the issuer the disclosures 

required under § 44.11(a)(8), as if the issuer were a covered fund;

(B) Ensures that the activities of the issuer are consistent with safety and soundness standards 

that are substantially similar to those that would apply if the banking entity engaged in the 

activities directly; and

(C) Complies with the restrictions in § 44.14 as if the issuer were a covered fund (except the 

banking entity may acquire and retain any ownership interest in the issuer).

(iii) The banking entity must not, directly or indirectly, guarantee, assume, or otherwise insure 

the obligations or performance of the issuer.

(iv) A banking entity’s ownership interest in or relationship with the issuer must:

(A) Comply with the limitations imposed in § 44.15, as if the issuer were a covered fund; and

(B) Be conducted in compliance with, and subject to, applicable banking laws and regulations, 

including applicable safety and soundness standards.
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(17) Family wealth management vehicles. (i) Subject to paragraph (c)(17)(ii) of this section, any 

entity that is not, and does not hold itself out as being, an entity or arrangement that raises money 

from investors primarily for the purpose of investing in securities for resale or other disposition 

or otherwise trading in securities, and: 

(A) If the entity is a trust, the grantor(s) of the entity are all family customers; and

(B) If the entity is not a trust:

(1) A majority of the voting interests in the entity are owned (directly or indirectly) by family 

customers; 

(2) A majority of the interests in the entity are owned (directly or indirectly) by family 

customers;

(3) The entity is owned only by family customers and up to 5 closely related persons of the 

family customers; and

(C) Notwithstanding paragraph (c)(17)(i)(A) and (B) of this section, up to an aggregate 0.5 

percent of the entity’s outstanding ownership interests may be acquired or retained by one or 

more entities that are not family customers or closely related persons if the ownership interest is 

acquired or retained by such parties for the purpose of and to the extent necessary for 

establishing corporate separateness or addressing bankruptcy, insolvency, or similar concerns. 

(ii) A banking entity may rely on the exclusion in paragraph (c)(17)(i) of this section with respect 

to an entity provided that the banking entity (or an affiliate):

(A) Provides bona fide trust, fiduciary, investment advisory, or commodity trading advisory 

services to the entity; 

(B) Does not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or 

performance of such entity; 
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(C) Complies with the disclosure obligations under § 44.11(a)(8), as if such entity were a 

covered fund, provided that the content may be modified to prevent the disclosure from being 

misleading and the manner of disclosure may be modified to accommodate the specific 

circumstances of the entity; 

(D) Does not acquire or retain, as principal, an ownership interest in the entity, other than as 

described in paragraph (c)(17)(i)(C) of this section; 

(E) Complies with the requirements of §§ 44.14(b) and 44.15, as if such entity were a covered 

fund; and

(F) Except for riskless principal transactions as defined in paragraph (d)(11) of this section, 

complies with the requirements of 12 CFR 223.15(a), as if such banking entity and its affiliates 

were a member bank and the entity were an affiliate thereof. 

(iii) For purposes of paragraph (c)(17) of this section, the following definitions apply:

(A) “Closely related person” means a natural person (including the estate and estate planning 

vehicles of such person) who has longstanding business or personal relationships with any family 

customer.

(B) “Family customer” means:

(1) A family client, as defined in Rule 202(a)(11)(G)-1(d)(4) of the Investment Advisers Act of 

1940 (17 CFR 275.202(a)(11)(G)-1(d)(4)); or

(2) Any natural person who is a father-in-law, mother-in-law, brother-in-law, sister-in-law, sonin-law or daughter-in-law of a family client, or a spouse or a spousal equivalent of any of the 

foregoing.

(18) Customer facilitation vehicles. (i) Subject to paragraph (c)(18)(ii) of this section, an issuer 

that is formed by or at the request of a customer of the banking entity for the purpose of 
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providing such customer (which may include one or more affiliates of such customer) with 

exposure to a transaction, investment strategy, or other service provided by the banking entity.

(ii) A banking entity may rely on the exclusion in paragraph (c)(18)(i) of this section with respect 

to an issuer provided that:

(A) All of the ownership interests of the issuer are owned by the customer (which may include 

one or more of its affiliates) for whom the issuer was created; 

(B) Notwithstanding paragraph (c)(18)(ii)(A) of this section, up to an aggregate 0.5 percent of 

the issuer’s outstanding ownership interests may be acquired or retained by one or more entities 

that are not customers if the ownership interest is acquired or retained by such parties for the 

purpose of and to the extent necessary for establishing corporate separateness or addressing 

bankruptcy, insolvency, or similar concerns; and

(C) The banking entity and its affiliates:

(1) Maintain documentation outlining how the banking entity intends to facilitate the customer’s 

exposure to such transaction, investment strategy, or service;

(2) Do not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or 

performance of such issuer; 

(3) Comply with the disclosure obligations under § 44.11(a)(8), as if such issuer were a covered 

fund, provided that the content may be modified to prevent the disclosure from being misleading 

and the manner of disclosure may be modified to accommodate the specific circumstances of the 

issuer; 

(4) Do not acquire or retain, as principal, an ownership interest in the issuer, other than as 

described in paragraph (c)(18)(ii)(B) of this section; 
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(5) Comply with the requirements of §§ 44.14(b) and 44.15, as if such issuer were a covered 

fund; and

(6) Except for riskless principal transactions as defined in paragraph (d)(11) of this section, 

comply with the requirements of 12 CFR 223.15(a), as if such banking entity and its affiliates 

were a member bank and the issuer were an affiliate thereof.

* * * * *

(d) * * *

(6) Ownership interest—(i) Ownership interest means any equity, partnership, or other similar 

interest. An “other similar interest” means an interest that: 

(A) Has the right to participate in the selection or removal of a general partner, managing 

member, member of the board of directors or trustees, investment manager, investment adviser, 

or commodity trading advisor of the covered fund, excluding:

(1) the rights of a creditor to exercise remedies upon the occurrence of an event of default or an 

acceleration event; and

(2) the right to participate in the removal of an investment manager for “cause” or participate in 

the selection of a replacement manager upon an investment manager's resignation or removal.

For purposes of this paragraph (d)(6)(i)(A)(2), “cause” for removal of an investment manager 

means one or more of the following events:

(i) the bankruptcy, insolvency, conservatorship or receivership of the investment manager;

(ii) the breach by the investment manager of any material provision of the covered fund’s 

transaction agreements applicable to the investment manager;

(iii) the breach by the investment manager of material representations or warranties;
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(iv) the occurrence of an act that constitutes fraud or criminal activity in the performance of the 

investment manager’s obligations under the covered fund’s transaction agreements;

(v) the indictment of the investment manager for a criminal offense, or the indictment of any 

officer, member, partner or other principal of the investment manager for a criminal offense 

materially related to his or her investment management activities;

(vi) a change in control with respect to the investment manager;

(vii) the loss, separation or incapacitation of an individual critical to the operation of the 

investment manager or primarily responsible for the management of the covered fund’s assets; or

(viii) other similar events that constitute “cause” for removal of an investment manager, provided 

that such events are not solely related to the performance of the covered fund or the investment 

manager’s exercise of investment discretion under the covered fund’s transaction agreements;

(B) Has the right under the terms of the interest to receive a share of the income, gains or profits 

of the covered fund;

(C) Has the right to receive the underlying assets of the covered fund after all other interests have 

been redeemed and/or paid in full (excluding the rights of a creditor to exercise remedies upon 

the occurrence of an event of default or an acceleration event);

(D) Has the right to receive all or a portion of excess spread (the positive difference, if any, 

between the aggregate interest payments received from the underlying assets of the covered fund 

and the aggregate interest paid to the holders of other outstanding interests);

(E) Provides under the terms of the interest that the amounts payable by the covered fund with 

respect to the interest could be reduced based on losses arising from the underlying assets of the 

covered fund, such as allocation of losses, write-downs or charge-offs of the outstanding 

principal balance, or reductions in the amount of interest due and payable on the interest;
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(F) Receives income on a pass-through basis from the covered fund, or has a rate of return that is 

determined by reference to the performance of the underlying assets of the covered fund; or

(G) Any synthetic right to have, receive, or be allocated any of the rights in paragraphs 

(d)(6)(i)(A) through (F) of this section.

(ii) Ownership interest does not include: 

(A) Restricted profit interest, which is an interest held by an entity (or an employee or former 

employee thereof) in a covered fund for which the entity (or employee thereof) serves as 

investment manager, investment adviser, commodity trading advisor, or other service provider, 

so long as:

(1) The sole purpose and effect of the interest is to allow the entity (or employee or former 

employee thereof) to share in the profits of the covered fund as performance compensation for 

the investment management, investment advisory, commodity trading advisory, or other services 

provided to the covered fund by the entity (or employee or former employee thereof), provided 

that the entity (or employee or former employee thereof) may be obligated under the terms of 

such interest to return profits previously received;

(2) All such profit, once allocated, is distributed to the entity (or employee or former employee 

thereof) promptly after being earned or, if not so distributed, is retained by the covered fund for 

the sole purpose of establishing a reserve amount to satisfy contractual obligations with respect 

to subsequent losses of the covered fund and such undistributed profit of the entity (or employee 

or former employee thereof) does not share in the subsequent investment gains of the covered 

fund;
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(3) Any amounts invested in the covered fund, including any amounts paid by the entity in 

connection with obtaining the restricted profit interest, are within the limits of § 44.12 of this 

subpart; and

(4) The interest is not transferable by the entity (or employee or former employee thereof) except 

to an affiliate thereof (or an employee of the banking entity or affiliate), to immediate family 

members, or through the intestacy, of the employee or former employee, or in connection with a 

sale of the business that gave rise to the restricted profit interest by the entity (or employee or 

former employee thereof) to an unaffiliated party that provides investment management, 

investment advisory, commodity trading advisory, or other services to the fund. 

(B) Any senior loan or senior debt interest that has the following characteristics:

(1) Under the terms of the interest the holders of such interest do not have the right to receive a 

share of the income, gains, or profits of the covered fund, but are entitled to receive only: 

(i) Interest at a stated interest rate, as well as commitment fees or other fees, which are not 

determined by reference to the performance of the underlying assets of the covered fund; and 

(ii) Repayment of a fixed principal amount, on or before a maturity date, in a contractuallydetermined manner (which may include prepayment premiums intended solely to reflect, and 

compensate holders of the interest for, forgone income resulting from an early prepayment);

(2) The entitlement to payments under the terms of the interest are absolute and could not be 

reduced based on losses arising from the underlying assets of the covered fund, such as 

allocation of losses, write-downs or charge-offs of the outstanding principal balance, or 

reductions in the amount of interest due and payable on the interest; and
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(3) The holders of the interest are not entitled to receive the underlying assets of the covered 

fund after all other interests have been redeemed or paid in full (excluding the rights of a creditor 

to exercise remedies upon the occurrence of an event of default or an acceleration event).

* * * * *

(d) * * *

(11) Riskless principal transaction. Riskless principal transaction means a transaction in which a 

banking entity, after receiving an order from a customer to buy (or sell) a security, purchases (or 

sells) the security in the secondary market for its own account to offset a contemporaneous sale 

to (or purchase from) the customer.

4. Amend § 44.12 by:

a. Revising paragraph (b)(1)(ii);

b. Revising paragraph (b)(4);

c. Adding paragraph (b)(5);

d. Revising paragraph (c)(1); and

e. Revising paragraphs (d) and (e).

The revisions and addition read as follows:

§ 44.12. Permitted investment in a covered fund.

* * * * *

(b) * * * 

(1) * * *

(ii) Treatment of registered investment companies, SEC-regulated business development 

companies, and foreign public funds. For purposes of paragraph (b)(1)(i) of this section, a 

registered investment company, SEC-regulated business development companies, or foreign 
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public fund as described in § 44.10(c)(1) will not be considered to be an affiliate of the banking 

entity so long as:

(A) The banking entity, together with its affiliates, does not own, control, or hold with the power 

to vote 25 percent or more of the voting shares of the company or fund; and

(B) The banking entity, or an affiliate of the banking entity, provides investment advisory, 

commodity trading advisory, administrative, and other services to the company or fund in 

compliance with the limitations under applicable regulation, order, or other authority.

* * * * *

(4) Multi-tier fund investments—(i) Master-feeder fund investments. If the principal investment 

strategy of a covered fund (the “feeder fund”) is to invest substantially all of its assets in another 

single covered fund (the “master fund”), then for purposes of the investment limitations in 

paragraphs (a)(2)(i)(B) and (a)(2)(ii) of this section, the banking entity’s permitted investment in 

such funds shall be measured only by reference to the value of the master fund. The banking 

entity’s permitted investment in the master fund shall include any investment by the banking 

entity in the master fund, as well as the banking entity’s pro-rata share of any ownership interest 

in the master fund that is held through the feeder fund; and

(ii) Fund-of-funds investments. If a banking entity organizes and offers a covered fund pursuant 

to § 44.11 for the purpose of investing in other covered funds (a “fund of funds”) and that fund 

of funds itself invests in another covered fund that the banking entity is permitted to own, then 

the banking entity’s permitted investment in that other fund shall include any investment by the 

banking entity in that other fund, as well as the banking entity’s pro-rata share of any ownership 

interest in the fund that is held through the fund of funds. The investment of the banking entity 

may not represent more than 3 percent of the amount or value of any single covered fund.
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(5) Parallel Investments and Co-Investments—(i) A banking entity shall not be required to 

include in the calculation of the investment limits under paragraph (a)(2) of this section any 

investment the banking entity makes alongside a covered fund as long as the investment is made 

in compliance with applicable laws and regulations, including applicable safety and soundness 

standards.

(ii) A banking entity shall not be restricted under this section in the amount of any investment the 

banking entity makes alongside a covered fund as long as the investment is made in compliance 

with applicable laws and regulations, including applicable safety and soundness standards.

(c) * * *

(1)(i) For purposes of paragraph (a)(2)(iii) of this section, the aggregate value of all ownership 

interests held by a banking entity shall be the sum of all amounts paid or contributed by the 

banking entity in connection with acquiring or retaining an ownership interest in covered funds 

(together with any amounts paid by the entity in connection with obtaining a restricted profit 

interest under § 44.10(d)(6)(ii)), on a historical cost basis;

(ii) Treatment of employee and director restricted profit interests financed by the banking entity. 

For purposes of paragraph (c)(1)(i) of this section, an investment by a director or employee of a 

banking entity who acquires a restricted profit interest in his or her personal capacity in a 

covered fund sponsored by the banking entity will be attributed to the banking entity if the 

banking entity, directly or indirectly, extends financing for the purpose of enabling the director 

or employee to acquire the restricted profit interest in the fund and the financing is used to 

acquire such ownership interest in the covered fund.

* * * * *
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(d) Capital treatment for a permitted investment in a covered fund. For purposes of calculating 

compliance with the applicable regulatory capital requirements, a banking entity shall deduct 

from the banking entity’s tier 1 capital (as determined under paragraph (c)(2) of this section) the 

greater of:

(1)(i) The sum of all amounts paid or contributed by the banking entity in connection with 

acquiring or retaining an ownership interest (together with any amounts paid by the entity in 

connection with obtaining a restricted profit interest under § 44.10(d)(6)(ii) of subpart C of this 

part), on a historical cost basis, plus any earnings received; and

(ii) The fair market value of the banking entity’s ownership interests in the covered fund as 

determined under paragraph (b)(2)(ii) or (b)(3) of this section (together with any amounts paid 

by the entity in connection with obtaining a restricted profit interest under § 44.10(d)(6)(ii) of 

subpart C of this part), if the banking entity accounts for the profits (or losses) of the fund 

investment in its financial statements.

(2) Treatment of employee and director restricted profit interests financed by the banking entity. 

For purposes of paragraph (d)(1) of this section, an investment by a director or employee of a 

banking entity who acquires a restricted profit interest in his or her personal capacity in a 

covered fund sponsored by the banking entity will be attributed to the banking entity if the 

banking entity, directly or indirectly, extends financing for the purpose of enabling the director 

or employee to acquire the restricted profit interest in the fund and the financing is used to 

acquire such ownership interest in the covered fund.

(e) Extension of time to divest an ownership interest. (1) Extension Period. Upon application by 

a banking entity, the Board may extend the period under paragraph (a)(2)(i) of this section for up 
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to 2 additional years if the Board finds that an extension would be consistent with safety and 

soundness and not detrimental to the public interest. 

(2) Application Requirements. An application for extension must:

(i) Be submitted to the Board at least 90 days prior to the expiration of the applicable time 

period;

(ii) Provide the reasons for application, including information that addresses the factors in 

paragraph (e)(3) of this section; and

(iii) Explain the banking entity’s plan for reducing the permitted investment in a covered fund 

through redemption, sale, dilution or other methods as required in paragraph (a)(2) of this 

section.

(3) Factors governing the Board determinations. In reviewing any application under paragraph 

(e)(1) of this section, the Board may consider all the facts and circumstances related to the 

permitted investment in a covered fund, including:

(i) Whether the investment would result, directly or indirectly, in a material exposure by the 

banking entity to high-risk assets or high-risk trading strategies;

(ii) The contractual terms governing the banking entity’s interest in the covered fund;

(iii) The date on which the covered fund is expected to have attracted sufficient investments from 

investors unaffiliated with the banking entity to enable the banking entity to comply with the 

limitations in paragraph (a)(2)(i) of this section;

(iv) The total exposure of the covered banking entity to the investment and the risks that 

disposing of, or maintaining, the investment in the covered fund may pose to the banking entity 

and the financial stability of the United States;
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(v) The cost to the banking entity of divesting or disposing of the investment within the 

applicable period;

(vi) Whether the investment or the divestiture or conformance of the investment would involve 

or result in a material conflict of interest between the banking entity and unaffiliated parties, 

including clients, customers, or counterparties to which it owes a duty;

(vii) The banking entity’s prior efforts to reduce through redemption, sale, dilution, or other 

methods its ownership interests in the covered fund, including activities related to the marketing 

of interests in such covered fund;

(viii) Market conditions; and

(ix) Any other factor that the Board believes appropriate.

(4) Authority to impose restrictions on activities or investment during any extension period. The 

Board may impose such conditions on any extension approved under paragraph (e)(1) of this 

section as the Board determines are necessary or appropriate to protect the safety and soundness 

of the banking entity or the financial stability of the United States, address material conflicts of 

interest or other unsound banking practices, or otherwise further the purposes of section 13 of the 

BHC Act and this part.

(5) Consultation. In the case of a banking entity that is primarily regulated by another Federal 

banking agency, the SEC, or the CFTC, the Board will consult with such agency prior to acting 

on an application by the banking entity for an extension under paragraph (e)(1) of this section.

5. Amend § 44.13 by adding paragraph (d) to read as follows:

§ 44.13. Other permitted covered fund activities and investments.

* * * * *
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(d) Permitted covered fund activities and investments of qualifying foreign excluded funds. (1) 

The prohibition contained in § 44.10(a) does not apply to a qualifying foreign excluded fund. 

(2) For purposes of this paragraph (d), a qualifying foreign excluded fund means a banking entity 

that: 

(i) Is organized or established outside the United States, and the ownership interests of which are 

offered and sold solely outside the United States;

(ii)(A) Would be a covered fund if the entity were organized or established in the United States, or 

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

primarily for the purpose of investing in financial instruments for resale or other disposition or 

otherwise trading in financial instruments;

(iii) Would not otherwise be a banking entity except by virtue of the acquisition or retention of 

an ownership interest in, sponsorship of, or relationship with the entity, by another banking 

entity that meets the following:

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

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

(B) The banking entity’s acquisition of an ownership interest in or sponsorship of the fund by the 

foreign banking entity meets the requirements for permitted covered fund activities and 

investments solely outside the United States, as provided in § 44.13(b);

(iv) Is established and operated as part of a bona fide asset management business; and

(v) Is not operated in a manner that enables the banking entity that sponsors or controls the 

qualifying foreign excluded fund, or any of its affiliates, to evade the requirements of section 13 

of the BHC Act or this part.

6. Amend § 44.14 by:
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a. Revising paragraph (a)(2)(i);

b. Revising paragraph (a)(2)(ii)(C);

c. Adding paragraphs (a)(2)(iii), (a)(2)(iv); and (a)(3); and

d. Revising paragraph (c).

The revisions and additions read as follows:

§ 44.14. Limitations on relationships with a covered fund.

(a) * * *

(2) * * *

(i) Acquire and retain any ownership interest in a covered fund in accordance with the 

requirements of §§ 44.11, 44.12, or 44.13;

(ii) * * *

(C) The Board has not determined that such transaction is inconsistent with the safe and sound 

operation and condition of the banking entity; and

(iii) Enter into a transaction with a covered fund that would be an exempt covered transaction 

under 12 U.S.C. 371c(d) or § 223.42 of the Board’s Regulation W (12 CFR 223.42) subject to 

the limitations specified under 12 U.S.C. 371c(d) or § 223.42 of the Board’s Regulation W (12 

CFR 223.42), as applicable, 

(iv) Enter into a riskless principal transaction with a covered fund; and

(v) Extend credit to or purchase assets from a covered fund, provided:

(A) Each extension of credit or purchase of assets is in the ordinary course of business in 

connection with payment transactions; settlement services; or futures, derivatives, and securities 

clearing; 

(B) Each extension of credit is repaid, sold, or terminated by the end of five business days; and
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(C) The banking entity making each extension of credit meets the requirements of § 

223.42(l)(1)(i) and (ii) of the Board’s Regulation W (12 CFR 223.42(l)(1)(i) and(ii)), as if the 

extension of credit was an intraday extension of credit, regardless of the duration of the extension 

of credit.

