104-4 (2 U.S.C. 1532) (``Unfunded Mandates Act''), requires that an
agency prepare a budgetary impact statement before promulgating any
rule likely to result in 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, as adjusted by
inflation, in any one year. If a budgetary impact statement is
required, Section 205 of the Unfunded Mandates Act also requires an
agency to identify and consider a reasonable number of regulatory
alternatives before promulgating a rule.
    The OCC has completed an assessment whether any mandates imposed by
the proposed rule may result in expenditures of $100 million or more
annually, as adjusted by inflation, by state, local, and tribal
governments, or by the private sector as required by the Unfunded
Mandates Act. The OCC focused its analysis on the impact of the various
compliance, recordkeeping, reporting, disclosure, and training
requirements in the proposed rule and, as provided for under section
201 of the Unfunded Mandates Act (2 U.S.C. 1531), excluded the cost of
requirements specifically set forth in the statute. Overall, the OCC
determined that this proposed rule will not result in expenditures by
state, local, and tribal governments, or by the private sector, of $100
million or more in any one year. Accordingly, this proposal is not
subject to Section 202 of the Unfunded Mandates Act.
    The OCC also will need to prepare an impact statement for the final
rule, for purposes of the Unfunded Mandates Act and the Congressional
Review Act, Public Law 104-121 (5 U.S.C. 801-808). Comments provided on
the costs and benefits of the proposed rule, in response to the
analysis and questions posed in the Supplemental Information Part
VII.D, will help to inform this assessment.

D. SEC: Small Business Regulatory Enforcement Fairness Act

    Under the Small Business Regulatory Enforcement Fairness Act of
1996,\368\ a rule is ``major'' if it has resulted, or is likely to
result, in:
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    \368\ Public Law 104-121, Title II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------

     An annual effect on the U.S. economy of $100 million or
more;
     A major increase in costs or prices for consumers or
individual industries; or
     Significant adverse effects on competition, investment, or
innovation.
    The SEC requests comment on whether its proposed rule would be a
``major'' rule for purposes of the Small Business Regulatory
Enforcement Fairness Act. In addition, the SEC solicits comment and
empirical data on:
     The potential effect on the U.S. economy on an annual
basis;
     Any potential increase in costs or prices for consumer or
individual industries; and
     Any potential effect on competition, investment, or
innovation.

VIII. SEC: Additional Matters

A. Statutory Authority and ``Covered Banking Entity'' Definition

1. Statutory authority
    Section --.1 of the proposed rule implementing section 13 of the
BHC Act cites section 13 of the BHC Act, pursuant to which the SEC is
adopting the entirety of the proposed rule with respect to ``covered
banking entities,'' as that term is defined in the SEC's proposed
rule.\369\ Section --.1 also cites the SEC's independent authority
under certain sections of the Exchange Act to adopt Sec. Sec.  --.5(c),
--.7(a), --.20, and Appendices A and C of the proposed rule.\370\
Compliance with such provisions, if adopted, will be subject to
examination and enforcement under the Exchange Act for certain covered
banking entities.
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    \369\ The SEC notes that the SEC is only proposing rules as they
would be applicable to the banking entities for which the SEC has
regulatory authority, as set forth in section 13(b)(2)(B)(IV) of the
BHC Act, e.g., registered broker-dealers. Accordingly, the SEC
proposal should be read in the context of these regulated entities
and comments to the SEC should focus on these entities. For
instance, the SEC is particularly interested in the impact of the
proposed rules on the activities of such entities.
    \370\ 15 U.S.C. 78o(c)(3)(A), 78o-10(f), (j), 78q(a), 78w.
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2. ``Covered Banking Entity'' Definition
    The proprietary trading and covered fund activity prohibition set
forth in section 13 of the BHC Act, as proposed to be implemented in
Sec.  --.3(a) and Sec.  --.10(a) of the proposed rule, would apply to
any ``covered banking entity.''\371\ The term ``banking entity'' is
generally defined under section 13 of the BHC Act to include any
insured depository institution, any company that controls an insured
depository institution, any company that is treated as a bank holding
company for purposes of section 8 of the International Banking Act of
1978, and any affiliates and subsidiaries of these entities.\372\
Section --.2(j) of the proposed rule implementing section 13 of BHC Act
would define the term ``covered banking entity.'' This term is used in
each Agency's proposed rule to describe the specific types of banking
entities to which that Agency's rule would apply.
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    \371\ Proposed rule Sec.  --.3(a) provides ``Except as otherwise
provided in this subpart, a covered banking entity may not engage in
proprietary trading.'' Proposed rule Sec.  --.10(a) provides
``Except as otherwise provided in this subpart, a covered banking
entity may not, as principal, directly or indirectly, acquire or
retain any ownership interest in or sponsor a covered fund.''
    \372\ See 12 U.S.C. 1851(h)(1); proposed rule Sec.  --.2(e).
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    As discussed in Part I of the Supplementary Information, the
authority for adopting regulations to implement section 13 of the BHC
Act is divided between the Agencies in the manner provided in section
13(b)(2).\373\