(3) Any transaction or activity permitted under paragraphs (a)(2)(iii), (iv) or (v) must comply 

with the limitations in § 44.15.

* * * * *

(c) Restrictions on other permitted transactions. Any transaction permitted under paragraphs 

(a)(2)(ii), (a)(2)(iii), or (a)(2)(iv) of this section shall be subject to section 23B of the Federal 

Reserve Act (12 U.S.C. 371c-1) as if the counterparty were an affiliate of the banking entity 

under section 23B.

Subpart D — Compliance Program Requirements; Violations

7. Amend § 44.20 by:

a. Revising paragraph (a);

b. Revising paragraph (d); and 

c. Revising paragraph (e).

The revisions and addition read as follows:

§ 44.20. Program for compliance; reporting.

(a) Program requirement. Each banking entity (other than a banking entity with limited trading 

assets and liabilities or a qualifying foreign excluded fund under section 44.6(f) or 44.13(d)) 

shall develop and provide for the continued administration of a compliance program reasonably 

designed to ensure and monitor compliance with the prohibitions and restrictions on proprietary 

trading and covered fund activities and investments set forth in section 13 of the BHC Act and 
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this part. The terms, scope, and detail of the compliance program shall be appropriate for the 

types, size, scope, and complexity of activities and business structure of the banking entity.

* * * * *

(d) Reporting requirements under appendix A to this part. (1) A banking entity (other than a 

qualifying foreign excluded fund under section 44.6(f) or 44.13(d)) engaged in proprietary 

trading activity permitted under subpart B shall comply with the reporting requirements 

described in appendix A to this part, if:

* * * * *

(e) Additional documentation for covered funds. A banking entity with significant trading assets 

and liabilities (other than a qualifying foreign excluded fund under section 44.6(f) or 44.13(d)) 

shall maintain records that include: 

* * * * *

BOARD OF GOVERNORS OF THE FEDERAL RESERVE

12 CFR Chapter II

Authority and Issuance

For the reasons stated in the Common Preamble, the Board proposes to amend chapter II

of Title 12, Code of Federal Regulations as follows:

PART 248—PROPRIETARY TRADING AND CERTAIN INTERESTS IN AND 

RELATIONSHIPS WITH COVERED FUNDS (Regulation VV)

8. The authority citation for part 248 continues to read as follows: 

Authority: 12 U.S.C. 1851, 12 U.S.C. 221 et seq., 12 U.S.C. 1818, 12 U.S.C. 1841 et seq., and 

12 U.S.C. 3103 et seq.
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Subpart B — Proprietary Trading

9. Amend § 248.6 by adding paragraph (f) to read as follows:

§ 248.6. Other permitted proprietary trading activities.

* * * * *

(f) Permitted trading activities of qualifying foreign excluded funds. The prohibition contained 

in § 248.3(a) does not apply to the purchase or sale of a financial instrument by a qualifying 

foreign excluded fund. For purposes of this paragraph (f), a qualifying foreign excluded fund 

means a banking entity that: 

(1) Is organized or established outside the United States, and the ownership interests of which are 

offered and sold solely outside the United States;

(2)(i) Would be a covered fund if the entity were organized or established in the United States, or 

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

primarily for the purpose of investing in financial instruments for resale or other disposition or 

otherwise trading in financial instruments;

(3) Would not otherwise be a banking entity except by virtue of the acquisition or retention of an 

ownership interest in, sponsorship of, or relationship with the entity, by another banking entity 

that meets the following:

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

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

(ii) The banking entity’s acquisition or retention of an ownership interest in or sponsorship of the 

fund meets the requirements for permitted covered fund activities and investments solely outside 

the United States, as provided in § 248.13(b);

(4) Is established and operated as part of a bona fide asset management business; and
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(5) Is not operated in a manner that enables the banking entity that sponsors or controls the 

qualifying foreign excluded fund, or any of its affiliates, to evade the requirements of section 13 

of the BHC Act or this part.

Subpart C — Covered Funds Activities and Investments

10. Amend § 248.10 by:

a. Revising paragraph (c)(1);

b. Revising paragraph (c)(3)(i);

c. Revising paragraph (c)(8);

d. Revising paragraph (c)(10)(i);

e. Revising paragraph (c)(11)(i);

f. Adding paragraphs (c)(15), (16), (17), and (18); 

g. Revising paragraph (d)(6); and

h. Adding paragraph (d)(11).

The revisions and additions read as follows:

§ 248.10. Prohibition on acquiring or retaining an ownership interest in and having certain 

relationships with a covered fund.

* * * * *

(c) * * *

(1) Foreign public funds. (i) Subject to paragraphs (c)(1)(ii) and (iii) of this section, an issuer 

that:

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

(B) Is authorized to offer and sell ownership interests, and such interests are offered and sold, 

through one or more public offerings. 
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(ii) With respect to a banking entity that is, or is controlled directly or indirectly by a banking 

entity that is, located in or organized under the laws of the United States or of any State and any 

issuer for which such banking entity acts as sponsor, the sponsoring banking entity may not rely 

on the exemption in paragraph (c)(1)(i) of this section for such issuer unless more than 75 

percent of the ownership interests in the issuer are sold to persons other than:

(A) Such sponsoring banking entity;

(B) Such issuer; 

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

(D) Directors and senior executive officers as defined in § 225.71(c) of the Board’s Regulation Y 

(12 CFR 225.71(c)) of such entities.

(iii) For purposes of paragraph (c)(1)(i)(B) of this section, the term “public offering” means a 

distribution (as defined in § 248.4(a)(3)) of securities in any jurisdiction outside the United 

States to investors, including retail investors, provided that:

(A) The distribution is subject to substantive disclosure and retail investor protection laws or 

regulations;

(B) With respect to an issuer for which the banking entity serves as the investment manager, 

investment adviser, commodity trading advisor, commodity pool operator, or sponsor, the 

distribution complies with all applicable requirements in the jurisdiction in which such 

distribution is being made;

(C) The distribution does not restrict availability to investors having a minimum level of net 

worth or net investment assets; and

(D) The issuer has filed or submitted, with the appropriate regulatory authority in such 

jurisdiction, offering disclosure documents that are publicly available.
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* * * * *

(3) * * *

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

* * * * *

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

the conditions of this paragraph (c)(8) and the assets or holdings of which are composed solely 

of:

(A) Loans as defined in § 248.2(t);

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

holders of such securities and rights or other assets that are related or incidental to purchasing or 

otherwise acquiring and holding the loans, provided that each asset that is a security (other than 

special units of beneficial interest and collateral certificates meeting the requirements of 

paragraph (c)(8)(v) of this section) meets the requirements of paragraph (c)(8)(iii) of this section;

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

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

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

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

(E) Debt securities, other than asset-backed securities and convertible securities, provided that: 

(1) the aggregate value of such debt securities does not exceed five percent of the aggregate 

value of loans held under paragraph (c)(8)(i)(A) of this section, cash and cash equivalents held 

under paragraph (c)(8)(iii)(A), and debt securities held under this paragraph (c)(8)(i)(E); and

(2) the aggregate value of the loans, cash and cash equivalents, and debt securities for purposes 

of this paragraph is calculated at par value at the most recent time any such debt security is 
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acquired, except that the issuing entity may instead determine the value of any such loan, cash 

equivalent, or debt security based on its fair market value if:

(i) the issuing entity is required to use the fair market value of such assets for purposes of 

calculating compliance with concentration limitations or other similar calculations under its 

transaction agreements, and 

(ii) the issuing entity’s valuation methodology values similarly situated assets consistently.

(ii) Impermissible assets. For purposes of this paragraph (c)(8), except as permitted under 

paragraph (c)(8)(i)(E) of this section, the assets or holdings of the issuing entity shall not include 

any of the following:

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

other than as permitted in paragraphs (c)(8)(iii), (iv), or (v) of this section;

(B) A derivative, other than a derivative that meets the requirements of paragraph (c)(8)(iv) of 

this section; or

(C) A commodity forward contract.

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

entity may hold securities, other than debt securities permitted under paragraph (c)(8)(i)(E), if 

those securities are:

(A) Cash equivalents – which, for the purposes of this paragraph, means high quality, highly 

liquid investments whose maturity corresponds to the securitization’s expected or potential need 

for funds and whose currency corresponds to either the underlying loans or the asset-backed 

securities – for purposes of the rights and assets in paragraph (c)(8)(i)(B) of this section; or

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

the asset-backed securities.
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(iv) Derivatives. The holdings of derivatives by the issuing entity shall be limited to interest rate 

or foreign exchange derivatives that satisfy all of the following conditions:

(A) The written terms of the derivatives directly relate to the loans, the asset-backed securities, 

the contractual rights or other assets described in paragraph (c)(8)(i)(B) of this section, or the 

debt securities described in paragraph (c)(8)(i)(E) of this section; and

(B) The derivatives reduce the interest rate and/or foreign exchange risks related to the loans, the 

asset-backed securities, the contractual rights or other assets described in paragraph (c)(8)(i)(B) 

of this section, or the debt securities described in paragraph (c)(8)(i)(E) of this section.

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

issuing entity may include collateral certificates and special units of beneficial interest issued by 

a special purpose vehicle, provided that:

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

certificate meets the requirements in this paragraph (c)(8);

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

transferring to the issuing entity for the loan securitization the economic risks and benefits of the 

assets that are permissible for loan securitizations under this paragraph (c)(8) and does not 

directly or indirectly transfer any interest in any other economic or financial exposure;

(C) The special unit of beneficial interest or collateral certificate is created solely to satisfy legal 

requirements or otherwise facilitate the structuring of the loan securitization; and

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

certificate and the issuing entity are established under the direction of the same entity that 

initiated the loan securitization.

* * * * *
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(10) Qualifying covered bonds—(i) Scope. An entity owning or holding a dynamic or fixed pool 

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

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

meet the conditions in paragraph (c)(8)(i) of this section.

* * * * *

(11) * * * 

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

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

Administration notice to proceed to qualify for a license as a small business investment 

company, which notice or license has not been revoked, or that has voluntarily surrendered its 

license to operate as a small business investment company in accordance with 13 CFR 107.1900 

and does not make any new investments (other than investments in cash equivalents, which, for 

the purposes of this paragraph, means high quality, highly liquid investments whose maturity 

corresponds to the issuer’s expected or potential need for funds and whose currency corresponds 

to the issuer’s assets) after such voluntary surrender; 

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

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

(11) of section 5136 of the Revised Statutes of the United States (12 U.S.C. 24), including the 

welfare of low- and moderate-income communities or families (such as providing housing, 

services, or jobs) and including investments that qualify for consideration under the regulations 

implementing the Community Reinvestment Act (12 U.S.C. 2901 et seq.); or
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(B) Qualified rehabilitation expenditures with respect to a qualified rehabilitated building or 

certified historic structure, as such terms are defined in section 47 of the Internal Revenue Code 

of 1986 or a similar State historic tax credit program;

(iii) That has elected to be regulated or is regulated as a rural business investment company, as 

described in 15 U.S.C. 80b-3(b)(8)(A) or (B), or that has terminated its participation as a rural 

business investment company in accordance with 7 CFR 4290.1900 and does not make any new 

investments (other than investments in cash equivalents, which, for the purposes of this 

paragraph, means high quality, highly liquid investments whose maturity corresponds to the 

issuer’s expected or potential need for funds and whose currency corresponds to the issuer’s 

assets) after such termination; or

(iv) That is a qualified opportunity fund, as defined in 26 U.S.C. 1400Z-2(d). 

* * * * *

(15) Credit funds. Subject to paragraphs (c)(15)(iii), (iv), and (v) of this section, an issuer that 

satisfies the asset and activity requirements of paragraphs (c)(15)(i) and (ii) of this section.

(i) Asset requirements. The issuer’s assets must be composed solely of:

(A) Loans as defined in § 248.2(t);

(B) Debt instruments, subject to paragraph (c)(15)(iv) of this section;

(C) Rights and other assets that are related or incidental to acquiring, holding, servicing, or 

selling such loans or debt instruments, provided that:

(1) Each right or asset held under this paragraph (c)(15)(i)(C) that is a security is either: 

(i) A cash equivalent (which, for the purposes of this paragraph, means high quality, highly 

liquid investments whose maturity corresponds to the issuer’s expected or potential need for 

funds and whose currency corresponds to either the underlying loans or the debt instruments); 
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(ii) A security received in lieu of debts previously contracted with respect to such loans or debt 

instruments; or 

(iii) An equity security (or right to acquire an equity security) received on customary terms in 

connection with such loans or debt instruments; and

(2) Rights or other assets held under this paragraph (c)(15)(i)(C) of this section may not include 

commodity forward contracts or any derivative; and

(D) Interest rate or foreign exchange derivatives, if:

(1) The written terms of the derivative directly relate to the loans, debt instruments, or other 

rights or assets described in paragraph (c)(15)(i)(C) of this section; and

(2) The derivative reduces the interest rate and/or foreign exchange risks related to the loans, 

debt instruments, or other rights or assets described in paragraph (c)(15)(i)(C) of this section.

(ii) Activity requirements. To be eligible for the exclusion of paragraph (c)(15) of this section, an 

issuer must:

(A) Not engage in any activity that would constitute proprietary trading under § 248.3(b)(l)(i), as 

if the issuer were a banking entity; and 

(B) Not issue asset-backed securities.

(iii) Requirements for a sponsor, investment adviser, or commodity trading advisor. A banking 

entity that acts as a sponsor, investment adviser, or commodity trading advisor to an issuer that 

meets the conditions in paragraphs (c)(15)(i) and (ii) of this section may not rely on this 

exclusion unless the banking entity:

(A) Provides in writing to any prospective and actual investor in the issuer the disclosures 

required under § 248.11(a)(8) of this subpart, as if the issuer were a covered fund;
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(B) Ensures that the activities of the issuer are consistent with safety and soundness standards 

that are substantially similar to those that would apply if the banking entity engaged in the 

activities directly; and

(C) Complies with the limitations imposed in § 248.14, as if the issuer were a covered fund, 

except the banking entity may acquire and retain any ownership interest in the issuer.

(iv) Additional Banking Entity Requirements. A banking entity may not rely on this exclusion 

with respect to an issuer that meets the conditions in paragraphs (c)(15)(i) and (ii) of this section 

unless:

(A) The banking entity does not, directly or indirectly, guarantee, assume, or otherwise insure the 

obligations or performance of the issuer or of any entity to which such issuer extends credit or in 

which such issuer invests; and

(B) Any assets the issuer holds pursuant to paragraphs (c)(15)(i)(B) or (i)(C)(1)(iii) of this 

section would be permissible for the banking entity to acquire and hold directly under applicable 

federal banking laws and regulations.

(v) Investment and Relationship Limits. A banking entity’s investment in, and relationship with, 

the issuer must:

(A) Comply with the limitations imposed in § 248.15, as if the issuer were a covered fund; and

(B) Be conducted in compliance with, and subject to, applicable banking laws and regulations, 

including applicable safety and soundness standards.

(16) Qualifying venture capital funds. (i) Subject to paragraphs (c)(16)(ii) through (iv) of this 

section, an issuer that:

(A) Is a venture capital fund as defined in 17 CFR 275.203(l)-1; and
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(B) Does not engage in any activity that would constitute proprietary trading under § 

248.3(b)(1)(i), as if the issuer were a banking entity.

(ii) A banking entity that acts as a sponsor, investment adviser, or commodity trading advisor to 

an issuer that meets the conditions in paragraph (c)(16)(i) of this section may not rely on this 

exclusion unless the banking entity:

(A) Provides in writing to any prospective and actual investor in the issuer the disclosures 

required under § 248.11(a)(8), as if the issuer were a covered fund;

(B) Ensures that the activities of the issuer are consistent with safety and soundness standards 

that are substantially similar to those that would apply if the banking entity engaged in the 

activities directly; and

(C) Complies with the restrictions in § 248.14 as if the issuer were a covered fund (except the 

banking entity may acquire and retain any ownership interest in the issuer).

(iii) The banking entity must not, directly or indirectly, guarantee, assume, or otherwise insure 

the obligations or performance of the issuer.

(iv) A banking entity’s ownership interest in or relationship with the issuer must:

(A) Comply with the limitations imposed in § 248.15, as if the issuer were a covered fund; and

(B) Be conducted in compliance with, and subject to, applicable banking laws and regulations, 

including applicable safety and soundness standards.

(17) Family wealth management vehicles. (i) Subject to paragraph (c)(17)(ii) of this section, any 

entity that is not, and does not hold itself out as being, an entity or arrangement that raises money 

from investors primarily for the purpose of investing in securities for resale or other disposition 

or otherwise trading in securities, and: 

(A) If the entity is a trust, the grantor(s) of the entity are all family customers; and
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(B) If the entity is not a trust:

(1) A majority of the voting interests in the entity are owned (directly or indirectly) by family 

customers; 

(2) A majority of the interests in the entity are owned (directly or indirectly) by family 

customers;

(3) The entity is owned only by family customers and up to 5 closely related persons of the 

family customers; and

(C) Notwithstanding paragraph (c)(17)(i)(A) and (B) of this section, up to an aggregate 0.5 

percent of the entity’s outstanding ownership interests may be acquired or retained by one or 

more entities that are not family customers or closely related persons if the ownership interest is 

acquired or retained by such parties for the purpose of and to the extent necessary for 

establishing corporate separateness or addressing bankruptcy, insolvency, or similar concerns. 

(ii) A banking entity may rely on the exclusion in paragraph (c)(17)(i) of this section with respect 

to an entity provided that the banking entity (or an affiliate):

(A) Provides bona fide trust, fiduciary, investment advisory, or commodity trading advisory 

services to the entity; 

(B) Does not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or 

performance of such entity; 

(C) Complies with the disclosure obligations under § 248.11(a)(8), as if such entity were a 

covered fund, provided that the content may be modified to prevent the disclosure from being 

misleading and the manner of disclosure may be modified to accommodate the specific 

circumstances of the entity; 
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(D) Does not acquire or retain, as principal, an ownership interest in the entity, other than as 

described in paragraph (c)(17)(i)(C) of this section; 

(E) Complies with the requirements of §§ 248.14(b) and 248.15, as if such entity were a covered 

fund; and

(F) Except for riskless principal transactions as defined in paragraph (d)(11) of this section, 

complies with the requirements of 12 CFR 223.15(a), as if such banking entity and its affiliates 

were a member bank and the entity were an affiliate thereof. 

(iii) For purposes of paragraph (c)(17) of this section, the following definitions apply:

(A) “Closely related person” means a natural person (including the estate and estate planning 

vehicles of such person) who has longstanding business or personal relationships with any family 

customer.

(B) “Family customer” means:

(1) A family client, as defined in Rule 202(a)(11)(G)-1(d)(4) of the Investment Advisers Act of 

1940 (17 CFR 275.202(a)(11)(G)-1(d)(4)); or

(2) Any natural person who is a father-in-law, mother-in-law, brother-in-law, sister-in-law, sonin-law or daughter-in-law of a family client, or a spouse or a spousal equivalent of any of the 

foregoing.

(18) Customer facilitation vehicles. (i) Subject to paragraph (c)(18)(ii) of this section, an issuer 

that is formed by or at the request of a customer of the banking entity for the purpose of 

providing such customer (which may include one or more affiliates of such customer) with 

exposure to a transaction, investment strategy, or other service provided by the banking entity.

(ii) A banking entity may rely on the exclusion in paragraph (c)(18)(i) of this section with respect 

to an issuer provided that:
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(A) All of the ownership interests of the issuer are owned by the customer (which may include 

one or more of its affiliates) for whom the issuer was created; 

(B) Notwithstanding paragraph (c)(18)(ii)(A) of this section, up to an aggregate 0.5 percent of 

the issuer’s outstanding ownership interests may be acquired or retained by one or more entities 

that are not customers if the ownership interest is acquired or retained by such parties for the 

purpose of and to the extent necessary for establishing corporate separateness or addressing 

bankruptcy, insolvency, or similar concerns; and

(C) The banking entity and its affiliates:

(1) Maintain documentation outlining how the banking entity intends to facilitate the customer’s 

exposure to such transaction, investment strategy, or service;

(2) Do not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or 

performance of such issuer; 

(3) Comply with the disclosure obligations under § 248.11(a)(8), as if such issuer were a covered 

fund, provided that the content may be modified to prevent the disclosure from being misleading 

and the manner of disclosure may be modified to accommodate the specific circumstances of the 

issuer; 

(4) Do not acquire or retain, as principal, an ownership interest in the issuer, other than as 

described in paragraph (c)(18)(ii)(B) of this section; 

(5) Comply with the requirements of §§ 248.14(b) and 248.15, as if such issuer were a covered 

fund; and

(6) Except for riskless principal transactions as defined in paragraph (d)(11) of this section, 

comply with the requirements of 12 CFR 223.15(a), as if such banking entity and its affiliates 

were a member bank and the issuer were an affiliate thereof.
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* * * * *

(d) * * *

(6) Ownership interest—(i) Ownership interest means any equity, partnership, or other similar 

interest. An “other similar interest” means an interest that: 

(A) Has the right to participate in the selection or removal of a general partner, managing 

member, member of the board of directors or trustees, investment manager, investment adviser, 

or commodity trading advisor of the covered fund, excluding:

(1) the rights of a creditor to exercise remedies upon the occurrence of an event of default or an 

acceleration event; and

(2) the right to participate in the removal of an investment manager for “cause” or participate in 

the selection of a replacement manager upon an investment manager's resignation or removal.

For purposes of this paragraph (d)(6)(i)(A)(2), “cause” for removal of an investment manager 

means one or more of the following events:

(i) the bankruptcy, insolvency, conservatorship or receivership of the investment manager;

(ii) the breach by the investment manager of any material provision of the covered fund’s 

transaction agreements applicable to the investment manager;

(iii) the breach by the investment manager of material representations or warranties;

(iv) the occurrence of an act that constitutes fraud or criminal activity in the performance of the 

investment manager’s obligations under the covered fund’s transaction agreements;

(v) the indictment of the investment manager for a criminal offense, or the indictment of any 

officer, member, partner or other principal of the investment manager for a criminal offense 

materially related to his or her investment management activities;

(vi) a change in control with respect to the investment manager;
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(vii) the loss, separation or incapacitation of an individual critical to the operation of the 

investment manager or primarily responsible for the management of the covered fund’s assets; or

(viii) other similar events that constitute “cause” for removal of an investment manager, provided 

that such events are not solely related to the performance of the covered fund or the investment 

manager’s exercise of investment discretion under the covered fund’s transaction agreements;

(B) Has the right under the terms of the interest to receive a share of the income, gains or profits 

of the covered fund;

(C) Has the right to receive the underlying assets of the covered fund after all other interests have 

been redeemed and/or paid in full (excluding the rights of a creditor to exercise remedies upon 

the occurrence of an event of default or an acceleration event);

(D) Has the right to receive all or a portion of excess spread (the positive difference, if any, 

between the aggregate interest payments received from the underlying assets of the covered fund 

and the aggregate interest paid to the holders of other outstanding interests);

(E) Provides under the terms of the interest that the amounts payable by the covered fund with 

respect to the interest could be reduced based on losses arising from the underlying assets of the 

covered fund, such as allocation of losses, write-downs or charge-offs of the outstanding 

principal balance, or reductions in the amount of interest due and payable on the interest;

(F) Receives income on a pass-through basis from the covered fund, or has a rate of return that is 

determined by reference to the performance of the underlying assets of the covered fund; or

(G) Any synthetic right to have, receive, or be allocated any of the rights in paragraphs 

(d)(6)(i)(A) through (F) of this section.

(ii) Ownership interest does not include: 
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(A) Restricted profit interest, which is an interest held by an entity (or an employee or former 

employee thereof) in a covered fund for which the entity (or employee thereof) serves as 

investment manager, investment adviser, commodity trading advisor, or other service provider, 

so long as:

(1) The sole purpose and effect of the interest is to allow the entity (or employee or former 

employee thereof) to share in the profits of the covered fund as performance compensation for 

the investment management, investment advisory, commodity trading advisory, or other services 

provided to the covered fund by the entity (or employee or former employee thereof), provided 

that the entity (or employee or former employee thereof) may be obligated under the terms of 

such interest to return profits previously received;

(2) All such profit, once allocated, is distributed to the entity (or employee or former employee 

thereof) promptly after being earned or, if not so distributed, is retained by the covered fund for 

the sole purpose of establishing a reserve amount to satisfy contractual obligations with respect 

to subsequent losses of the covered fund and such undistributed profit of the entity (or employee 

or former employee thereof) does not share in the subsequent investment gains of the covered 

fund;

(3) Any amounts invested in the covered fund, including any amounts paid by the entity in 

connection with obtaining the restricted profit interest, are within the limits of § 248.12 of this 

subpart; and

(4) The interest is not transferable by the entity (or employee or former employee thereof) except 

to an affiliate thereof (or an employee of the banking entity or affiliate), to immediate family 

members, or through the intestacy, of the employee or former employee, or in connection with a 

sale of the business that gave rise to the restricted profit interest by the entity (or employee or
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former employee thereof) to an unaffiliated party that provides investment management, 

investment advisory, commodity trading advisory, or other services to the fund. 

(B) Any senior loan or senior debt interest that has the following characteristics:

(1) Under the terms of the interest the holders of such interest do not have the right to receive a 

share of the income, gains, or profits of the covered fund, but are entitled to receive only: 

(i) Interest at a stated interest rate, as well as commitment fees or other fees, which are not 

determined by reference to the performance of the underlying assets of the covered fund; and 

(ii) Repayment of a fixed principal amount, on or before a maturity date, in a contractuallydetermined manner (which may include prepayment premiums intended solely to reflect, and 

compensate holders of the interest for, forgone income resulting from an early prepayment);

(2) The entitlement to payments under the terms of the interest are absolute and could not be 

reduced based on losses arising from the underlying assets of the covered fund, such as 

allocation of losses, write-downs or charge-offs of the outstanding principal balance, or 

reductions in the amount of interest due and payable on the interest; and

(3) The holders of the interest are not entitled to receive the underlying assets of the covered 

fund after all other interests have been redeemed or paid in full (excluding the rights of a creditor 

to exercise remedies upon the occurrence of an event of default or an acceleration event).

* * * * *

(d) * * *

(11) Riskless principal transaction. Riskless principal transaction means a transaction in which a 

banking entity, after receiving an order from a customer to buy (or sell) a security, purchases (or 

sells) the security in the secondary market for its own account to offset a contemporaneous sale 

to (or purchase from) the customer.
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11. Amend § 248.12 by:

a. Revising paragraph (b)(1)(ii);

b. Revising paragraph (b)(4);

c. Adding paragraph (b)(5);

d. Revising paragraph (c)(1); and

e. Revising paragraphs (d) and (e).

The revisions and addition read as follows:

§ 248.12. Permitted investment in a covered fund.

* * * * *

(b) * * * 

(1) * * *

(ii) Treatment of registered investment companies, SEC-regulated business development 

companies, and foreign public funds. For purposes of paragraph (b)(1)(i) of this section, a 

registered investment company, SEC-regulated business development companies, or foreign 

public fund as described in § 248.10(c)(1) will not be considered to be an affiliate of the banking 

entity so long as:

(A) The banking entity, together with its affiliates, does not own, control, or hold with the power 

to vote 25 percent or more of the voting shares of the company or fund; and

(B) The banking entity, or an affiliate of the banking entity, provides investment advisory, 

commodity trading advisory, administrative, and other services to the company or fund in 

compliance with the limitations under applicable regulation, order, or other authority.

* * * * *
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(4) Multi-tier fund investments—(i) Master-feeder fund investments. If the principal investment 

strategy of a covered fund (the “feeder fund”) is to invest substantially all of its assets in another 

single covered fund (the “master fund”), then for purposes of the investment limitations in 

paragraphs (a)(2)(i)(B) and (a)(2)(ii) of this section, the banking entity’s permitted investment in 

such funds shall be measured only by reference to the value of the master fund. The banking 

entity’s permitted investment in the master fund shall include any investment by the banking 

entity in the master fund, as well as the banking entity’s pro-rata share of any ownership interest 

in the master fund that is held through the feeder fund; and

(ii) Fund-of-funds investments. If a banking entity organizes and offers a covered fund pursuant 

to § 248.11 for the purpose of investing in other covered funds (a “fund of funds”) and that fund 

of funds itself invests in another covered fund that the banking entity is permitted to own, then 

the banking entity’s permitted investment in that other fund shall include any investment by the 

banking entity in that other fund, as well as the banking entity’s pro-rata share of any ownership 

interest in the fund that is held through the fund of funds. The investment of the banking entity 

may not represent more than 3 percent of the amount or value of any single covered fund.

(5) Parallel Investments and Co-Investments—(i) A banking entity shall not be required to 

include in the calculation of the investment limits under paragraph (a)(2) of this section any 

investment the banking entity makes alongside a covered fund as long as the investment is made 

in compliance with applicable laws and regulations, including applicable safety and soundness 

standards.

(ii) A banking entity shall not be restricted under this section in the amount of any investment the 

banking entity makes alongside a covered fund as long as the investment is made in compliance 

with applicable laws and regulations, including applicable safety and soundness standards.
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(c) * * *

(1)(i) For purposes of paragraph (a)(2)(iii) of this section, the aggregate value of all ownership 

interests held by a banking entity shall be the sum of all amounts paid or contributed by the 

banking entity in connection with acquiring or retaining an ownership interest in covered funds 

(together with any amounts paid by the entity in connection with obtaining a restricted profit 

interest under § 248.10(d)(6)(ii)), on a historical cost basis;

(ii) Treatment of employee and director restricted profit interests financed by the banking entity. 

For purposes of paragraph (c)(1)(i) of this section, an investment by a director or employee of a 

banking entity who acquires a restricted profit interest in his or her personal capacity in a 

covered fund sponsored by the banking entity will be attributed to the banking entity if the 

banking entity, directly or indirectly, extends financing for the purpose of enabling the director 

or employee to acquire the restricted profit interest in the fund and the financing is used to 

acquire such ownership interest in the covered fund.

* * * * *

(d) Capital treatment for a permitted investment in a covered fund. For purposes of calculating 

compliance with the applicable regulatory capital requirements, a banking entity shall deduct 

from the banking entity’s tier 1 capital (as determined under paragraph (c)(2) of this section) the 

greater of:

(1)(i) The sum of all amounts paid or contributed by the banking entity in connection with 

acquiring or retaining an ownership interest (together with any amounts paid by the entity in 

connection with obtaining a restricted profit interest under § 248.10(d)(6)(ii) of subpart C of this 

part), on a historical cost basis, plus any earnings received; and
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(ii) The fair market value of the banking entity’s ownership interests in the covered fund as 

determined under paragraph (b)(2)(ii) or (b)(3) of this section (together with any amounts paid 

by the entity in connection with obtaining a restricted profit interest under § 248.10(d)(6)(ii) of 

subpart C of this part), if the banking entity accounts for the profits (or losses) of the fund 

investment in its financial statements.

(2) Treatment of employee and director restricted profit interests financed by the banking entity. 

For purposes of paragraph (d)(1) of this section, an investment by a director or employee of a 

banking entity who acquires a restricted profit interest in his or her personal capacity in a 

covered fund sponsored by the banking entity will be attributed to the banking entity if the 

banking entity, directly or indirectly, extends financing for the purpose of enabling the director 

or employee to acquire the restricted profit interest in the fund and the financing is used to 

acquire such ownership interest in the covered fund.

(e) Extension of time to divest an ownership interest. (1) Extension Period. Upon application by 

a banking entity, the Board may extend the period under paragraph (a)(2)(i) of this section for up 

to 2 additional years if the Board finds that an extension would be consistent with safety and 

soundness and not detrimental to the public interest. 

(2) Application Requirements. An application for extension must:

(i) Be submitted to the Board at least 90 days prior to the expiration of the applicable time 

period;

(ii) Provide the reasons for application, including information that addresses the factors in 

paragraph (e)(3) of this section; and
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(iii) Explain the banking entity’s plan for reducing the permitted investment in a covered fund 

through redemption, sale, dilution or other methods as required in paragraph (a)(2) of this 

section.

(3) Factors governing the Board determinations. In reviewing any application under paragraph 

(e)(1) of this section, the Board may consider all the facts and circumstances related to the 

permitted investment in a covered fund, including:

(i) Whether the investment would result, directly or indirectly, in a material exposure by the 

banking entity to high-risk assets or high-risk trading strategies;

(ii) The contractual terms governing the banking entity’s interest in the covered fund;

(iii) The date on which the covered fund is expected to have attracted sufficient investments from 

investors unaffiliated with the banking entity to enable the banking entity to comply with the 

limitations in paragraph (a)(2)(i) of this section;

(iv) The total exposure of the covered banking entity to the investment and the risks that 

disposing of, or maintaining, the investment in the covered fund may pose to the banking entity 

and the financial stability of the United States;

(v) The cost to the banking entity of divesting or disposing of the investment within the 

applicable period;

(vi) Whether the investment or the divestiture or conformance of the investment would involve 

or result in a material conflict of interest between the banking entity and unaffiliated parties, 

including clients, customers, or counterparties to which it owes a duty;

(vii) The banking entity’s prior efforts to reduce through redemption, sale, dilution, or other 

methods its ownership interests in the covered fund, including activities related to the marketing 

of interests in such covered fund;
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(viii) Market conditions; and

(ix) Any other factor that the Board believes appropriate.

(4) Authority to impose restrictions on activities or investment during any extension period. The 

Board may impose such conditions on any extension approved under paragraph (e)(1) of this 

section as the Board determines are necessary or appropriate to protect the safety and soundness 

of the banking entity or the financial stability of the United States, address material conflicts of 

interest or other unsound banking practices, or otherwise further the purposes of section 13 of the 

BHC Act and this part.

(5) Consultation. In the case of a banking entity that is primarily regulated by another Federal 

banking agency, the SEC, or the CFTC, the Board will consult with such agency prior to acting 

on an application by the banking entity for an extension under paragraph (e)(1) of this section.

12. Amend § 248.13 by adding paragraph (d) to read as follows:

§ 248.13. Other permitted covered fund activities and investments.

* * * * *

(d) Permitted covered fund activities and investments of qualifying foreign excluded funds. (1) 

The prohibition contained in § 248.10(a) does not apply to a qualifying foreign excluded fund. 

(2) For purposes of this paragraph (d), a qualifying foreign excluded fund means a banking entity 

that: 

(i) Is organized or established outside the United States, and the ownership interests of which are 

offered and sold solely outside the United States;

(ii)(A) Would be a covered fund if the entity were organized or established in the United States, or 
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(B) Is, or holds itself out as being, an entity or arrangement that raises money from investors 

primarily for the purpose of investing in financial instruments for resale or other disposition or 

otherwise trading in financial instruments;

(iii) Would not otherwise be a banking entity except by virtue of the acquisition or retention of 

an ownership interest in, sponsorship of, or relationship with the entity, by another banking 

entity that meets the following:

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

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

(B) The banking entity’s acquisition of an ownership interest in or sponsorship of the fund by the 

foreign banking entity meets the requirements for permitted covered fund activities and 

investments solely outside the United States, as provided in § 248.13(b);

(iv) Is established and operated as part of a bona fide asset management business; and

(v) Is not operated in a manner that enables the banking entity that sponsors or controls the 

qualifying foreign excluded fund, or any of its affiliates, to evade the requirements of section 13 

of the BHC Act or this part.

13. Amend § 248.14 by:

a. Revising paragraph (a)(2)(i);

b. Revising paragraph (a)(2)(ii)(C);

c. Adding paragraphs (a)(2)(iii), (a)(2)(iv); and (a)(3); and

d. Revising paragraph (c).

The revisions and additions read as follows:

§ 248.14. Limitations on relationships with a covered fund.

(a) * * *
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(2) * * *

(i) Acquire and retain any ownership interest in a covered fund in accordance with the 

requirements of §§ 248.11, 248.12, or 248.13;

(ii) * * *

(C) The Board has not determined that such transaction is inconsistent with the safe and sound 

operation and condition of the banking entity; and

(iii) Enter into a transaction with a covered fund that would be an exempt covered transaction 

under 12 U.S.C. 371c(d) or § 223.42 of the Board’s Regulation W (12 CFR 223.42) subject to 

the limitations specified under 12 U.S.C. 371c(d) or § 223.42 of the Board’s Regulation W (12 

CFR 223.42), as applicable, 

(iv) Enter into a riskless principal transaction with a covered fund; and

(v) Extend credit to or purchase assets from a covered fund, provided:

(A) Each extension of credit or purchase of assets is in the ordinary course of business in 

connection with payment transactions; settlement services; or futures, derivatives, and securities 

clearing; 

(B) Each extension of credit is repaid, sold, or terminated by the end of five business days; and

(C) The banking entity making each extension of credit meets the requirements of § 

223.42(l)(1)(i) and (ii) of the Board’s Regulation W (12 CFR 223.42(l)(1)(i) and(ii)), as if the 

extension of credit was an intraday extension of credit, regardless of the duration of the extension 

of credit.

(3) Any transaction or activity permitted under paragraphs (a)(2)(iii), (iv) or (v) must comply 

with the limitations in § 248.15.

* * * * *
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(c) Restrictions on other permitted transactions. Any transaction permitted under paragraphs 

(a)(2)(ii), (a)(2)(iii), or (a)(2)(iv) of this section shall be subject to section 23B of the Federal 

Reserve Act (12 U.S.C. 371c-1) as if the counterparty were an affiliate of the banking entity 

under section 23B.

Subpart D — Compliance Program Requirements; Violations

14. Amend § 248.20 by:

a. Revising paragraph (a);

b. Revising paragraph (d); and 

c. Revising paragraph (e).

The revisions and addition read as follows:

§ 248.20. Program for compliance; reporting.

(a) Program requirement. Each banking entity (other than a banking entity with limited trading 

assets and liabilities or a qualifying foreign excluded fund under section 248.6(f) or 248.13(d)) 

shall develop and provide for the continued administration of a compliance program reasonably 

designed to ensure and monitor compliance with the prohibitions and restrictions on proprietary 

trading and covered fund activities and investments set forth in section 13 of the BHC Act and 

this part. The terms, scope, and detail of the compliance program shall be appropriate for the 

types, size, scope, and complexity of activities and business structure of the banking entity.

* * * * *

(d) Reporting requirements under appendix A to this part. (1) A banking entity (other than a 

qualifying foreign excluded fund under section 248.6(f) or 248.13(d)) engaged in proprietary 

trading activity permitted under subpart B shall comply with the reporting requirements 

described in appendix A to this part, if:
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* * * * *

(e) Additional documentation for covered funds. A banking entity with significant trading assets 

and liabilities (other than a qualifying foreign excluded fund under section 248.6(f) or 248.13(d)) 

shall maintain records that include: 

* * * * *

FEDERAL DEPOSIT INSURANCE CORPORATION 

12 CFR Chapter III

Authority and Issuance

For the reasons set forth in the Common Preamble, the Federal Deposit Insurance 

Corporation proposes to amend chapter III of Title 12, Code of Federal Regulations as follows:

PART 351 — PROPRIETARY TRADING AND CERTAIN INTERESTS IN AND 

RELATIONSHIPS WITH COVERED FUNDS

15. The authority citation for part 351 continues to read as follows: 

Authority: 12 U.S.C. 1851; 1811 et seq.; 3101 et seq.; and 5412.

Subpart B — Proprietary Trading

16. Amend § 351.6 by adding paragraph (f) to read as follows:

§ 351.6. Other permitted proprietary trading activities.

* * * * *

(f) Permitted trading activities of qualifying foreign excluded funds. The prohibition contained 

in § 351.3(a) does not apply to the purchase or sale of a financial instrument by a qualifying 

foreign excluded fund. For purposes of this paragraph (f), a qualifying foreign excluded fund 

means a banking entity that: 
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(1) Is organized or established outside the United States, and the ownership interests of which are 

offered and sold solely outside the United States;

(2)(i) Would be a covered fund if the entity were organized or established in the United States, or 

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

primarily for the purpose of investing in financial instruments for resale or other disposition or 

otherwise trading in financial instruments;

(3) Would not otherwise be a banking entity except by virtue of the acquisition or retention of an 

ownership interest in, sponsorship of, or relationship with the entity, by another banking entity 

that meets the following:

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

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

(ii) The banking entity’s acquisition or retention of an ownership interest in or sponsorship of the 

fund meets the requirements for permitted covered fund activities and investments solely outside 

the United States, as provided in § 351.13(b);

(4) Is established and operated as part of a bona fide asset management business; and

(5) Is not operated in a manner that enables the banking entity that sponsors or controls the 

qualifying foreign excluded fund, or any of its affiliates, to evade the requirements of section 13 

of the BHC Act or this part.

Subpart C — Covered Funds Activities and Investments

17. Amend § 351.10 by:

a. Revising paragraph (c)(1);

b. Revising paragraph (c)(3)(i);

c. Revising paragraph (c)(8);
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d. Revising paragraph (c)(10)(i);

e. Revising paragraph (c)(11)(i);

f. Adding paragraphs (c)(15), (16), (17), and (18); 

g. Revising paragraph (d)(6); and

h. Adding paragraph (d)(11).

The revisions and additions read as follows:

§ 351.10. Prohibition on acquiring or retaining an ownership interest in and having certain 

relationships with a covered fund.

* * * * *

(c) * * *

(1) Foreign public funds. (i) Subject to paragraphs (c)(1)(ii) and (iii) of this section, an issuer 

that:

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

(B) Is authorized to offer and sell ownership interests, and such interests are offered and sold, 

through one or more public offerings. 

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

entity that is, located in or organized under the laws of the United States or of any State and any 

issuer for which such banking entity acts as sponsor, the sponsoring banking entity may not rely 

on the exemption in paragraph (c)(1)(i) of this section for such issuer unless more than 75 

percent of the ownership interests in the issuer are sold to persons other than:

(A) Such sponsoring banking entity;

(B) Such issuer; 

(C) Affiliates of such sponsoring banking entity or such issuer; and
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(D) Directors and senior executive officers as defined in § 225.71(c) of the Board’s Regulation Y 

(12 CFR 225.71(c)) of such entities.

(iii) For purposes of paragraph (c)(1)(i)(B) of this section, the term “public offering” means a 

distribution (as defined in § 351.4(a)(3)) of securities in any jurisdiction outside the United 

States to investors, including retail investors, provided that:

(A) The distribution is subject to substantive disclosure and retail investor protection laws or 

regulations;

(B) With respect to an issuer for which the banking entity serves as the investment manager, 

investment adviser, commodity trading advisor, commodity pool operator, or sponsor, the 

distribution complies with all applicable requirements in the jurisdiction in which such 

distribution is being made;

(C) The distribution does not restrict availability to investors having a minimum level of net 

worth or net investment assets; and

(D) The issuer has filed or submitted, with the appropriate regulatory authority in such 

jurisdiction, offering disclosure documents that are publicly available.