Section 13 of the BHC Act generally prohibits a banking entity from
engaging in proprietary trading or investing in or sponsoring a hedge
fund or private equity fund, and section 13(b)(2)(B)(i)(IV) of the BHC
Act directs the SEC to issue rules implementing that section with
respect to any entity for which the SEC is the primary financial
regulatory agency, as that term is defined in section 2 of the Dodd-
Frank Act.\374\ The SEC has proposed to restate that statutory
provision in defining ``covered banking entity'' for purposes of the
SEC's proposed rule.\375\
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    \373\ See 12 U.S.C. 1851(b)(2). Under section 13(b)(2)(B) of the
BHC Act, rules implementing section 13's prohibitions and
restrictions must be issued by: (i) The appropriate Federal banking
agencies (i.e., the Board, the OCC, and the FDIC), jointly, with
respect to insured depository institutions; (ii) the Board, with
respect to any company that controls an insured depository
institution, or that is treated as a bank holding company for
purposes of section 8 of the International Banking Act, any nonbank
financial company supervised by the Board, and any subsidiary of any
of the foregoing (other than a subsidiary for which an appropriate
Federal banking agency, the SEC, or the CFTC is the primary
financial regulatory agency); (iii) the CFTC with respect to any
entity for which it is the primary financial regulatory agency, as
defined in section 2 of the Dodd-Frank Act; and (iv) the SEC with
respect to any entity for which it is the primary financial
regulatory agency, as defined in section 2 of the Dodd-Frank Act.
See id.
    \374\ Under section 2(12)(B) of the Dodd-Frank Act, the term
``primary financial regulatory agency'' means the SEC with respect
to (i) SEC-registered brokers and dealers, with respect to the
activities of the broker or dealer that require the broker or dealer
to be registered as such under the Exchange Act; (ii) SEC-registered
investment companies, with respect to the activities of the
investment company that require the investment company to be
registered under the Investment Company Act; (iii) SEC-registered
investment advisers, with respect to the investment advisory
activities of such company and activities that are incidental to
such advisory activities; (iv) SEC-registered clearing agencies,
with respect to the activities of the clearing agency that require
the agency to be registered under the Exchange Act; (v) SEC-
registered nationally recognized statistical rating organizations;
(vi) SEC-registered transfer agents; (vii) national securities
exchanges registered with the SEC; (viii) national securities
associations registered with the SEC; (ix) SEC-registered securities
information processors; (x) the Municipal Securities Rulemaking
Board; (xi) the Public Company Accounting Oversight Board; (xii) the
Securities Investor Protection Corporation; and (xiii) SEC-
registered security-based swap execution facilities, security-based
swap data repositories, security-based swap dealers, and major
security-based swap participants, with respect to the security-based
swap activities of the person that require such person to be
registered under the Exchange Act. See section 2(12)(B) of the Dodd-
Frank Act. The SEC notes that, with respect to SEC-registered
clearing agencies, to the extent a clearing agency acquires or takes
a position in one or more covered financial positions in connection
with clearing securities transactions, such positions would be
excluded from the definition of trading account under the proposal.
See proposed rule Sec.  --.3(b)(2)(iii)(D). As a result of this
proposed exclusion, clearing agencies' positions taken in connection
with clearing securities transactions would not involve proprietary
trading, as defined under the proposal, and would not be subject to
the prohibition on proprietary trading in Sec.  --.3(a) of the
proposed rule. As discussed further below, the proposal is designed
to reduce any burdens on covered banking entities that do not engage
in proprietary trading and covered fund activities and investments.
    \375\ See SEC proposed rule Sec.  --.2(j).
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    The SEC recognizes that some entities that would be included in the
SEC's proposed definition of ``covered banking entity'' generally do
not engage in covered trading activities and covered fund activities
and investments. The SEC notes that, to the extent the covered banking
entity does not engage in activities and investments covered by section
13 of the BHC Act and the proposed rule, the proposal is reasonably
designed to reduce and alleviate any burdens on such a covered banking
entity, while also preventing evasion of the proposed rule.
Specifically, a covered banking entity that does not engage in
activities and investments prohibited or restricted by section 13 of
the BHC Act and the proposed rule would only be required to include
measures in its existing compliance policies and procedures that are
reasonably designed to prevent the covered banking entity from becoming
engaged in such activities and making such investments under the
proposed rule.\376\
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    \376\ See proposed rule Sec.  --.20(d). However, to the extent
that the covered banking entity becomes engaged in such activities
or investments, it would be required to develop a more detailed
compliance program, as set forth in Sec.  --.20(b) of the proposed
rule.
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    The SEC requests comment on the proposed definition of ``covered
banking entity.'' In particular, the SEC requests comment on the
following questions:
    Question SEC-1. Is the SEC's proposed definition of the term
``covered banking entity'' sufficiently clear? If not, why not? Please
suggest an alternative definition.
    Question SEC-2. Is the SEC's proposed definition of the term
``covered banking entity'' appropriate, or is it over- or under-
inclusive? Please explain.
    Question SEC-3. Should any of the covered banking entities included
in the SEC's proposed definition of ``covered banking entity'' be
excluded? If so, which entities, why, and on what basis? Should the
SEC's proposed rule provide specific guidance or exemptions for any
such entities?
    Question SEC-4. Would particular types of entities incur costs or
burdens that are greater than other types of entities that are included
in the SEC's proposed definition of ``covered banking entity''? If so,
should any such difference be addressed or mitigated? How?
    Question SEC-5. Are all of the provisions in the proposed rule
relevant to the business conducted by SEC covered banking entities? If
not, which provisions are not relevant and how should this be addressed
in the rule? Are there differences between the SEC's covered banking
entities and other types of banking entities subject to the rules of
the Federal banking agencies or the CFTC that have not been
sufficiently accounted for in the proposed rule? If so, what are these
differences and how should the SEC's rule account for such differences
in a manner that is consistent with the statutory requirement that the
Agencies' rules be consistent and comparable, to the extent possible?