* * * * *

(3) * * *

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

* * * * *

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

the conditions of this paragraph (c)(8) and the assets or holdings of which are composed solely 

of:

(A) Loans as defined in § 351.2(t);
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(B) Rights or other assets designed to assure the servicing or timely distribution of proceeds to 

holders of such securities and rights or other assets that are related or incidental to purchasing or 

otherwise acquiring and holding the loans, provided that each asset that is a security (other than 

special units of beneficial interest and collateral certificates meeting the requirements of 

paragraph (c)(8)(v) of this section) meets the requirements of paragraph (c)(8)(iii) of this section;

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

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

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

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

(E) Debt securities, other than asset-backed securities and convertible securities, provided that: 

(1) the aggregate value of such debt securities does not exceed five percent of the aggregate 

value of loans held under paragraph (c)(8)(i)(A) of this section, cash and cash equivalents held 

under paragraph (c)(8)(iii)(A), and debt securities held under this paragraph (c)(8)(i)(E); and

(2) the aggregate value of the loans, cash and cash equivalents, and debt securities for purposes 

of this paragraph is calculated at par value at the most recent time any such debt security is 

acquired, except that the issuing entity may instead determine the value of any such loan, cash 

equivalent, or debt security based on its fair market value if:

(i) the issuing entity is required to use the fair market value of such assets for purposes of 

calculating compliance with concentration limitations or other similar calculations under its 

transaction agreements, and 

(ii) the issuing entity’s valuation methodology values similarly situated assets consistently.
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(ii) Impermissible assets. For purposes of this paragraph (c)(8), except as permitted under 

paragraph (c)(8)(i)(E) of this section, the assets or holdings of the issuing entity shall not include 

any of the following:

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

other than as permitted in paragraphs (c)(8)(iii), (iv), or (v) of this section;

(B) A derivative, other than a derivative that meets the requirements of paragraph (c)(8)(iv) of 

this section; or

(C) A commodity forward contract.

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

entity may hold securities, other than debt securities permitted under paragraph (c)(8)(i)(E), if 

those securities are:

(A) Cash equivalents – which, for the purposes of this paragraph, means high quality, highly 

liquid investments whose maturity corresponds to the securitization’s expected or potential need 

for funds and whose currency corresponds to either the underlying loans or the asset-backed 

securities – for purposes of the rights and assets in paragraph (c)(8)(i)(B) of this section; or

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

the asset-backed securities.

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

or foreign exchange derivatives that satisfy all of the following conditions:

(A) The written terms of the derivatives directly relate to the loans, the asset-backed securities, 

the contractual rights or other assets described in paragraph (c)(8)(i)(B) of this section, or the 

debt securities described in paragraph (c)(8)(i)(E) of this section; and
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(B) The derivatives reduce the interest rate and/or foreign exchange risks related to the loans, the 

asset-backed securities, the contractual rights or other assets described in paragraph (c)(8)(i)(B) 

of this section, or the debt securities described in paragraph (c)(8)(i)(E) of this section.

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

issuing entity may include collateral certificates and special units of beneficial interest issued by 

a special purpose vehicle, provided that:

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

certificate meets the requirements in this paragraph (c)(8);

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

transferring to the issuing entity for the loan securitization the economic risks and benefits of the 

assets that are permissible for loan securitizations under this paragraph (c)(8) and does not 

directly or indirectly transfer any interest in any other economic or financial exposure;

(C) The special unit of beneficial interest or collateral certificate is created solely to satisfy legal 

requirements or otherwise facilitate the structuring of the loan securitization; and

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

certificate and the issuing entity are established under the direction of the same entity that 

initiated the loan securitization.

* * * * *

(10) Qualifying covered bonds—(i) Scope. An entity owning or holding a dynamic or fixed pool 

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

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

meet the conditions in paragraph (c)(8)(i) of this section.

* * * * *
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(11) * * * 

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

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

Administration notice to proceed to qualify for a license as a small business investment 

company, which notice or license has not been revoked, or that has voluntarily surrendered its 

license to operate as a small business investment company in accordance with 13 CFR 107.1900 

and does not make any new investments (other than investments in cash equivalents, which, for 

the purposes of this paragraph, means high quality, highly liquid investments whose maturity 

corresponds to the issuer’s expected or potential need for funds and whose currency corresponds 

to the issuer’s assets) after such voluntary surrender; 

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

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

(11) of section 5136 of the Revised Statutes of the United States (12 U.S.C. 24), including the 

welfare of low- and moderate-income communities or families (such as providing housing, 

services, or jobs) and including investments that qualify for consideration under the regulations 

implementing the Community Reinvestment Act (12 U.S.C. 2901 et seq.); or

(B) Qualified rehabilitation expenditures with respect to a qualified rehabilitated building or 

certified historic structure, as such terms are defined in section 47 of the Internal Revenue Code 

of 1986 or a similar State historic tax credit program;

(iii) That has elected to be regulated or is regulated as a rural business investment company, as 

described in 15 U.S.C. 80b-3(b)(8)(A) or (B), or that has terminated its participation as a rural 

business investment company in accordance with 7 CFR 4290.1900 and does not make any new 

investments (other than investments in cash equivalents, which, for the purposes of this 
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paragraph, means high quality, highly liquid investments whose maturity corresponds to the 

issuer’s expected or potential need for funds and whose currency corresponds to the issuer’s 

assets) after such termination; or

(iv) That is a qualified opportunity fund, as defined in 26 U.S.C. 1400Z-2(d). 

* * * * *

(15) Credit funds. Subject to paragraphs (c)(15)(iii), (iv), and (v) of this section, an issuer that 

satisfies the asset and activity requirements of paragraphs (c)(15)(i) and (ii) of this section.

(i) Asset requirements. The issuer’s assets must be composed solely of:

(A) Loans as defined in § 351.2(t);

(B) Debt instruments, subject to paragraph (c)(15)(iv) of this section;

(C) Rights and other assets that are related or incidental to acquiring, holding, servicing, or 

selling such loans or debt instruments, provided that:

(1) Each right or asset held under this paragraph (c)(15)(i)(C) that is a security is either: 

(i) A cash equivalent (which, for the purposes of this paragraph, means high quality, highly 

liquid investments whose maturity corresponds to the issuer’s expected or potential need for 

funds and whose currency corresponds to either the underlying loans or the debt instruments); 

(ii) A security received in lieu of debts previously contracted with respect to such loans or debt 

instruments; or 

(iii) An equity security (or right to acquire an equity security) received on customary terms in 

connection with such loans or debt instruments; and

(2) Rights or other assets held under this paragraph (c)(15)(i)(C) of this section may not include 

commodity forward contracts or any derivative; and

(D) Interest rate or foreign exchange derivatives, if:
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(1) The written terms of the derivative directly relate to the loans, debt instruments, or other 

rights or assets described in paragraph (c)(15)(i)(C) of this section; and

(2) The derivative reduces the interest rate and/or foreign exchange risks related to the loans, 

debt instruments, or other rights or assets described in paragraph (c)(15)(i)(C) of this section.

(ii) Activity requirements. To be eligible for the exclusion of paragraph (c)(15) of this section, an 

issuer must:

(A) Not engage in any activity that would constitute proprietary trading under § 351.3(b)(l)(i), as 

if the issuer were a banking entity; and 

(B) Not issue asset-backed securities.

(iii) Requirements for a sponsor, investment adviser, or commodity trading advisor. A banking 

entity that acts as a sponsor, investment adviser, or commodity trading advisor to an issuer that 

meets the conditions in paragraphs (c)(15)(i) and (ii) of this section may not rely on this 

exclusion unless the banking entity:

(A) Provides in writing to any prospective and actual investor in the issuer the disclosures 

required under § 351.11(a)(8) of this subpart, as if the issuer were a covered fund;

(B) Ensures that the activities of the issuer are consistent with safety and soundness standards 

that are substantially similar to those that would apply if the banking entity engaged in the 

activities directly; and

(C) Complies with the limitations imposed in § 351.14, as if the issuer were a covered fund, 

except the banking entity may acquire and retain any ownership interest in the issuer.

(iv) Additional Banking Entity Requirements. A banking entity may not rely on this exclusion 

with respect to an issuer that meets the conditions in paragraphs (c)(15)(i) and (ii) of this section 

unless:
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(A) The banking entity does not, directly or indirectly, guarantee, assume, or otherwise insure the 

obligations or performance of the issuer or of any entity to which such issuer extends credit or in 

which such issuer invests; and

(B) Any assets the issuer holds pursuant to paragraphs (c)(15)(i)(B) or (i)(C)(1)(iii) of this 

section would be permissible for the banking entity to acquire and hold directly under applicable 

federal banking laws and regulations.

(v) Investment and Relationship Limits. A banking entity’s investment in, and relationship with, 

the issuer must:

(A) Comply with the limitations imposed in § 351.15, as if the issuer were a covered fund; and

(B) Be conducted in compliance with, and subject to, applicable banking laws and regulations, 

including applicable safety and soundness standards.

(16) Qualifying venture capital funds. (i) Subject to paragraphs (c)(16)(ii) through (iv) of this 

section, an issuer that:

(A) Is a venture capital fund as defined in 17 CFR 275.203(l)-1; and

(B) Does not engage in any activity that would constitute proprietary trading under § 

351.3(b)(1)(i), as if the issuer were a banking entity.

(ii) A banking entity that acts as a sponsor, investment adviser, or commodity trading advisor to 

an issuer that meets the conditions in paragraph (c)(16)(i) of this section may not rely on this 

exclusion unless the banking entity:

(A) Provides in writing to any prospective and actual investor in the issuer the disclosures 

required under § 351.11(a)(8), as if the issuer were a covered fund;
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(B) Ensures that the activities of the issuer are consistent with safety and soundness standards 

that are substantially similar to those that would apply if the banking entity engaged in the 

activities directly; and

(C) Complies with the restrictions in § 351.14 as if the issuer were a covered fund (except the 

banking entity may acquire and retain any ownership interest in the issuer).

(iii) The banking entity must not, directly or indirectly, guarantee, assume, or otherwise insure 

the obligations or performance of the issuer.

(iv) A banking entity’s ownership interest in or relationship with the issuer must:

(A) Comply with the limitations imposed in § 351.15, as if the issuer were a covered fund; and

(B) Be conducted in compliance with, and subject to, applicable banking laws and regulations, 

including applicable safety and soundness standards.

(17) Family wealth management vehicles. (i) Subject to paragraph (c)(17)(ii) of this section, any 

entity that is not, and does not hold itself out as being, an entity or arrangement that raises money 

from investors primarily for the purpose of investing in securities for resale or other disposition 

or otherwise trading in securities, and: 

(A) If the entity is a trust, the grantor(s) of the entity are all family customers; and

(B) If the entity is not a trust:

(1) A majority of the voting interests in the entity are owned (directly or indirectly) by family 

customers; 

(2) A majority of the interests in the entity are owned (directly or indirectly) by family 

customers;

(3) The entity is owned only by family customers and up to 5 closely related persons of the 

family customers; and
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(C) Notwithstanding paragraph (c)(17)(i)(A) and (B) of this section, up to an aggregate 0.5 

percent of the entity’s outstanding ownership interests may be acquired or retained by one or 

more entities that are not family customers or closely related persons if the ownership interest is 

acquired or retained by such parties for the purpose of and to the extent necessary for 

establishing corporate separateness or addressing bankruptcy, insolvency, or similar concerns. 

(ii) A banking entity may rely on the exclusion in paragraph (c)(17)(i) of this section with respect 

to an entity provided that the banking entity (or an affiliate):

(A) Provides bona fide trust, fiduciary, investment advisory, or commodity trading advisory 

services to the entity; 

(B) Does not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or 

performance of such entity; 

(C) Complies with the disclosure obligations under § 351.11(a)(8), as if such entity were a 

covered fund, provided that the content may be modified to prevent the disclosure from being 

misleading and the manner of disclosure may be modified to accommodate the specific 

circumstances of the entity; 

(D) Does not acquire or retain, as principal, an ownership interest in the entity, other than as 

described in paragraph (c)(17)(i)(C) of this section; 

(E) Complies with the requirements of §§ 351.14(b) and 351.15, as if such entity were a covered 

fund; and

(F) Except for riskless principal transactions as defined in paragraph (d)(11) of this section, 

complies with the requirements of 12 CFR 223.15(a), as if such banking entity and its affiliates 

were a member bank and the entity were an affiliate thereof. 

(iii) For purposes of paragraph (c)(17) of this section, the following definitions apply:
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(A) “Closely related person” means a natural person (including the estate and estate planning 

vehicles of such person) who has longstanding business or personal relationships with any family 

customer.

(B) “Family customer” means:

(1) A family client, as defined in Rule 202(a)(11)(G)-1(d)(4) of the Investment Advisers Act of 

1940 (17 CFR 275.202(a)(11)(G)-1(d)(4)); or

(2) Any natural person who is a father-in-law, mother-in-law, brother-in-law, sister-in-law, sonin-law or daughter-in-law of a family client, or a spouse or a spousal equivalent of any of the 

foregoing.

(18) Customer facilitation vehicles. (i) Subject to paragraph (c)(18)(ii) of this section, an issuer 

that is formed by or at the request of a customer of the banking entity for the purpose of 

providing such customer (which may include one or more affiliates of such customer) with 

exposure to a transaction, investment strategy, or other service provided by the banking entity.

(ii) A banking entity may rely on the exclusion in paragraph (c)(18)(i) of this section with respect 

to an issuer provided that:

(A) All of the ownership interests of the issuer are owned by the customer (which may include 

one or more of its affiliates) for whom the issuer was created; 

(B) Notwithstanding paragraph (c)(18)(ii)(A) of this section, up to an aggregate 0.5 percent of 

the issuer’s outstanding ownership interests may be acquired or retained by one or more entities 

that are not customers if the ownership interest is acquired or retained by such parties for the 

purpose of and to the extent necessary for establishing corporate separateness or addressing 

bankruptcy, insolvency, or similar concerns; and

(C) The banking entity and its affiliates:
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(1) Maintain documentation outlining how the banking entity intends to facilitate the customer’s 

exposure to such transaction, investment strategy, or service;

(2) Do not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or 

performance of such issuer; 

(3) Comply with the disclosure obligations under § 351.11(a)(8), as if such issuer were a covered 

fund, provided that the content may be modified to prevent the disclosure from being misleading 

and the manner of disclosure may be modified to accommodate the specific circumstances of the 

issuer; 

(4) Do not acquire or retain, as principal, an ownership interest in the issuer, other than as 

described in paragraph (c)(18)(ii)(B) of this section; 

(5) Comply with the requirements of §§ 351.14(b) and 351.15, as if such issuer were a covered 

fund; and

(6) Except for riskless principal transactions as defined in paragraph (d)(11) of this section, 

comply with the requirements of 12 CFR 223.15(a), as if such banking entity and its affiliates 

were a member bank and the issuer were an affiliate thereof.

* * * * *

(d) * * *

(6) Ownership interest—(i) Ownership interest means any equity, partnership, or other similar 

interest. An “other similar interest” means an interest that: 

(A) Has the right to participate in the selection or removal of a general partner, managing 

member, member of the board of directors or trustees, investment manager, investment adviser, 

or commodity trading advisor of the covered fund, excluding:
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(1) the rights of a creditor to exercise remedies upon the occurrence of an event of default or an 

acceleration event; and

(2) the right to participate in the removal of an investment manager for “cause” or participate in 

the selection of a replacement manager upon an investment manager's resignation or removal.

For purposes of this paragraph (d)(6)(i)(A)(2), “cause” for removal of an investment manager 

means one or more of the following events:

(i) the bankruptcy, insolvency, conservatorship or receivership of the investment manager;

(ii) the breach by the investment manager of any material provision of the covered fund’s 

transaction agreements applicable to the investment manager;

(iii) the breach by the investment manager of material representations or warranties;

(iv) the occurrence of an act that constitutes fraud or criminal activity in the performance of the 

investment manager’s obligations under the covered fund’s transaction agreements;

(v) the indictment of the investment manager for a criminal offense, or the indictment of any 

officer, member, partner or other principal of the investment manager for a criminal offense 

materially related to his or her investment management activities;

(vi) a change in control with respect to the investment manager;

(vii) the loss, separation or incapacitation of an individual critical to the operation of the 

investment manager or primarily responsible for the management of the covered fund’s assets; or

(viii) other similar events that constitute “cause” for removal of an investment manager, provided 

that such events are not solely related to the performance of the covered fund or the investment 

manager’s exercise of investment discretion under the covered fund’s transaction agreements;

(B) Has the right under the terms of the interest to receive a share of the income, gains or profits 

of the covered fund;
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(C) Has the right to receive the underlying assets of the covered fund after all other interests have 

been redeemed and/or paid in full (excluding the rights of a creditor to exercise remedies upon 

the occurrence of an event of default or an acceleration event);

(D) Has the right to receive all or a portion of excess spread (the positive difference, if any, 

between the aggregate interest payments received from the underlying assets of the covered fund 

and the aggregate interest paid to the holders of other outstanding interests);

(E) Provides under the terms of the interest that the amounts payable by the covered fund with 

respect to the interest could be reduced based on losses arising from the underlying assets of the 

covered fund, such as allocation of losses, write-downs or charge-offs of the outstanding 

principal balance, or reductions in the amount of interest due and payable on the interest;

(F) Receives income on a pass-through basis from the covered fund, or has a rate of return that is 

determined by reference to the performance of the underlying assets of the covered fund; or

(G) Any synthetic right to have, receive, or be allocated any of the rights in paragraphs 

(d)(6)(i)(A) through (F) of this section.

(ii) Ownership interest does not include: 

(A) Restricted profit interest, which is an interest held by an entity (or an employee or former 

employee thereof) in a covered fund for which the entity (or employee thereof) serves as 

investment manager, investment adviser, commodity trading advisor, or other service provider, 

so long as:

(1) The sole purpose and effect of the interest is to allow the entity (or employee or former 

employee thereof) to share in the profits of the covered fund as performance compensation for 

the investment management, investment advisory, commodity trading advisory, or other services 

provided to the covered fund by the entity (or employee or former employee thereof), provided 
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that the entity (or employee or former employee thereof) may be obligated under the terms of 

such interest to return profits previously received;

(2) All such profit, once allocated, is distributed to the entity (or employee or former employee 

thereof) promptly after being earned or, if not so distributed, is retained by the covered fund for 

the sole purpose of establishing a reserve amount to satisfy contractual obligations with respect 

to subsequent losses of the covered fund and such undistributed profit of the entity (or employee 

or former employee thereof) does not share in the subsequent investment gains of the covered 

fund;

(3) Any amounts invested in the covered fund, including any amounts paid by the entity in 

connection with obtaining the restricted profit interest, are within the limits of § 351.12 of this 

subpart; and

(4) The interest is not transferable by the entity (or employee or former employee thereof) except 

to an affiliate thereof (or an employee of the banking entity or affiliate), to immediate family 

members, or through the intestacy, of the employee or former employee, or in connection with a 

sale of the business that gave rise to the restricted profit interest by the entity (or employee or

former employee thereof) to an unaffiliated party that provides investment management, 

investment advisory, commodity trading advisory, or other services to the fund. 

(B) Any senior loan or senior debt interest that has the following characteristics:

(1) Under the terms of the interest the holders of such interest do not have the right to receive a 

share of the income, gains, or profits of the covered fund, but are entitled to receive only: 

(i) Interest at a stated interest rate, as well as commitment fees or other fees, which are not 

determined by reference to the performance of the underlying assets of the covered fund; and 
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(ii) Repayment of a fixed principal amount, on or before a maturity date, in a contractuallydetermined manner (which may include prepayment premiums intended solely to reflect, and 

compensate holders of the interest for, forgone income resulting from an early prepayment);

(2) The entitlement to payments under the terms of the interest are absolute and could not be 

reduced based on losses arising from the underlying assets of the covered fund, such as 

allocation of losses, write-downs or charge-offs of the outstanding principal balance, or 

reductions in the amount of interest due and payable on the interest; and

(3) The holders of the interest are not entitled to receive the underlying assets of the covered 

fund after all other interests have been redeemed or paid in full (excluding the rights of a creditor 

to exercise remedies upon the occurrence of an event of default or an acceleration event).

* * * * *

(d) * * *

(11) Riskless principal transaction. Riskless principal transaction means a transaction in which a 

banking entity, after receiving an order from a customer to buy (or sell) a security, purchases (or 

sells) the security in the secondary market for its own account to offset a contemporaneous sale 

to (or purchase from) the customer.

18. Amend § 351.12 by:

a. Revising paragraph (b)(1)(ii);

b. Revising paragraph (b)(4);

c. Adding paragraph (b)(5);

d. Revising paragraph (c)(1); and

e. Revising paragraphs (d) and (e).

The revisions and addition read as follows:
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§ 351.12. Permitted investment in a covered fund.

* * * * *

(b) * * * 

(1) * * *

(ii) Treatment of registered investment companies, SEC-regulated business development 

companies, and foreign public funds. For purposes of paragraph (b)(1)(i) of this section, a 

registered investment company, SEC-regulated business development companies, or foreign 

public fund as described in § 351.10(c)(1) will not be considered to be an affiliate of the banking 

entity so long as:

(A) The banking entity, together with its affiliates, does not own, control, or hold with the power 

to vote 25 percent or more of the voting shares of the company or fund; and

(B) The banking entity, or an affiliate of the banking entity, provides investment advisory, 

commodity trading advisory, administrative, and other services to the company or fund in 

compliance with the limitations under applicable regulation, order, or other authority.

* * * * *

(4) Multi-tier fund investments—(i) Master-feeder fund investments. If the principal investment 

strategy of a covered fund (the “feeder fund”) is to invest substantially all of its assets in another 

single covered fund (the “master fund”), then for purposes of the investment limitations in 

paragraphs (a)(2)(i)(B) and (a)(2)(ii) of this section, the banking entity’s permitted investment in 

such funds shall be measured only by reference to the value of the master fund. The banking 

entity’s permitted investment in the master fund shall include any investment by the banking 

entity in the master fund, as well as the banking entity’s pro-rata share of any ownership interest 

in the master fund that is held through the feeder fund; and
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(ii) Fund-of-funds investments. If a banking entity organizes and offers a covered fund pursuant 

to § 351.11 for the purpose of investing in other covered funds (a “fund of funds”) and that fund 

of funds itself invests in another covered fund that the banking entity is permitted to own, then 

the banking entity’s permitted investment in that other fund shall include any investment by the 

banking entity in that other fund, as well as the banking entity’s pro-rata share of any ownership 

interest in the fund that is held through the fund of funds. The investment of the banking entity 

may not represent more than 3 percent of the amount or value of any single covered fund.

(5) Parallel Investments and Co-Investments—(i) A banking entity shall not be required to 

include in the calculation of the investment limits under paragraph (a)(2) of this section any 

investment the banking entity makes alongside a covered fund as long as the investment is made 

in compliance with applicable laws and regulations, including applicable safety and soundness 

standards.

(ii) A banking entity shall not be restricted under this section in the amount of any investment the 

banking entity makes alongside a covered fund as long as the investment is made in compliance 

with applicable laws and regulations, including applicable safety and soundness standards.

(c) * * *

(1)(i) For purposes of paragraph (a)(2)(iii) of this section, the aggregate value of all ownership 

interests held by a banking entity shall be the sum of all amounts paid or contributed by the 

banking entity in connection with acquiring or retaining an ownership interest in covered funds 

(together with any amounts paid by the entity in connection with obtaining a restricted profit 

interest under § 351.10(d)(6)(ii)), on a historical cost basis;

(ii) Treatment of employee and director restricted profit interests financed by the banking entity. 

For purposes of paragraph (c)(1)(i) of this section, an investment by a director or employee of a 
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banking entity who acquires a restricted profit interest in his or her personal capacity in a 

covered fund sponsored by the banking entity will be attributed to the banking entity if the 

banking entity, directly or indirectly, extends financing for the purpose of enabling the director 

or employee to acquire the restricted profit interest in the fund and the financing is used to 

acquire such ownership interest in the covered fund.

* * * * *

(d) Capital treatment for a permitted investment in a covered fund. For purposes of calculating 

compliance with the applicable regulatory capital requirements, a banking entity shall deduct 

from the banking entity’s tier 1 capital (as determined under paragraph (c)(2) of this section) the 

greater of:

(1)(i) The sum of all amounts paid or contributed by the banking entity in connection with 

acquiring or retaining an ownership interest (together with any amounts paid by the entity in 

connection with obtaining a restricted profit interest under § 351.10(d)(6)(ii) of subpart C of this 

part), on a historical cost basis, plus any earnings received; and

(ii) The fair market value of the banking entity’s ownership interests in the covered fund as 

determined under paragraph (b)(2)(ii) or (b)(3) of this section (together with any amounts paid 

by the entity in connection with obtaining a restricted profit interest under § 351.10(d)(6)(ii) of 

subpart C of this part), if the banking entity accounts for the profits (or losses) of the fund 

investment in its financial statements.

(2) Treatment of employee and director restricted profit interests financed by the banking entity. 

For purposes of paragraph (d)(1) of this section, an investment by a director or employee of a 

banking entity who acquires a restricted profit interest in his or her personal capacity in a 

covered fund sponsored by the banking entity will be attributed to the banking entity if the 
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banking entity, directly or indirectly, extends financing for the purpose of enabling the director 

or employee to acquire the restricted profit interest in the fund and the financing is used to 

acquire such ownership interest in the covered fund.

(e) Extension of time to divest an ownership interest. (1) Extension Period. Upon application by 

a banking entity, the Board may extend the period under paragraph (a)(2)(i) of this section for up 

to 2 additional years if the Board finds that an extension would be consistent with safety and 

soundness and not detrimental to the public interest. 

(2) Application Requirements. An application for extension must:

(i) Be submitted to the Board at least 90 days prior to the expiration of the applicable time 

period;

(ii) Provide the reasons for application, including information that addresses the factors in 

paragraph (e)(3) of this section; and

(iii) Explain the banking entity’s plan for reducing the permitted investment in a covered fund 

through redemption, sale, dilution or other methods as required in paragraph (a)(2) of this 

section.

(3) Factors governing the Board determinations. In reviewing any application under paragraph 

(e)(1) of this section, the Board may consider all the facts and circumstances related to the 

permitted investment in a covered fund, including:

(i) Whether the investment would result, directly or indirectly, in a material exposure by the 

banking entity to high-risk assets or high-risk trading strategies;

(ii) The contractual terms governing the banking entity’s interest in the covered fund;
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(iii) The date on which the covered fund is expected to have attracted sufficient investments from 

investors unaffiliated with the banking entity to enable the banking entity to comply with the 

limitations in paragraph (a)(2)(i) of this section;

(iv) The total exposure of the covered banking entity to the investment and the risks that 

disposing of, or maintaining, the investment in the covered fund may pose to the banking entity 

and the financial stability of the United States;

(v) The cost to the banking entity of divesting or disposing of the investment within the 

applicable period;

(vi) Whether the investment or the divestiture or conformance of the investment would involve 

or result in a material conflict of interest between the banking entity and unaffiliated parties, 

including clients, customers, or counterparties to which it owes a duty;

(vii) The banking entity’s prior efforts to reduce through redemption, sale, dilution, or other 

methods its ownership interests in the covered fund, including activities related to the marketing 

of interests in such covered fund;

(viii) Market conditions; and

(ix) Any other factor that the Board believes appropriate.

(4) Authority to impose restrictions on activities or investment during any extension period. The 

Board may impose such conditions on any extension approved under paragraph (e)(1) of this 

section as the Board determines are necessary or appropriate to protect the safety and soundness 

of the banking entity or the financial stability of the United States, address material conflicts of 

interest or other unsound banking practices, or otherwise further the purposes of section 13 of the 

BHC Act and this part.
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(5) Consultation. In the case of a banking entity that is primarily regulated by another Federal 

banking agency, the SEC, or the CFTC, the Board will consult with such agency prior to acting 

on an application by the banking entity for an extension under paragraph (e)(1) of this section.

19. Amend § 351.13 by adding paragraph (d) to read as follows:

§ 351.13. Other permitted covered fund activities and investments.

* * * * *

(d) Permitted covered fund activities and investments of qualifying foreign excluded funds. (1) 

The prohibition contained in § 351.10(a) does not apply to a qualifying foreign excluded fund. 

(2) For purposes of this paragraph (d), a qualifying foreign excluded fund means a banking entity 

that: 

(i) Is organized or established outside the United States, and the ownership interests of which are 

offered and sold solely outside the United States;

(ii)(A) Would be a covered fund if the entity were organized or established in the United States, or 

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

primarily for the purpose of investing in financial instruments for resale or other disposition or 

otherwise trading in financial instruments;

(iii) Would not otherwise be a banking entity except by virtue of the acquisition or retention of 

an ownership interest in, sponsorship of, or relationship with the entity, by another banking 

entity that meets the following:

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

that is organized, under the laws of the United States or of any State; and
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(B) The banking entity’s acquisition of an ownership interest in or sponsorship of the fund by the 

foreign banking entity meets the requirements for permitted covered fund activities and 

investments solely outside the United States, as provided in § 351.13(b);

(iv) Is established and operated as part of a bona fide asset management business; and

(v) Is not operated in a manner that enables the banking entity that sponsors or controls the 

qualifying foreign excluded fund, or any of its affiliates, to evade the requirements of section 13 

of the BHC Act or this part.

20. Amend § 351.14 by:

a. Revising paragraph (a)(2)(i);

b. Revising paragraph (a)(2)(ii)(C);

c. Adding paragraphs (a)(2)(iii), (a)(2)(iv); and (a)(3); and

d. Revising paragraph (c).

The revisions and additions read as follows:

§ 351.14. Limitations on relationships with a covered fund.

(a) * * *

(2) * * *

(i) Acquire and retain any ownership interest in a covered fund in accordance with the 

requirements of §§ 351.11, 351.12, or 351.13;

(ii) * * *

(C) The Board has not determined that such transaction is inconsistent with the safe and sound 

operation and condition of the banking entity; and
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(iii) Enter into a transaction with a covered fund that would be an exempt covered transaction 

under 12 U.S.C. 371c(d) or § 223.42 of the Board’s Regulation W (12 CFR 223.42) subject to 

the limitations specified under 12 U.S.C. 371c(d) or § 223.42 of the Board’s Regulation W (12 

CFR 223.42), as applicable, 

(iv) Enter into a riskless principal transaction with a covered fund; and

(v) Extend credit to or purchase assets from a covered fund, provided:

(A) Each extension of credit or purchase of assets is in the ordinary course of business in 

connection with payment transactions; settlement services; or futures, derivatives, and securities 

clearing; 

(B) Each extension of credit is repaid, sold, or terminated by the end of five business days; and

(C) The banking entity making each extension of credit meets the requirements of § 

223.42(l)(1)(i) and (ii) of the Board’s Regulation W (12 CFR 223.42(l)(1)(i) and(ii)), as if the 

extension of credit was an intraday extension of credit, regardless of the duration of the extension 

of credit.

(3) Any transaction or activity permitted under paragraphs (a)(2)(iii), (iv) or (v) must comply 

with the limitations in § 351.15.

* * * * *

(c) Restrictions on other permitted transactions. Any transaction permitted under paragraphs 

(a)(2)(ii), (a)(2)(iii), or (a)(2)(iv) of this section shall be subject to section 23B of the Federal 

Reserve Act (12 U.S.C. 371c-1) as if the counterparty were an affiliate of the banking entity 

under section 23B.

Subpart D — Compliance Program Requirements; Violations

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

b. Revising paragraph (d); and 

c. Revising paragraph (e).

The revisions and addition read as follows:

§ 351.20. Program for compliance; reporting.

(a) Program requirement. Each banking entity (other than a banking entity with limited trading 

assets and liabilities or a qualifying foreign excluded fund under section 351.6(f) or 351.13(d)) 

shall develop and provide for the continued administration of a compliance program reasonably 

designed to ensure and monitor compliance with the prohibitions and restrictions on proprietary 

trading and covered fund activities and investments set forth in section 13 of the BHC Act and 

this part. The terms, scope, and detail of the compliance program shall be appropriate for the 

types, size, scope, and complexity of activities and business structure of the banking entity.

* * * * *

(d) Reporting requirements under appendix A to this part. (1) A banking entity (other than a 

qualifying foreign excluded fund under section 351.6(f) or 351.13(d)) engaged in proprietary 

trading activity permitted under subpart B shall comply with the reporting requirements 

described in appendix A to this part, if:

* * * * *

(e) Additional documentation for covered funds. A banking entity with significant trading assets 

and liabilities (other than a qualifying foreign excluded fund under section 351.6(f) or 351.13(d)) 

shall maintain records that include: 

* * * * *
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COMMODITY FUTURES TRADING COMMISSION

17 CFR Chapter I

Authority and Issuance

For the reasons set forth in the Common Preamble, the Commodity Futures Trading 

Commission proposes to amend part 75 to chapter I of Title 17 of the Code of Federal 

Regulations as follows:

PART 75 PROPRIETARY TRADING AND CERTAIN INTERESTS IN AND 

RELATIONSHIPS WITH COVERED FUNDS

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

Authority: 12 U.S.C. 1851.

Subpart B — Proprietary Trading

23. Amend § 75.6 by adding paragraph (f) to read as follows:

§ 75.6. Other permitted proprietary trading activities.

* * * * *

(f) Permitted trading activities of qualifying foreign excluded funds. The prohibition contained 

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

foreign excluded fund. For purposes of this paragraph (f), a qualifying foreign excluded fund 

means a banking entity that: 

(1) Is organized or established outside the United States, and the ownership interests of which are 

offered and sold solely outside the United States;

(2)(i) Would be a covered fund if the entity were organized or established in the United States, or 
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(ii) Is, or holds itself out as being, an entity or arrangement that raises money from investors 

primarily for the purpose of investing in financial instruments for resale or other disposition or 

otherwise trading in financial instruments;

(3) Would not otherwise be a banking entity except by virtue of the acquisition or retention of an 

ownership interest in, sponsorship of, or relationship with the entity, by another banking entity 

that meets the following:

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

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

(ii) The banking entity’s acquisition or retention of an ownership interest in or sponsorship of the 

fund meets the requirements for permitted covered fund activities and investments solely outside 

the United States, as provided in § 75.13(b);

(4) Is established and operated as part of a bona fide asset management business; and

(5) Is not operated in a manner that enables the banking entity that sponsors or controls the 

qualifying foreign excluded fund, or any of its affiliates, to evade the requirements of section 13 

of the BHC Act or this part.

Subpart C — Covered Funds Activities and Investments

24. Amend § 75.10 by:

a. Revising paragraph (c)(1);

b. Revising paragraph (c)(3)(i);

c. Revising paragraph (c)(8);

d. Revising paragraph (c)(10)(i);

e. Revising paragraph (c)(11)(i);

f. Adding paragraphs (c)(15), (16), (17), and (18); 
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g. Revising paragraph (d)(6); and

h. Adding paragraph (d)(11).

The revisions and additions read as follows:

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

relationships with a covered fund.

* * * * *

(c) * * *

(1) Foreign public funds. (i) Subject to paragraphs (c)(1)(ii) and (iii) of this section, an issuer 

that:

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

(B) Is authorized to offer and sell ownership interests, and such interests are offered and sold, 

through one or more public offerings. 

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

entity that is, located in or organized under the laws of the United States or of any State and any 

issuer for which such banking entity acts as sponsor, the sponsoring banking entity may not rely 

on the exemption in paragraph (c)(1)(i) of this section for such issuer unless more than 75 

percent of the ownership interests in the issuer are sold to persons other than:

(A) Such sponsoring banking entity;

(B) Such issuer; 

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

(D) Directors and senior executive officers as defined in § 225.71(c) of the Board’s Regulation Y 

(12 CFR 225.71(c)) of such entities.
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(iii) For purposes of paragraph (c)(1)(i)(B) of this section, the term “public offering” means a 

distribution (as defined in § 75.4(a)(3)) of securities in any jurisdiction outside the United States 

to investors, including retail investors, provided that:

(A) The distribution is subject to substantive disclosure and retail investor protection laws or 

regulations;

(B) With respect to an issuer for which the banking entity serves as the investment manager, 

investment adviser, commodity trading advisor, commodity pool operator, or sponsor, the 

distribution complies with all applicable requirements in the jurisdiction in which such 

distribution is being made;

(C) The distribution does not restrict availability to investors having a minimum level of net 

worth or net investment assets; and

(D) The issuer has filed or submitted, with the appropriate regulatory authority in such 

jurisdiction, offering disclosure documents that are publicly available.

* * * * *

(3) * * *

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

* * * * *

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

the conditions of this paragraph (c)(8) and the assets or holdings of which are composed solely 

of:

(A) Loans as defined in § 75.2(t);

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

holders of such securities and rights or other assets that are related or incidental to purchasing or 
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otherwise acquiring and holding the loans, provided that each asset that is a security (other than 

special units of beneficial interest and collateral certificates meeting the requirements of 

paragraph (c)(8)(v) of this section) meets the requirements of paragraph (c)(8)(iii) of this section;

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

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

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

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

(E) Debt securities, other than asset-backed securities and convertible securities, provided that: 

(1) the aggregate value of such debt securities does not exceed five percent of the aggregate 

value of loans held under paragraph (c)(8)(i)(A) of this section, cash and cash equivalents held 

under paragraph (c)(8)(iii)(A), and debt securities held under this paragraph (c)(8)(i)(E); and

(2) the aggregate value of the loans, cash and cash equivalents, and debt securities for purposes 

of this paragraph is calculated at par value at the most recent time any such debt security is 

acquired, except that the issuing entity may instead determine the value of any such loan, cash 

equivalent, or debt security based on its fair market value if:

(i) the issuing entity is required to use the fair market value of such assets for purposes of 

calculating compliance with concentration limitations or other similar calculations under its 

transaction agreements, and 

(ii) the issuing entity’s valuation methodology values similarly situated assets consistently.

(ii) Impermissible assets. For purposes of this paragraph (c)(8), except as permitted under 

paragraph (c)(8)(i)(E) of this section, the assets or holdings of the issuing entity shall not include 

any of the following:
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(A) A security, including an asset-backed security, or an interest in an equity or debt security 

other than as permitted in paragraphs (c)(8)(iii), (iv), or (v) of this section;

(B) A derivative, other than a derivative that meets the requirements of paragraph (c)(8)(iv) of 

this section; or

(C) A commodity forward contract.

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

entity may hold securities, other than debt securities permitted under paragraph (c)(8)(i)(E), if 

those securities are:

(A) Cash equivalents – which, for the purposes of this paragraph, means high quality, highly 

liquid investments whose maturity corresponds to the securitization’s expected or potential need 

for funds and whose currency corresponds to either the underlying loans or the asset-backed 

securities – for purposes of the rights and assets in paragraph (c)(8)(i)(B) of this section; or

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

the asset-backed securities.

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

or foreign exchange derivatives that satisfy all of the following conditions:

(A) The written terms of the derivatives directly relate to the loans, the asset-backed securities, 

the contractual rights or other assets described in paragraph (c)(8)(i)(B) of this section, or the 

debt securities described in paragraph (c)(8)(i)(E) of this section; and

(B) The derivatives reduce the interest rate and/or foreign exchange risks related to the loans, the 

asset-backed securities, the contractual rights or other assets described in paragraph (c)(8)(i)(B) 

of this section, or the debt securities described in paragraph (c)(8)(i)(E) of this section.
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(v) Special units of beneficial interest and collateral certificates. The assets or holdings of the 

issuing entity may include collateral certificates and special units of beneficial interest issued by 

a special purpose vehicle, provided that:

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

certificate meets the requirements in this paragraph (c)(8);

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

transferring to the issuing entity for the loan securitization the economic risks and benefits of the 

assets that are permissible for loan securitizations under this paragraph (c)(8) and does not 

directly or indirectly transfer any interest in any other economic or financial exposure;

(C) The special unit of beneficial interest or collateral certificate is created solely to satisfy legal 

requirements or otherwise facilitate the structuring of the loan securitization; and

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

certificate and the issuing entity are established under the direction of the same entity that 

initiated the loan securitization.

* * * * *

(10) Qualifying covered bonds—(i) Scope. An entity owning or holding a dynamic or fixed pool 

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

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

meet the conditions in paragraph (c)(8)(i) of this section.

* * * * *

(11) * * * 

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

Business Investment Act of 1958 (15 U.S.C. 662), or that has received from the Small Business 
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Administration notice to proceed to qualify for a license as a small business investment 

company, which notice or license has not been revoked, or that has voluntarily surrendered its 

license to operate as a small business investment company in accordance with 13 CFR 107.1900 

and does not make any new investments (other than investments in cash equivalents, which, for 

the purposes of this paragraph, means high quality, highly liquid investments whose maturity 

corresponds to the issuer’s expected or potential need for funds and whose currency corresponds 

to the issuer’s assets) after such voluntary surrender; 

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

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

(11) of section 5136 of the Revised Statutes of the United States (12 U.S.C. 24), including the 

welfare of low- and moderate-income communities or families (such as providing housing, 

services, or jobs) and including investments that qualify for consideration under the regulations 

implementing the Community Reinvestment Act (12 U.S.C. 2901 et seq.); or

(B) Qualified rehabilitation expenditures with respect to a qualified rehabilitated building or 

certified historic structure, as such terms are defined in section 47 of the Internal Revenue Code 

of 1986 or a similar State historic tax credit program;

(iii) That has elected to be regulated or is regulated as a rural business investment company, as 

described in 15 U.S.C. 80b-3(b)(8)(A) or (B), or that has terminated its participation as a rural 

business investment company in accordance with 7 CFR 4290.1900 and does not make any new 

investments (other than investments in cash equivalents, which, for the purposes of this 

paragraph, means high quality, highly liquid investments whose maturity corresponds to the 

issuer’s expected or potential need for funds and whose currency corresponds to the issuer’s 

assets) after such termination; or
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(iv) That is a qualified opportunity fund, as defined in 26 U.S.C. 1400Z-2(d). 

* * * * *

(15) Credit funds. Subject to paragraphs (c)(15)(iii), (iv), and (v) of this section, an issuer that 

satisfies the asset and activity requirements of paragraphs (c)(15)(i) and (ii) of this section.

(i) Asset requirements. The issuer’s assets must be composed solely of:

(A) Loans as defined in § 75.2(t);

(B) Debt instruments, subject to paragraph (c)(15)(iv) of this section;

(C) Rights and other assets that are related or incidental to acquiring, holding, servicing, or 

selling such loans or debt instruments, provided that:

(1) Each right or asset held under this paragraph (c)(15)(i)(C) that is a security is either: 

(i) A cash equivalent (which, for the purposes of this paragraph, means high quality, highly 

liquid investments whose maturity corresponds to the issuer’s expected or potential need for 

funds and whose currency corresponds to either the underlying loans or the debt instruments); 

(ii) A security received in lieu of debts previously contracted with respect to such loans or debt 

instruments; or 

(iii) An equity security (or right to acquire an equity security) received on customary terms in 

connection with such loans or debt instruments; and

(2) Rights or other assets held under this paragraph (c)(15)(i)(C) of this section may not include 

commodity forward contracts or any derivative; and

(D) Interest rate or foreign exchange derivatives, if:

(1) The written terms of the derivative directly relate to the loans, debt instruments, or other 

rights or assets described in paragraph (c)(15)(i)(C) of this section; and
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(2) The derivative reduces the interest rate and/or foreign exchange risks related to the loans, 

debt instruments, or other rights or assets described in paragraph (c)(15)(i)(C) of this section.

(ii) Activity requirements. To be eligible for the exclusion of paragraph (c)(15) of this section, an 

issuer must:

(A) Not engage in any activity that would constitute proprietary trading under § 75.3(b)(l)(i), as 

if the issuer were a banking entity; and 

(B) Not issue asset-backed securities.

(iii) Requirements for a sponsor, investment adviser, or commodity trading advisor. A banking 

entity that acts as a sponsor, investment adviser, or commodity trading advisor to an issuer that 

meets the conditions in paragraphs (c)(15)(i) and (ii) of this section may not rely on this 

exclusion unless the banking entity:

(A) Provides in writing to any prospective and actual investor in the issuer the disclosures 

required under § 75.11(a)(8) of this subpart, as if the issuer were a covered fund;

(B) Ensures that the activities of the issuer are consistent with safety and soundness standards 

that are substantially similar to those that would apply if the banking entity engaged in the 

activities directly; and

(C) Complies with the limitations imposed in § 75.14, as if the issuer were a covered fund, 

except the banking entity may acquire and retain any ownership interest in the issuer.

(iv) Additional Banking Entity Requirements. A banking entity may not rely on this exclusion 

with respect to an issuer that meets the conditions in paragraphs (c)(15)(i) and (ii) of this section 

unless:
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(A) The banking entity does not, directly or indirectly, guarantee, assume, or otherwise insure the 

obligations or performance of the issuer or of any entity to which such issuer extends credit or in 

which such issuer invests; and

(B) Any assets the issuer holds pursuant to paragraphs (c)(15)(i)(B) or (i)(C)(1)(iii) of this 

section would be permissible for the banking entity to acquire and hold directly under applicable 

federal banking laws and regulations.

(v) Investment and Relationship Limits. A banking entity’s investment in, and relationship with, 

the issuer must:

(A) Comply with the limitations imposed in § 75.15, as if the issuer were a covered fund; and

(B) Be conducted in compliance with, and subject to, applicable banking laws and regulations, 

including applicable safety and soundness standards.

(16) Qualifying venture capital funds. (i) Subject to paragraphs (c)(16)(ii) through (iv) of this 

section, an issuer that:

(A) Is a venture capital fund as defined in 17 CFR 275.203(l)-1; and

(B) Does not engage in any activity that would constitute proprietary trading under § 

75.3(b)(1)(i), as if the issuer were a banking entity.

(ii) A banking entity that acts as a sponsor, investment adviser, or commodity trading advisor to 

an issuer that meets the conditions in paragraph (c)(16)(i) of this section may not rely on this 

exclusion unless the banking entity:

(A) Provides in writing to any prospective and actual investor in the issuer the disclosures 

required under § 75.11(a)(8), as if the issuer were a covered fund;
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(B) Ensures that the activities of the issuer are consistent with safety and soundness standards 

that are substantially similar to those that would apply if the banking entity engaged in the 

activities directly; and

(C) Complies with the restrictions in § 75.14 as if the issuer were a covered fund (except the 

banking entity may acquire and retain any ownership interest in the issuer).

(iii) The banking entity must not, directly or indirectly, guarantee, assume, or otherwise insure 

the obligations or performance of the issuer.

(iv) A banking entity’s ownership interest in or relationship with the issuer must:

(A) Comply with the limitations imposed in § 75.15, as if the issuer were a covered fund; and

(B) Be conducted in compliance with, and subject to, applicable banking laws and regulations, 

including applicable safety and soundness standards.

(17) Family wealth management vehicles. (i) Subject to paragraph (c)(17)(ii) of this section, any 

entity that is not, and does not hold itself out as being, an entity or arrangement that raises money 

from investors primarily for the purpose of investing in securities for resale or other disposition 

or otherwise trading in securities, and: 

(A) If the entity is a trust, the grantor(s) of the entity are all family customers; and

(B) If the entity is not a trust:

(1) A majority of the voting interests in the entity are owned (directly or indirectly) by family 

customers; 

(2) A majority of the interests in the entity are owned (directly or indirectly) by family

customers;

(3) The entity is owned only by family customers and up to 5 closely related persons of the 

family customers; and
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(C) Notwithstanding paragraph (c)(17)(i)(A) and (B) of this section, up to an aggregate 0.5 

percent of the entity’s outstanding ownership interests may be acquired or retained by one or 

more entities that are not family customers or closely related persons if the ownership interest is 

acquired or retained by such parties for the purpose of and to the extent necessary for 

establishing corporate separateness or addressing bankruptcy, insolvency, or similar concerns. 

(ii) A banking entity may rely on the exclusion in paragraph (c)(17)(i) of this section with respect 

to an entity provided that the banking entity (or an affiliate):

(A) Provides bona fide trust, fiduciary, investment advisory, or commodity trading advisory 

services to the entity; 

(B) Does not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or 

performance of such entity; 

(C) Complies with the disclosure obligations under § 75.11(a)(8), as if such entity were a 

covered fund, provided that the content may be modified to prevent the disclosure from being 

misleading and the manner of disclosure may be modified to accommodate the specific 

circumstances of the entity; 

(D) Does not acquire or retain, as principal, an ownership interest in the entity, other than as 

described in paragraph (c)(17)(i)(C) of this section; 

(E) Complies with the requirements of §§ 75.14(b) and 75.15, as if such entity were a covered 

fund; and

(F) Except for riskless principal transactions as defined in paragraph (d)(11) of this section, 

complies with the requirements of 12 CFR 223.15(a), as if such banking entity and its affiliates 

were a member bank and the entity were an affiliate thereof. 

(iii) For purposes of paragraph (c)(17) of this section, the following definitions apply:
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(A) “Closely related person” means a natural person (including the estate and estate planning 

vehicles of such person) who has longstanding business or personal relationships with any family 

customer.

(B) “Family customer” means:

(1) A family client, as defined in Rule 202(a)(11)(G)-1(d)(4) of the Investment Advisers Act of 

1940 (17 CFR 275.202(a)(11)(G)-1(d)(4)); or

(2) Any natural person who is a father-in-law, mother-in-law, brother-in-law, sister-in-law, sonin-law or daughter-in-law of a family client, or a spouse or a spousal equivalent of any of the 

foregoing.

(18) Customer facilitation vehicles. (i) Subject to paragraph (c)(18)(ii) of this section, an issuer 

that is formed by or at the request of a customer of the banking entity for the purpose of 

providing such customer (which may include one or more affiliates of such customer) with 

exposure to a transaction, investment strategy, or other service provided by the banking entity.

(ii) A banking entity may rely on the exclusion in paragraph (c)(18)(i) of this section with respect 

to an issuer provided that:

(A) All of the ownership interests of the issuer are owned by the customer (which may include 

one or more of its affiliates) for whom the issuer was created; 

(B) Notwithstanding paragraph (c)(18)(ii)(A) of this section, up to an aggregate 0.5 percent of 

the issuer’s outstanding ownership interests may be acquired or retained by one or more entities 

that are not customers if the ownership interest is acquired or retained by such parties for the 

purpose of and to the extent necessary for establishing corporate separateness or addressing 

bankruptcy, insolvency, or similar concerns; and

(C) The banking entity and its affiliates:
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(1) Maintain documentation outlining how the banking entity intends to facilitate the customer’s 

exposure to such transaction, investment strategy, or service;

(2) Do not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or 

performance of such issuer; 

(3) Comply with the disclosure obligations under § 75.11(a)(8), as if such issuer were a covered 

fund, provided that the content may be modified to prevent the disclosure from being misleading 

and the manner of disclosure may be modified to accommodate the specific circumstances of the 

issuer; 

(4) Do not acquire or retain, as principal, an ownership interest in the issuer, other than as 

described in paragraph (c)(18)(ii)(B) of this section; 

(5) Comply with the requirements of §§ 75.14(b) and 75.15, as if such issuer were a covered 

fund; and

(6) Except for riskless principal transactions as defined in paragraph (d)(11) of this section, 

comply with the requirements of 12 CFR 223.15(a), as if such banking entity and its affiliates 

were a member bank and the issuer were an affiliate thereof.

* * * * *

(d) * * *

(6) Ownership interest—(i) Ownership interest means any equity, partnership, or other similar 

interest. An “other similar interest” means an interest that: 

(A) Has the right to participate in the selection or removal of a general partner, managing 

member, member of the board of directors or trustees, investment manager, investment adviser, 

or commodity trading advisor of the covered fund, excluding:
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(1) the rights of a creditor to exercise remedies upon the occurrence of an event of default or an 

acceleration event; and

(2) the right to participate in the removal of an investment manager for “cause” or participate in 

the selection of a replacement manager upon an investment manager's resignation or removal.

For purposes of this paragraph (d)(6)(i)(A)(2), “cause” for removal of an investment manager 

means one or more of the following events:

(i) the bankruptcy, insolvency, conservatorship or receivership of the investment manager;

(ii) the breach by the investment manager of any material provision of the covered fund’s 

transaction agreements applicable to the investment manager;

(iii) the breach by the investment manager of material representations or warranties;

(iv) the occurrence of an act that constitutes fraud or criminal activity in the performance of the 

investment manager’s obligations under the covered fund’s transaction agreements;

(v) the indictment of the investment manager for a criminal offense, or the indictment of any 

officer, member, partner or other principal of the investment manager for a criminal offense 

materially related to his or her investment management activities;

(vi) a change in control with respect to the investment manager;

(vii) the loss, separation or incapacitation of an individual critical to the operation of the 

investment manager or primarily responsible for the management of the covered fund’s assets; or

(viii) other similar events that constitute “cause” for removal of an investment manager, provided 

that such events are not solely related to the performance of the covered fund or the investment 

manager’s exercise of investment discretion under the covered fund’s transaction agreements;

(B) Has the right under the terms of the interest to receive a share of the income, gains or profits 

of the covered fund;
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(C) Has the right to receive the underlying assets of the covered fund after all other interests have 

been redeemed and/or paid in full (excluding the rights of a creditor to exercise remedies upon 

the occurrence of an event of default or an acceleration event);

(D) Has the right to receive all or a portion of excess spread (the positive difference, if any, 

between the aggregate interest payments received from the underlying assets of the covered fund 

and the aggregate interest paid to the holders of other outstanding interests);

(E) Provides under the terms of the interest that the amounts payable by the covered fund with 

respect to the interest could be reduced based on losses arising from the underlying assets of the 

covered fund, such as allocation of losses, write-downs or charge-offs of the outstanding 

principal balance, or reductions in the amount of interest due and payable on the interest;

(F) Receives income on a pass-through basis from the covered fund, or has a rate of return that is 

determined by reference to the performance of the underlying assets of the covered fund; or

(G) Any synthetic right to have, receive, or be allocated any of the rights in paragraphs 

(d)(6)(i)(A) through (F) of this section.

(ii) Ownership interest does not include: 

(A) Restricted profit interest, which is an interest held by an entity (or an employee or former 

employee thereof) in a covered fund for which the entity (or employee thereof) serves as 

investment manager, investment adviser, commodity trading advisor, or other service provider, 

so long as:

(1) The sole purpose and effect of the interest is to allow the entity (or employee or former 

employee thereof) to share in the profits of the covered fund as performance compensation for 

the investment management, investment advisory, commodity trading advisory, or other services 

provided to the covered fund by the entity (or employee or former employee thereof), provided 
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that the entity (or employee or former employee thereof) may be obligated under the terms of 

such interest to return profits previously received;

(2) All such profit, once allocated, is distributed to the entity (or employee or former employee 

thereof) promptly after being earned or, if not so distributed, is retained by the covered fund for 

the sole purpose of establishing a reserve amount to satisfy contractual obligations with respect 

to subsequent losses of the covered fund and such undistributed profit of the entity (or employee

or former employee thereof) does not share in the subsequent investment gains of the covered 

fund;

(3) Any amounts invested in the covered fund, including any amounts paid by the entity in 

connection with obtaining the restricted profit interest, are within the limits of § 75.12 of this 

subpart; and

(4) The interest is not transferable by the entity (or employee or former employee thereof) except 

to an affiliate thereof (or an employee of the banking entity or affiliate), to immediate family 

members, or through the intestacy, of the employee or former employee, or in connection with a 

sale of the business that gave rise to the restricted profit interest by the entity (or employee or 

former employee thereof) to an unaffiliated party that provides investment management, 

investment advisory, commodity trading advisory, or other services to the fund. 

(B) Any senior loan or senior debt interest that has the following characteristics:

(1) Under the terms of the interest the holders of such interest do not have the right to receive a 

share of the income, gains, or profits of the covered fund, but are entitled to receive only: 

(i) Interest at a stated interest rate, as well as commitment fees or other fees, which are not 

determined by reference to the performance of the underlying assets of the covered fund; and 
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(ii) Repayment of a fixed principal amount, on or before a maturity date, in a contractuallydetermined manner (which may include prepayment premiums intended solely to reflect, and 

compensate holders of the interest for, forgone income resulting from an early prepayment);

(2) The entitlement to payments under the terms of the interest are absolute and could not be 

reduced based on losses arising from the underlying assets of the covered fund, such as 

allocation of losses, write-downs or charge-offs of the outstanding principal balance, or 

reductions in the amount of interest due and payable on the interest; and

(3) The holders of the interest are not entitled to receive the underlying assets of the covered

fund after all other interests have been redeemed or paid in full (excluding the rights of a creditor 

to exercise remedies upon the occurrence of an event of default or an acceleration event).

* * * * *

(d) * * *

(11) Riskless principal transaction. Riskless principal transaction means a transaction in which a 

banking entity, after receiving an order from a customer to buy (or sell) a security, purchases (or 

sells) the security in the secondary market for its own account to offset a contemporaneous sale 

to (or purchase from) the customer.

26. Amend § 75.12 by:

a. Revising paragraph (b)(1)(ii);

b. Revising paragraph (b)(4);

c. Adding paragraph (b)(5);

d. Revising paragraph (c)(1); and

e. Revising paragraphs (d) and (e).

The revisions and addition read as follows:
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§ 75.12. Permitted investment in a covered fund.

* * * * *

(b) * * * 

(1) * * *

(ii) Treatment of registered investment companies, SEC-regulated business development 

companies, and foreign public funds. For purposes of paragraph (b)(1)(i) of this section, a 

registered investment company, SEC-regulated business development companies, or foreign 

public fund as described in § 75.10(c)(1) will not be considered to be an affiliate of the banking 

entity so long as:

(A) The banking entity, together with its affiliates, does not own, control, or hold with the power 

to vote 25 percent or more of the voting shares of the company or fund; and

(B) The banking entity, or an affiliate of the banking entity, provides investment advisory, 

commodity trading advisory, administrative, and other services to the company or fund in 

compliance with the limitations under applicable regulation, order, or other authority.

* * * * *

(4) Multi-tier fund investments—(i) Master-feeder fund investments. If the principal investment 

strategy of a covered fund (the “feeder fund”) is to invest substantially all of its assets in another 

single covered fund (the “master fund”), then for purposes of the investment limitations in 

paragraphs (a)(2)(i)(B) and (a)(2)(ii) of this section, the banking entity’s permitted investment in 

such funds shall be measured only by reference to the value of the master fund. The banking 

entity’s permitted investment in the master fund shall include any investment by the banking 

entity in the master fund, as well as the banking entity’s pro-rata share of any ownership interest 

in the master fund that is held through the feeder fund; and
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(ii) Fund-of-funds investments. If a banking entity organizes and offers a covered fund pursuant 

to § 75.11 for the purpose of investing in other covered funds (a “fund of funds”) and that fund 

of funds itself invests in another covered fund that the banking entity is permitted to own, then 

the banking entity’s permitted investment in that other fund shall include any investment by the 

banking entity in that other fund, as well as the banking entity’s pro-rata share of any ownership 

interest in the fund that is held through the fund of funds. The investment of the banking entity 

may not represent more than 3 percent of the amount or value of any single covered fund.

(5) Parallel Investments and Co-Investments—(i) A banking entity shall not be required to 

include in the calculation of the investment limits under paragraph (a)(2) of this section any 

investment the banking entity makes alongside a covered fund as long as the investment is made 

in compliance with applicable laws and regulations, including applicable safety and soundness 

standards.

(ii) A banking entity shall not be restricted under this section in the amount of any investment the 

banking entity makes alongside a covered fund as long as the investment is made in compliance 

with applicable laws and regulations, including applicable safety and soundness standards.

(c) * * *

(1)(i) For purposes of paragraph (a)(2)(iii) of this section, the aggregate value of all ownership 

interests held by a banking entity shall be the sum of all amounts paid or contributed by the 

banking entity in connection with acquiring or retaining an ownership interest in covered funds 

(together with any amounts paid by the entity in connection with obtaining a restricted profit 

interest under § 75.10(d)(6)(ii)), on a historical cost basis;

(ii) Treatment of employee and director restricted profit interests financed by the banking entity. 

For purposes of paragraph (c)(1)(i) of this section, an investment by a director or employee of a 
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banking entity who acquires a restricted profit interest in his or her personal capacity in a 

covered fund sponsored by the banking entity will be attributed to the banking entity if the 

banking entity, directly or indirectly, extends financing for the purpose of enabling the director 

or employee to acquire the restricted profit interest in the fund and the financing is used to 

acquire such ownership interest in the covered fund.

* * * * *

(d) Capital treatment for a permitted investment in a covered fund. For purposes of calculating 

compliance with the applicable regulatory capital requirements, a banking entity shall deduct 

from the banking entity’s tier 1 capital (as determined under paragraph (c)(2) of this section) the 

greater of:

(1)(i) The sum of all amounts paid or contributed by the banking entity in connection with 

acquiring or retaining an ownership interest (together with any amounts paid by the entity in 

connection with obtaining a restricted profit interest under § 75.10(d)(6)(ii) of subpart C of this 

part), on a historical cost basis, plus any earnings received; and

(ii) The fair market value of the banking entity’s ownership interests in the covered fund as

determined under paragraph (b)(2)(ii) or (b)(3) of this section (together with any amounts paid 

by the entity in connection with obtaining a restricted profit interest under § 75.10(d)(6)(ii) of 

subpart C of this part), if the banking entity accounts for the profits (or losses) of the fund 

investment in its financial statements.

(2) Treatment of employee and director restricted profit interests financed by the banking entity. 

For purposes of paragraph (d)(1) of this section, an investment by a director or employee of a 

banking entity who acquires a restricted profit interest in his or her personal capacity in a 

covered fund sponsored by the banking entity will be attributed to the banking entity if the 
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banking entity, directly or indirectly, extends financing for the purpose of enabling the director 

or employee to acquire the restricted profit interest in the fund and the financing is used to 

acquire such ownership interest in the covered fund.

(e) Extension of time to divest an ownership interest. (1) Extension Period. Upon application by 

a banking entity, the Board may extend the period under paragraph (a)(2)(i) of this section for up 

to 2 additional years if the Board finds that an extension would be consistent with safety and 

soundness and not detrimental to the public interest. 

(2) Application Requirements. An application for extension must:

(i) Be submitted to the Board at least 90 days prior to the expiration of the applicable time 

period;

(ii) Provide the reasons for application, including information that addresses the factors in 

paragraph (e)(3) of this section; and

(iii) Explain the banking entity’s plan for reducing the permitted investment in a covered fund 

through redemption, sale, dilution or other methods as required in paragraph (a)(2) of this

section.

(3) Factors governing the Board determinations. In reviewing any application under paragraph 

(e)(1) of this section, the Board may consider all the facts and circumstances related to the 

permitted investment in a covered fund, including:

(i) Whether the investment would result, directly or indirectly, in a material exposure by the 

banking entity to high-risk assets or high-risk trading strategies;

(ii) The contractual terms governing the banking entity’s interest in the covered fund;
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(iii) The date on which the covered fund is expected to have attracted sufficient investments from 

investors unaffiliated with the banking entity to enable the banking entity to comply with the 

limitations in paragraph (a)(2)(i) of this section;

(iv) The total exposure of the covered banking entity to the investment and the risks that 

disposing of, or maintaining, the investment in the covered fund may pose to the banking entity 

and the financial stability of the United States;

(v) The cost to the banking entity of divesting or disposing of the investment within the 

applicable period;

(vi) Whether the investment or the divestiture or conformance of the investment would involve 

or result in a material conflict of interest between the banking entity and unaffiliated parties, 

including clients, customers, or counterparties to which it owes a duty;

(vii) The banking entity’s prior efforts to reduce through redemption, sale, dilution, or other 

methods its ownership interests in the covered fund, including activities related to the marketing 

of interests in such covered fund;

(viii) Market conditions; and

(ix) Any other factor that the Board believes appropriate.

(4) Authority to impose restrictions on activities or investment during any extension period. The 

Board may impose such conditions on any extension approved under paragraph (e)(1) of this 

section as the Board determines are necessary or appropriate to protect the safety and soundness 

of the banking entity or the financial stability of the United States, address material conflicts of 

interest or other unsound banking practices, or otherwise further the purposes of section 13 of the 

BHC Act and this part.
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(5) Consultation. In the case of a banking entity that is primarily regulated by another Federal 

banking agency, the SEC, or the CFTC, the Board will consult with such agency prior to acting 

on an application by the banking entity for an extension under paragraph (e)(1) of this section.

26. Amend § 75.13 by adding paragraph (d) to read as follows:

§ 75.13. Other permitted covered fund activities and investments.

* * * * *

(d) Permitted covered fund activities and investments of qualifying foreign excluded funds. (1) 

The prohibition contained in § 75.10(a) does not apply to a qualifying foreign excluded fund. 

(2) For purposes of this paragraph (d), a qualifying foreign excluded fund means a banking entity 

that: 

(i) Is organized or established outside the United States, and the ownership interests of which are 

offered and sold solely outside the United States;

(ii)(A) Would be a covered fund if the entity were organized or established in the United States, or 

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

primarily for the purpose of investing in financial instruments for resale or other disposition or 

otherwise trading in financial instruments;

(iii) Would not otherwise be a banking entity except by virtue of the acquisition or retention of 

an ownership interest in, sponsorship of, or relationship with the entity, by another banking 

entity that meets the following:

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

that is organized, under the laws of the United States or of any State; and
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(B) The banking entity’s acquisition of an ownership interest in or sponsorship of the fund by the 

foreign banking entity meets the requirements for permitted covered fund activities and 

investments solely outside the United States, as provided in § 75.13(b);

(iv) Is established and operated as part of a bona fide asset management business; and

(v) Is not operated in a manner that enables the banking entity that sponsors or controls the 

qualifying foreign excluded fund, or any of its affiliates, to evade the requirements of section 13 

of the BHC Act or this part.

27. Amend § 75.14 by:

a. Revising paragraph (a)(2)(i);

b. Revising paragraph (a)(2)(ii)(C);

c. Adding paragraphs (a)(2)(iii), (a)(2)(iv); and (a)(3); and

d. Revising paragraph (c).

The revisions and additions read as follows:

§ 75.14. Limitations on relationships with a covered fund.

(a) * * *

(2) * * *

(i) Acquire and retain any ownership interest in a covered fund in accordance with the 

requirements of §§ 75.11, 75.12, or 75.13;

(ii) * * *

(C) The Board has not determined that such transaction is inconsistent with the safe and sound 

operation and condition of the banking entity; and

(iii) Enter into a transaction with a covered fund that would be an exempt covered transaction 

under 12 U.S.C. 371c(d) or § 223.42 of the Board’s Regulation W (12 CFR 223.42) subject to 
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the limitations specified under 12 U.S.C. 371c(d) or § 223.42 of the Board’s Regulation W (12 

CFR 223.42), as applicable, 

(iv) Enter into a riskless principal transaction with a covered fund; and

(v) Extend credit to or purchase assets from a covered fund, provided:

(A) Each extension of credit or purchase of assets is in the ordinary course of business in 

connection with payment transactions; settlement services; or futures, derivatives, and securities 

clearing; 

(B) Each extension of credit is repaid, sold, or terminated by the end of five business days; and

(C) The banking entity making each extension of credit meets the requirements of § 

223.42(l)(1)(i) and (ii) of the Board’s Regulation W (12 CFR 223.42(l)(1)(i) and(ii)), as if the 

extension of credit was an intraday extension of credit, regardless of the duration of the extension 

of credit.

(3) Any transaction or activity permitted under paragraphs (a)(2)(iii), (iv) or (v) must comply 

with the limitations in § 75.15.

* * * * *

(c) Restrictions on other permitted transactions. Any transaction permitted under paragraphs 

(a)(2)(ii), (a)(2)(iii), or (a)(2)(iv) of this section shall be subject to section 23B of the Federal 

Reserve Act (12 U.S.C. 371c-1) as if the counterparty were an affiliate of the banking entity 

under section 23B.

Subpart D — Compliance Program Requirements; Violations

28. Amend § 75.20 by:

a. Revising paragraph (a);

b. Revising paragraph (d); and 
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c. Revising paragraph (e).

The revisions and addition read as follows:

§ 75.20. Program for compliance; reporting.

(a) Program requirement. Each banking entity (other than a banking entity with limited trading 

assets and liabilities or a qualifying foreign excluded fund under section 75.6(f) or 75.13(d)) 

shall develop and provide for the continued administration of a compliance program reasonably 

designed to ensure and monitor compliance with the prohibitions and restrictions on proprietary 

trading and covered fund activities and investments set forth in section 13 of the BHC Act and 

this part. The terms, scope, and detail of the compliance program shall be appropriate for the 

types, size, scope, and complexity of activities and business structure of the banking entity.

* * * * *

(d) Reporting requirements under appendix A to this part. (1) A banking entity (other than a 

qualifying foreign excluded fund under section 75.6(f) or 75.13(d)) engaged in proprietary 

trading activity permitted under subpart B shall comply with the reporting requirements 

described in appendix A to this part, if:

* * * * *

(e) Additional documentation for covered funds. A banking entity with significant trading assets 

and liabilities (other than a qualifying foreign excluded fund under section 75.6(f) or 75.13(d)) 

shall maintain records that include: 

* * * * *
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SECURITIES AND EXCHANGE COMMISSION

17 CFR Chapter II 

Authority and Issuance

For the reasons set forth in the Common Preamble, the Securities and Exchange 

Commission proposes to amend part 255 to chapter II of Title 17 of the Code of Federal 

Regulations as follows:

PART 255 PROPRIETARY TRADING AND CERTAIN INTERESTS IN AND 

RELATIONSHIPS WITH COVERED FUNDS

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

Authority: 12 U.S.C. 1851.

Subpart B — Proprietary Trading

30. Amend § 255.6 by adding paragraph (f) to read as follows:

§ 255.6. Other permitted proprietary trading activities.

* * * * *

(f) Permitted trading activities of qualifying foreign excluded funds. The prohibition contained 

in § 255.3(a) does not apply to the purchase or sale of a financial instrument by a qualifying 

foreign excluded fund. For purposes of this paragraph (f), a qualifying foreign excluded fund 

means a banking entity that: 

(1) Is organized or established outside the United States, and the ownership interests of which are 

offered and sold solely outside the United States;

(2)(i) Would be a covered fund if the entity were organized or established in the United States, or 
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(ii) Is, or holds itself out as being, an entity or arrangement that raises money from investors 

primarily for the purpose of investing in financial instruments for resale or other disposition or 

otherwise trading in financial instruments;

(3) Would not otherwise be a banking entity except by virtue of the acquisition or retention of an 

ownership interest in, sponsorship of, or relationship with the entity, by another banking entity 

that meets the following:

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

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

(ii) The banking entity’s acquisition or retention of an ownership interest in or sponsorship of the 

fund meets the requirements for permitted covered fund activities and investments solely outside 

the United States, as provided in § 255.13(b);

(4) Is established and operated as part of a bona fide asset management business; and

(5) Is not operated in a manner that enables the banking entity that sponsors or controls the

qualifying foreign excluded fund, or any of its affiliates, to evade the requirements of section 13 

of the BHC Act or this part.

Subpart C — Covered Funds Activities and Investments

31. Amend § 255.10 by:

a. Revising paragraph (c)(1);

b. Revising paragraph (c)(3)(i);

c. Revising paragraph (c)(8);

d. Revising paragraph (c)(10)(i);

e. Revising paragraph (c)(11)(i);

f. Adding paragraphs (c)(15), (16), (17), and (18); 
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g. Revising paragraph (d)(6); and

h. Adding paragraph (d)(11).

The revisions and additions read as follows:

§ 255.10. Prohibition on acquiring or retaining an ownership interest in and having certain 

relationships with a covered fund.

* * * * *

(c) * * *

(1) Foreign public funds. (i) Subject to paragraphs (c)(1)(ii) and (iii) of this section, an issuer 

that:

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

(B) Is authorized to offer and sell ownership interests, and such interests are offered and sold, 

through one or more public offerings. 

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

entity that is, located in or organized under the laws of the United States or of any State and any 

issuer for which such banking entity acts as sponsor, the sponsoring banking entity may not rely 

on the exemption in paragraph (c)(1)(i) of this section for such issuer unless more than 75 

percent of the ownership interests in the issuer are sold to persons other than:

(A) Such sponsoring banking entity;

(B) Such issuer; 

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

(D) Directors and senior executive officers as defined in § 225.71(c) of the Board’s Regulation Y 

(12 CFR 225.71(c)) of such entities.
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(iii) For purposes of paragraph (c)(1)(i)(B) of this section, the term “public offering” means a 

distribution (as defined in § 255.4(a)(3)) of securities in any jurisdiction outside the United 

States to investors, including retail investors, provided that:

(A) The distribution is subject to substantive disclosure and retail investor protection laws or 

regulations;

(B) With respect to an issuer for which the banking entity serves as the investment manager, 

investment adviser, commodity trading advisor, commodity pool operator, or sponsor, the 

distribution complies with all applicable requirements in the jurisdiction in which such 

distribution is being made;

(C) The distribution does not restrict availability to investors having a minimum level of net 

worth or net investment assets; and

(D) The issuer has filed or submitted, with the appropriate regulatory authority in such 

jurisdiction, offering disclosure documents that are publicly available.

* * * * *

(3) * * *

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

* * * * *

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

the conditions of this paragraph (c)(8) and the assets or holdings of which are composed solely 

of:

(A) Loans as defined in § 255.2(t);

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

holders of such securities and rights or other assets that are related or incidental to purchasing or 
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otherwise acquiring and holding the loans, provided that each asset that is a security (other than 

special units of beneficial interest and collateral certificates meeting the requirements of 

paragraph (c)(8)(v) of this section) meets the requirements of paragraph (c)(8)(iii) of this section;

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

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

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

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

(E) Debt securities, other than asset-backed securities and convertible securities, provided that: 

(1) the aggregate value of such debt securities does not exceed five percent of the aggregate 

value of loans held under paragraph (c)(8)(i)(A) of this section, cash and cash equivalents held 

under paragraph (c)(8)(iii)(A), and debt securities held under this paragraph (c)(8)(i)(E); and

(2) the aggregate value of the loans, cash and cash equivalents, and debt securities for purposes 

of this paragraph is calculated at par value at the most recent time any such debt security is 

acquired, except that the issuing entity may instead determine the value of any such loan, cash 

equivalent, or debt security based on its fair market value if:

(i) the issuing entity is required to use the fair market value of such assets for purposes of 

calculating compliance with concentration limitations or other similar calculations under its 

transaction agreements, and 

(ii) the issuing entity’s valuation methodology values similarly situated assets consistently.

(ii) Impermissible assets. For purposes of this paragraph (c)(8), except as permitted under 

paragraph (c)(8)(i)(E) of this section, the assets or holdings of the issuing entity shall not include 

any of the following:
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(A) A security, including an asset-backed security, or an interest in an equity or debt security 

other than as permitted in paragraphs (c)(8)(iii), (iv), or (v) of this section;

(B) A derivative, other than a derivative that meets the requirements of paragraph (c)(8)(iv) of 

this section; or

(C) A commodity forward contract.

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

entity may hold securities, other than debt securities permitted under paragraph (c)(8)(i)(E), if 

those securities are:

(A) Cash equivalents – which, for the purposes of this paragraph, means high quality, highly 

liquid investments whose maturity corresponds to the securitization’s expected or potential need 

for funds and whose currency corresponds to either the underlying loans or the asset-backed 

securities – for purposes of the rights and assets in paragraph (c)(8)(i)(B) of this section; or

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

the asset-backed securities.

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

or foreign exchange derivatives that satisfy all of the following conditions:

(A) The written terms of the derivatives directly relate to the loans, the asset-backed securities, 

the contractual rights or other assets described in paragraph (c)(8)(i)(B) of this section, or the 

debt securities described in paragraph (c)(8)(i)(E) of this section; and

(B) The derivatives reduce the interest rate and/or foreign exchange risks related to the loans, the 

asset-backed securities, the contractual rights or other assets described in paragraph (c)(8)(i)(B) 

of this section, or the debt securities described in paragraph (c)(8)(i)(E) of this section.
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(v) Special units of beneficial interest and collateral certificates. The assets or holdings of the 

issuing entity may include collateral certificates and special units of beneficial interest issued by 

a special purpose vehicle, provided that:

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

certificate meets the requirements in this paragraph (c)(8);

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

transferring to the issuing entity for the loan securitization the economic risks and benefits of the 

assets that are permissible for loan securitizations under this paragraph (c)(8) and does not 

directly or indirectly transfer any interest in any other economic or financial exposure;

(C) The special unit of beneficial interest or collateral certificate is created solely to satisfy legal 

requirements or otherwise facilitate the structuring of the loan securitization; and

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

certificate and the issuing entity are established under the direction of the same entity that 

initiated the loan securitization.

* * * * *

(10) Qualifying covered bonds—(i) Scope. An entity owning or holding a dynamic or fixed pool 

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

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

meet the conditions in paragraph (c)(8)(i) of this section.

* * * * *

(11) * * * 

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

Business Investment Act of 1958 (15 U.S.C. 662), or that has received from the Small Business 
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Administration notice to proceed to qualify for a license as a small business investment 

company, which notice or license has not been revoked, or that has voluntarily surrendered its 

license to operate as a small business investment company in accordance with 13 CFR 107.1900 

and does not make any new investments (other than investments in cash equivalents, which, for 

the purposes of this paragraph, means high quality, highly liquid investments whose maturity 

corresponds to the issuer’s expected or potential need for funds and whose currency corresponds 

to the issuer’s assets) after such voluntary surrender; 

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

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

(11) of section 5136 of the Revised Statutes of the United States (12 U.S.C. 24), including the 

welfare of low- and moderate-income communities or families (such as providing housing, 

services, or jobs) and including investments that qualify for consideration under the regulations 

implementing the Community Reinvestment Act (12 U.S.C. 2901 et seq.); or

(B) Qualified rehabilitation expenditures with respect to a qualified rehabilitated building or 

certified historic structure, as such terms are defined in section 47 of the Internal Revenue Code 

of 1986 or a similar State historic tax credit program;

(iii) That has elected to be regulated or is regulated as a rural business investment company, as 

described in 15 U.S.C. 80b-3(b)(8)(A) or (B), or that has terminated its participation as a rural 

business investment company in accordance with 7 CFR 4290.1900 and does not make any new 

investments (other than investments in cash equivalents, which, for the purposes of this 

paragraph, means high quality, highly liquid investments whose maturity corresponds to the 

issuer’s expected or potential need for funds and whose currency corresponds to the issuer’s 

assets) after such termination; or
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(iv) That is a qualified opportunity fund, as defined in 26 U.S.C. 1400Z-2(d). 

* * * * *

(15) Credit funds. Subject to paragraphs (c)(15)(iii), (iv), and (v) of this section, an issuer that 

satisfies the asset and activity requirements of paragraphs (c)(15)(i) and (ii) of this section.

(i) Asset requirements. The issuer’s assets must be composed solely of:

(A) Loans as defined in § 255.2(t);

(B) Debt instruments, subject to paragraph (c)(15)(iv) of this section;

(C) Rights and other assets that are related or incidental to acquiring, holding, servicing, or 

selling such loans or debt instruments, provided that:

(1) Each right or asset held under this paragraph (c)(15)(i)(C) that is a security is either: 

(i) A cash equivalent (which, for the purposes of this paragraph, means high quality, highly 

liquid investments whose maturity corresponds to the issuer’s expected or potential need for 

funds and whose currency corresponds to either the underlying loans or the debt instruments); 

(ii) A security received in lieu of debts previously contracted with respect to such loans or debt 

instruments; or 

(iii) An equity security (or right to acquire an equity security) received on customary terms in 

connection with such loans or debt instruments; and

(2) Rights or other assets held under this paragraph (c)(15)(i)(C) of this section may not include 

commodity forward contracts or any derivative; and

(D) Interest rate or foreign exchange derivatives, if:

(1) The written terms of the derivative directly relate to the loans, debt instruments, or other 

rights or assets described in paragraph (c)(15)(i)(C) of this section; and
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(2) The derivative reduces the interest rate and/or foreign exchange risks related to the loans, 

debt instruments, or other rights or assets described in paragraph (c)(15)(i)(C) of this section.

(ii) Activity requirements. To be eligible for the exclusion of paragraph (c)(15) of this section, an 

issuer must:

(A) Not engage in any activity that would constitute proprietary trading under § 255.3(b)(l)(i), as 

if the issuer were a banking entity; and 

(B) Not issue asset-backed securities.

(iii) Requirements for a sponsor, investment adviser, or commodity trading advisor. A banking 

entity that acts as a sponsor, investment adviser, or commodity trading advisor to an issuer that 

meets the conditions in paragraphs (c)(15)(i) and (ii) of this section may not rely on this 

exclusion unless the banking entity:

(A) Provides in writing to any prospective and actual investor in the issuer the disclosures 

required under § 255.11(a)(8) of this subpart, as if the issuer were a covered fund;

(B) Ensures that the activities of the issuer are consistent with safety and soundness standards 

that are substantially similar to those that would apply if the banking entity engaged in the 

activities directly; and

(C) Complies with the limitations imposed in § 255.14, as if the issuer were a covered fund, 

except the banking entity may acquire and retain any ownership interest in the issuer.

(iv) Additional Banking Entity Requirements. A banking entity may not rely on this exclusion 

with respect to an issuer that meets the conditions in paragraphs (c)(15)(i) and (ii) of this section 

unless:
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(A) The banking entity does not, directly or indirectly, guarantee, assume, or otherwise insure the 

obligations or performance of the issuer or of any entity to which such issuer extends credit or in 

which such issuer invests; and

(B) Any assets the issuer holds pursuant to paragraphs (c)(15)(i)(B) or (i)(C)(1)(iii) of this 

section would be permissible for the banking entity to acquire and hold directly under applicable 

federal banking laws and regulations.

(v) Investment and Relationship Limits. A banking entity’s investment in, and relationship with, 

the issuer must:

(A) Comply with the limitations imposed in § 255.15, as if the issuer were a covered fund; and

(B) Be conducted in compliance with, and subject to, applicable banking laws and regulations, 

including applicable safety and soundness standards.

(16) Qualifying venture capital funds. (i) Subject to paragraphs (c)(16)(ii) through (iv) of this 

section, an issuer that:

(A) Is a venture capital fund as defined in 17 CFR 275.203(l)-1; and

(B) Does not engage in any activity that would constitute proprietary trading under § 

255.3(b)(1)(i), as if the issuer were a banking entity.

(ii) A banking entity that acts as a sponsor, investment adviser, or commodity trading advisor to 

an issuer that meets the conditions in paragraph (c)(16)(i) of this section may not rely on this 

exclusion unless the banking entity:

(A) Provides in writing to any prospective and actual investor in the issuer the disclosures 

required under § 255.11(a)(8), as if the issuer were a covered fund;
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(B) Ensures that the activities of the issuer are consistent with safety and soundness standards 

that are substantially similar to those that would apply if the banking entity engaged in the 

activities directly; and

(C) Complies with the restrictions in § 255.14 as if the issuer were a covered fund (except the 

banking entity may acquire and retain any ownership interest in the issuer).

(iii) The banking entity must not, directly or indirectly, guarantee, assume, or otherwise insure 

the obligations or performance of the issuer.

(iv) A banking entity’s ownership interest in or relationship with the issuer must:

(A) Comply with the limitations imposed in § 255.15, as if the issuer were a covered fund; and

(B) Be conducted in compliance with, and subject to, applicable banking laws and regulations, 

including applicable safety and soundness standards.

(17) Family wealth management vehicles. (i) Subject to paragraph (c)(17)(ii) of this section, any 

entity that is not, and does not hold itself out as being, an entity or arrangement that raises money 

from investors primarily for the purpose of investing in securities for resale or other disposition 

or otherwise trading in securities, and: 

(A) If the entity is a trust, the grantor(s) of the entity are all family customers; and

(B) If the entity is not a trust:

(1) A majority of the voting interests in the entity are owned (directly or indirectly) by family 

customers; 

(2) A majority of the interests in the entity are owned (directly or indirectly) by family 

customers;

(3) The entity is owned only by family customers and up to 5 closely related persons of the 

family customers; and
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(C) Notwithstanding paragraph (c)(17)(i)(A) and (B) of this section, up to an aggregate 0.5 

percent of the entity’s outstanding ownership interests may be acquired or retained by one or 

more entities that are not family customers or closely related persons if the ownership interest is 

acquired or retained by such parties for the purpose of and to the extent necessary for 

establishing corporate separateness or addressing bankruptcy, insolvency, or similar concerns. 

(ii) A banking entity may rely on the exclusion in paragraph (c)(17)(i) of this section with respect 

to an entity provided that the banking entity (or an affiliate):

(A) Provides bona fide trust, fiduciary, investment advisory, or commodity trading advisory 

services to the entity; 

(B) Does not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or 

performance of such entity; 

(C) Complies with the disclosure obligations under § 255.11(a)(8), as if such entity were a 

covered fund, provided that the content may be modified to prevent the disclosure from being 

misleading and the manner of disclosure may be modified to accommodate the specific 

circumstances of the entity; 

(D) Does not acquire or retain, as principal, an ownership interest in the entity, other than as 

described in paragraph (c)(17)(i)(C) of this section; 

(E) Complies with the requirements of §§ 255.14(b) and 255.15, as if such entity were a covered 

fund; and

(F) Except for riskless principal transactions as defined in paragraph (d)(11) of this section, 

complies with the requirements of 12 CFR 223.15(a), as if such banking entity and its affiliates 

were a member bank and the entity were an affiliate thereof. 

(iii) For purposes of paragraph (c)(17) of this section, the following definitions apply:
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(A) “Closely related person” means a natural person (including the estate and estate planning 

vehicles of such person) who has longstanding business or personal relationships with any family 

customer.

(B) “Family customer” means:

(1) A family client, as defined in Rule 202(a)(11)(G)-1(d)(4) of the Investment Advisers Act of 

1940 (17 CFR 275.202(a)(11)(G)-1(d)(4)); or

(2) Any natural person who is a father-in-law, mother-in-law, brother-in-law, sister-in-law, sonin-law or daughter-in-law of a family client, or a spouse or a spousal equivalent of any of the 

foregoing.

(18) Customer facilitation vehicles. (i) Subject to paragraph (c)(18)(ii) of this section, an issuer 

that is formed by or at the request of a customer of the banking entity for the purpose of 

providing such customer (which may include one or more affiliates of such customer) with 

exposure to a transaction, investment strategy, or other service provided by the banking entity.

(ii) A banking entity may rely on the exclusion in paragraph (c)(18)(i) of this section with respect 

to an issuer provided that:

(A) All of the ownership interests of the issuer are owned by the customer (which may include 

one or more of its affiliates) for whom the issuer was created; 

(B) Notwithstanding paragraph (c)(18)(ii)(A) of this section, up to an aggregate 0.5 percent of 

the issuer’s outstanding ownership interests may be acquired or retained by one or more entities 

that are not customers if the ownership interest is acquired or retained by such parties for the 

purpose of and to the extent necessary for establishing corporate separateness or addressing 

bankruptcy, insolvency, or similar concerns; and

(C) The banking entity and its affiliates:
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(1) Maintain documentation outlining how the banking entity intends to facilitate the customer’s 

exposure to such transaction, investment strategy, or service;

(2) Do not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or 

performance of such issuer; 

(3) Comply with the disclosure obligations under § 255.11(a)(8), as if such issuer were a covered 

fund, provided that the content may be modified to prevent the disclosure from being misleading 

and the manner of disclosure may be modified to accommodate the specific circumstances of the 

issuer; 

(4) Do not acquire or retain, as principal, an ownership interest in the issuer, other than as 

described in paragraph (c)(18)(ii)(B) of this section; 

(5) Comply with the requirements of §§ 255.14(b) and 255.15, as if such issuer were a covered 

fund; and

(6) Except for riskless principal transactions as defined in paragraph (d)(11) of this section, 

comply with the requirements of 12 CFR 223.15(a), as if such banking entity and its affiliates 

were a member bank and the issuer were an affiliate thereof.

* * * * *

(d) * * *

(6) Ownership interest—(i) Ownership interest means any equity, partnership, or other similar 

interest. An “other similar interest” means an interest that: 

(A) Has the right to participate in the selection or removal of a general partner, managing 

member, member of the board of directors or trustees, investment manager, investment adviser, 

or commodity trading advisor of the covered fund, excluding:
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(1) the rights of a creditor to exercise remedies upon the occurrence of an event of default or an 

acceleration event; and

(2) the right to participate in the removal of an investment manager for “cause” or participate in 

the selection of a replacement manager upon an investment manager's resignation or removal.

For purposes of this paragraph (d)(6)(i)(A)(2), “cause” for removal of an investment manager 

means one or more of the following events:

(i) the bankruptcy, insolvency, conservatorship or receivership of the investment manager;

(ii) the breach by the investment manager of any material provision of the covered fund’s 

transaction agreements applicable to the investment manager;

(iii) the breach by the investment manager of material representations or warranties;

(iv) the occurrence of an act that constitutes fraud or criminal activity in the performance of the 

investment manager’s obligations under the covered fund’s transaction agreements;

(v) the indictment of the investment manager for a criminal offense, or the indictment of any 

officer, member, partner or other principal of the investment manager for a criminal offense 

materially related to his or her investment management activities;

(vi) a change in control with respect to the investment manager;

(vii) the loss, separation or incapacitation of an individual critical to the operation of the 

investment manager or primarily responsible for the management of the covered fund’s assets; or

(viii) other similar events that constitute “cause” for removal of an investment manager, provided 

that such events are not solely related to the performance of the covered fund or the investment 

manager’s exercise of investment discretion under the covered fund’s transaction agreements;

(B) Has the right under the terms of the interest to receive a share of the income, gains or profits 

of the covered fund;
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(C) Has the right to receive the underlying assets of the covered fund after all other interests have 

been redeemed and/or paid in full (excluding the rights of a creditor to exercise remedies upon 

the occurrence of an event of default or an acceleration event);

(D) Has the right to receive all or a portion of excess spread (the positive difference, if any, 

between the aggregate interest payments received from the underlying assets of the covered fund 

and the aggregate interest paid to the holders of other outstanding interests);

(E) Provides under the terms of the interest that the amounts payable by the covered fund with 

respect to the interest could be reduced based on losses arising from the underlying assets of the 

covered fund, such as allocation of losses, write-downs or charge-offs of the outstanding 

principal balance, or reductions in the amount of interest due and payable on the interest;

(F) Receives income on a pass-through basis from the covered fund, or has a rate of return that is 

determined by reference to the performance of the underlying assets of the covered fund; or

(G) Any synthetic right to have, receive, or be allocated any of the rights in paragraphs 

(d)(6)(i)(A) through (F) of this section.

(ii) Ownership interest does not include: 

(A) Restricted profit interest, which is an interest held by an entity (or an employee or former 

employee thereof) in a covered fund for which the entity (or employee thereof) serves as 

investment manager, investment adviser, commodity trading advisor, or other service provider, 

so long as:

(1) The sole purpose and effect of the interest is to allow the entity (or employee or former 

employee thereof) to share in the profits of the covered fund as performance compensation for 

the investment management, investment advisory, commodity trading advisory, or other services 

provided to the covered fund by the entity (or employee or former employee thereof), provided 
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that the entity (or employee or former employee thereof) may be obligated under the terms of 

such interest to return profits previously received;

(2) All such profit, once allocated, is distributed to the entity (or employee or former employee 

thereof) promptly after being earned or, if not so distributed, is retained by the covered fund for 

the sole purpose of establishing a reserve amount to satisfy contractual obligations with respect 

to subsequent losses of the covered fund and such undistributed profit of the entity (or employee 

or former employee thereof) does not share in the subsequent investment gains of the covered 

fund;

(3) Any amounts invested in the covered fund, including any amounts paid by the entity in 

connection with obtaining the restricted profit interest, are within the limits of § 255.12 of this 

subpart; and

(4) The interest is not transferable by the entity (or employee or former employee thereof) except 

to an affiliate thereof (or an employee of the banking entity or affiliate), to immediate family 

members, or through the intestacy, of the employee or former employee, or in connection with a 

sale of the business that gave rise to the restricted profit interest by the entity (or employee or 

former employee thereof) to an unaffiliated party that provides investment management, 

investment advisory, commodity trading advisory, or other services to the fund. 

(B) Any senior loan or senior debt interest that has the following characteristics:

(1) Under the terms of the interest the holders of such interest do not have the right to receive a 

share of the income, gains, or profits of the covered fund, but are entitled to receive only: 

(i) Interest at a stated interest rate, as well as commitment fees or other fees, which are not 

determined by reference to the performance of the underlying assets of the covered fund; and 
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(ii) Repayment of a fixed principal amount, on or before a maturity date, in a contractuallydetermined manner (which may include prepayment premiums intended solely to reflect, and 

compensate holders of the interest for, forgone income resulting from an early prepayment);

(2) The entitlement to payments under the terms of the interest are absolute and could not be 

reduced based on losses arising from the underlying assets of the covered fund, such as 

allocation of losses, write-downs or charge-offs of the outstanding principal balance, or 

reductions in the amount of interest due and payable on the interest; and

(3) The holders of the interest are not entitled to receive the underlying assets of the covered 

fund after all other interests have been redeemed or paid in full (excluding the rights of a creditor 

to exercise remedies upon the occurrence of an event of default or an acceleration event).

* * * * *

(d) * * *

(11) Riskless principal transaction. Riskless principal transaction means a transaction in which a 

banking entity, after receiving an order from a customer to buy (or sell) a security, purchases (or 

sells) the security in the secondary market for its own account to offset a contemporaneous sale 

to (or purchase from) the customer.

32. Amend § 255.12 by:

a. Revising paragraph (b)(1)(ii);

b. Revising paragraph (b)(4);

c. Adding paragraph (b)(5);

d. Revising paragraph (c)(1); and

e. Revising paragraphs (d) and (e).

The revisions and addition read as follows:
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§ 255.12. Permitted investment in a covered fund.

* * * * *

(b) * * * 

(1) * * *

(ii) Treatment of registered investment companies, SEC-regulated business development 

companies, and foreign public funds. For purposes of paragraph (b)(1)(i) of this section, a 

registered investment company, SEC-regulated business development companies, or foreign 

public fund as described in § 255.10(c)(1) will not be considered to be an affiliate of the banking 

entity so long as:

(A) The banking entity, together with its affiliates, does not own, control, or hold with the power 

to vote 25 percent or more of the voting shares of the company or fund; and

(B) The banking entity, or an affiliate of the banking entity, provides investment advisory, 

commodity trading advisory, administrative, and other services to the company or fund in 

compliance with the limitations under applicable regulation, order, or other authority.

* * * * *

(4) Multi-tier fund investments—(i) Master-feeder fund investments. If the principal investment 

strategy of a covered fund (the “feeder fund”) is to invest substantially all of its assets in another 

single covered fund (the “master fund”), then for purposes of the investment limitations in 

paragraphs (a)(2)(i)(B) and (a)(2)(ii) of this section, the banking entity’s permitted investment in 

such funds shall be measured only by reference to the value of the master fund. The banking 

entity’s permitted investment in the master fund shall include any investment by the banking 

entity in the master fund, as well as the banking entity’s pro-rata share of any ownership interest 

in the master fund that is held through the feeder fund; and
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(ii) Fund-of-funds investments. If a banking entity organizes and offers a covered fund pursuant 

to § 255.11 for the purpose of investing in other covered funds (a “fund of funds”) and that fund 

of funds itself invests in another covered fund that the banking entity is permitted to own, then 

the banking entity’s permitted investment in that other fund shall include any investment by the 

banking entity in that other fund, as well as the banking entity’s pro-rata share of any ownership 

interest in the fund that is held through the fund of funds. The investment of the banking entity 

may not represent more than 3 percent of the amount or value of any single covered fund.

(5) Parallel Investments and Co-Investments—(i) A banking entity shall not be required to 

include in the calculation of the investment limits under paragraph (a)(2) of this section any 

investment the banking entity makes alongside a covered fund as long as the investment is made 

in compliance with applicable laws and regulations, including applicable safety and soundness 

standards.

(ii) A banking entity shall not be restricted under this section in the amount of any investment the 

banking entity makes alongside a covered fund as long as the investment is made in compliance 

with applicable laws and regulations, including applicable safety and soundness standards.

(c) * * *

(1)(i) For purposes of paragraph (a)(2)(iii) of this section, the aggregate value of all ownership 

interests held by a banking entity shall be the sum of all amounts paid or contributed by the 

banking entity in connection with acquiring or retaining an ownership interest in covered funds 

(together with any amounts paid by the entity in connection with obtaining a restricted profit 

interest under § 255.10(d)(6)(ii)), on a historical cost basis;

(ii) Treatment of employee and director restricted profit interests financed by the banking entity. 

For purposes of paragraph (c)(1)(i) of this section, an investment by a director or employee of a 
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banking entity who acquires a restricted profit interest in his or her personal capacity in a 

covered fund sponsored by the banking entity will be attributed to the banking entity if the 

banking entity, directly or indirectly, extends financing for the purpose of enabling the director 

or employee to acquire the restricted profit interest in the fund and the financing is used to 

acquire such ownership interest in the covered fund.

* * * * *

(d) Capital treatment for a permitted investment in a covered fund. For purposes of calculating 

compliance with the applicable regulatory capital requirements, a banking entity shall deduct 

from the banking entity’s tier 1 capital (as determined under paragraph (c)(2) of this section) the 

greater of:

(1)(i) The sum of all amounts paid or contributed by the banking entity in connection with 

acquiring or retaining an ownership interest (together with any amounts paid by the entity in 

connection with obtaining a restricted profit interest under § 255.10(d)(6)(ii) of subpart C of this 

part), on a historical cost basis, plus any earnings received; and

(ii) The fair market value of the banking entity’s ownership interests in the covered fund as 

determined under paragraph (b)(2)(ii) or (b)(3) of this section (together with any amounts paid 

by the entity in connection with obtaining a restricted profit interest under § 255.10(d)(6)(ii) of 

subpart C of this part), if the banking entity accounts for the profits (or losses) of the fund 

investment in its financial statements.

(2) Treatment of employee and director restricted profit interests financed by the banking entity. 

For purposes of paragraph (d)(1) of this section, an investment by a director or employee of a 

banking entity who acquires a restricted profit interest in his or her personal capacity in a 

covered fund sponsored by the banking entity will be attributed to the banking entity if the 
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banking entity, directly or indirectly, extends financing for the purpose of enabling the director 

or employee to acquire the restricted profit interest in the fund and the financing is used to 

acquire such ownership interest in the covered fund.

(e) Extension of time to divest an ownership interest. (1) Extension Period. Upon application by 

a banking entity, the Board may extend the period under paragraph (a)(2)(i) of this section for up 

to 2 additional years if the Board finds that an extension would be consistent with safety and 

soundness and not detrimental to the public interest. 

(2) Application Requirements. An application for extension must:

(i) Be submitted to the Board at least 90 days prior to the expiration of the applicable time 

period;

(ii) Provide the reasons for application, including information that addresses the factors in 

paragraph (e)(3) of this section; and

(iii) Explain the banking entity’s plan for reducing the permitted investment in a covered fund 

through redemption, sale, dilution or other methods as required in paragraph (a)(2) of this 

section.

(3) Factors governing the Board determinations. In reviewing any application under paragraph 

(e)(1) of this section, the Board may consider all the facts and circumstances related to the 

permitted investment in a covered fund, including:

(i) Whether the investment would result, directly or indirectly, in a material exposure by the 

banking entity to high-risk assets or high-risk trading strategies;

(ii) The contractual terms governing the banking entity’s interest in the covered fund;
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(iii) The date on which the covered fund is expected to have attracted sufficient investments from 

investors unaffiliated with the banking entity to enable the banking entity to comply with the 

limitations in paragraph (a)(2)(i) of this section;

(iv) The total exposure of the covered banking entity to the investment and the risks that 

disposing of, or maintaining, the investment in the covered fund may pose to the banking entity 

and the financial stability of the United States;

(v) The cost to the banking entity of divesting or disposing of the investment within the 

applicable period;

(vi) Whether the investment or the divestiture or conformance of the investment would involve 

or result in a material conflict of interest between the banking entity and unaffiliated parties, 

including clients, customers, or counterparties to which it owes a duty;

(vii) The banking entity’s prior efforts to reduce through redemption, sale, dilution, or other 

methods its ownership interests in the covered fund, including activities related to the marketing 

of interests in such covered fund;

(viii) Market conditions; and

(ix) Any other factor that the Board believes appropriate.

(4) Authority to impose restrictions on activities or investment during any extension period. The 

Board may impose such conditions on any extension approved under paragraph (e)(1) of this 

section as the Board determines are necessary or appropriate to protect the safety and soundness 

of the banking entity or the financial stability of the United States, address material conflicts of 

interest or other unsound banking practices, or otherwise further the purposes of section 13 of the 

BHC Act and this part.
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(5) Consultation. In the case of a banking entity that is primarily regulated by another Federal 

banking agency, the SEC, or the CFTC, the Board will consult with such agency prior to acting 

on an application by the banking entity for an extension under paragraph (e)(1) of this section.

33. Amend § 255.13 by adding paragraph (d) to read as follows:

§ 255.13. Other permitted covered fund activities and investments.

* * * * *

(d) Permitted covered fund activities and investments of qualifying foreign excluded funds. (1) 

The prohibition contained in § 255.10(a) does not apply to a qualifying foreign excluded fund. 

(2) For purposes of this paragraph (d), a qualifying foreign excluded fund means a banking entity 

that: 

(i) Is organized or established outside the United States, and the ownership interests of which are 

offered and sold solely outside the United States;

(ii)(A) Would be a covered fund if the entity were organized or established in the United States, or 

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

primarily for the purpose of investing in financial instruments for resale or other disposition or 

otherwise trading in financial instruments;

(iii) Would not otherwise be a banking entity except by virtue of the acquisition or retention of 

an ownership interest in, sponsorship of, or relationship with the entity, by another banking 

entity that meets the following:

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

that is organized, under the laws of the United States or of any State; and
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(B) The banking entity’s acquisition of an ownership interest in or sponsorship of the fund by the 

foreign banking entity meets the requirements for permitted covered fund activities and 

investments solely outside the United States, as provided in § 255.13(b);

(iv) Is established and operated as part of a bona fide asset management business; and

(v) Is not operated in a manner that enables the banking entity that sponsors or controls the 

qualifying foreign excluded fund, or any of its affiliates, to evade the requirements of section 13 

of the BHC Act or this part.

34. Amend § 255.14 by:

a. Revising paragraph (a)(2)(i);

b. Revising paragraph (a)(2)(ii)(C);

c. Adding paragraphs (a)(2)(iii), (a)(2)(iv); and (a)(3); and

d. Revising paragraph (c).

The revisions and additions read as follows:

§ 255.14. Limitations on relationships with a covered fund.

(a) * * *

(2) * * *

(i) Acquire and retain any ownership interest in a covered fund in accordance with the 

requirements of §§ 255.11, 255.12, or 255.13;

(ii) * * *

(C) The Board has not determined that such transaction is inconsistent with the safe and sound 

operation and condition of the banking entity; and

(iii) Enter into a transaction with a covered fund that would be an exempt covered transaction 

under 12 U.S.C. 371c(d) or § 223.42 of the Board’s Regulation W (12 CFR 223.42) subject to 
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(subject to technical corrections)

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the limitations specified under 12 U.S.C. 371c(d) or § 223.42 of the Board’s Regulation W (12 

CFR 223.42), as applicable, 

(iv) Enter into a riskless principal transaction with a covered fund; and

(v) Extend credit to or purchase assets from a covered fund, provided:

(A) Each extension of credit or purchase of assets is in the ordinary course of business in 

connection with payment transactions; settlement services; or futures, derivatives, and securities 

clearing; 

(B) Each extension of credit is repaid, sold, or terminated by the end of five business days; and

(C) The banking entity making each extension of credit meets the requirements of § 

223.42(l)(1)(i) and (ii) of the Board’s Regulation W (12 CFR 223.42(l)(1)(i) and(ii)), as if the 

extension of credit was an intraday extension of credit, regardless of the duration of the extension 

of credit.

(3) Any transaction or activity permitted under paragraphs (a)(2)(iii), (iv) or (v) must comply 

with the limitations in § 255.15.

* * * * *

(c) Restrictions on other permitted transactions. Any transaction permitted under paragraphs 

(a)(2)(ii), (a)(2)(iii), or (a)(2)(iv) of this section shall be subject to section 23B of the Federal 

Reserve Act (12 U.S.C. 371c-1) as if the counterparty were an affiliate of the banking entity 

under section 23B.

Subpart D — Compliance Program Requirements; Violations

35. Amend § 255.20 by:

a. Revising paragraph (a);

b. Revising paragraph (d); and 
Voting Draft – As approved by the Commodity Futures Trading Commission on 6/24/2020

(subject to technical corrections)

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c. Revising paragraph (e).

The revisions and addition read as follows:

§ 255.20. Program for compliance; reporting.

(a) Program requirement. Each banking entity (other than a banking entity with limited trading 

assets and liabilities or a qualifying foreign excluded fund under section 255.6(f) or 255.13(d)) 

shall develop and provide for the continued administration of a compliance program reasonably 

designed to ensure and monitor compliance with the prohibitions and restrictions on proprietary 

trading and covered fund activities and investments set forth in section 13 of the BHC Act and 

this part. The terms, scope, and detail of the compliance program shall be appropriate for the 

types, size, scope, and complexity of activities and business structure of the banking entity.

* * * * *

(d) Reporting requirements under appendix A to this part. (1) A banking entity (other than a 

qualifying foreign excluded fund under section 255.6(f) or 255.13(d)) engaged in proprietary 

trading activity permitted under subpart B shall comply with the reporting requirements 

described in appendix A to this part, if:

* * * * *

(e) Additional documentation for covered funds. A banking entity with significant trading assets 

and liabilities (other than a qualifying foreign excluded fund under section 255.6(f) or 255.13(d)) 

shall maintain records that include: 

* * * * *