B. Consideration of the Impact of Reporting and Recordkeeping and
Compliance Program Proposed Rules on Competition and on the Promotion
of Efficiency, Competition, and Capital Formation

    Section 3(f) of the Exchange Act requires the SEC, whenever it
engages in rulemaking and is required to consider or determine whether
an action is necessary or appropriate in the public interest, to
consider, in addition to the protection of investors, whether the
action would promote efficiency, competition, and capital
formation.\377\ In addition, section 23(a)(2) of the Exchange Act
requires the SEC, when adopting rules under the Exchange Act, to
consider the impact such rules would have on competition.\378\ Section
23(a)(2) of the Exchange Act also prohibits the SEC from adopting any
rule that would impose a burden on competition not necessary or
appropriate in furtherance of the purposes of the Exchange Act. The
SEC's consideration of the factors specified in Exchange Act sections
3(f) and 23(a)(2) is limited to those portions of the proposal that, in
addition to being proposed under section 13 of the BHC Act, are also
being proposed pursuant to the SEC's authority under the Exchange Act
with respect to covered banking entities that are registered broker-
dealers and security-based swap dealers. The remaining portions of the
joint proposed rule are being proposed exclusively under the authority
set forth in Section 13 of the BHC Act, which does not require
consideration of the factors specified in Exchange Act sections 3(f)
and 23(a)(2).
---------------------------------------------------------------------------

    \377\ 15 U.S.C. 78c(f).
    \378\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    As discussed above in Part III.B.5 of the Supplementary
Information, Sec.  --.7(a) of the proposed rule and proposed Appendix A
require covered banking entities that meet, together with their
affiliates and subsidiaries, the $1 billion gross trading assets and
liabilities threshold to: (i) Calculate and report certain quantitative
measurements, and (ii) create and retain records related to such
quantitative measurements. Further, under Sec.  --.7(a) of the proposed
rule and proposed Appendix A, a larger number of

quantitative measurements are required to be calculated and reported by
covered banking entities that, together with their affiliates and
subsidiaries, have over $5 billion gross trading assets and
liabilities. In addition, such measurements are required to be
calculated and reported for a broader scope of trading activities if a
covered banking entity meets the $5 billion threshold.
    The reporting and recordkeeping requirements in Sec.  --.7(a) and
Appendix A of the proposed rule are likely to impose certain costs on
covered banking entities that meet the $1 billion gross trading assets
and liabilities threshold, including costs associated with
implementing, monitoring, and attributing financial and personnel
resources for purposes of complying with the reporting and
recordkeeping requirements. Moreover, such costs will likely be greater
for covered banking entities that meet the $5 billion threshold.
Incurring these costs may marginally reduce the ability of covered
banking entities that are registered broker-dealers and security-based
swap dealers to compete with their non-banking entity counterparts or
with banking entities that do not meet the $1 billion threshold.
Further, as a result of these costs, the proposal may impose additional
competitive burdens on registered broker-dealers and security-based
swap dealers that, together with their affiliates and subsidiaries,
meet the $5 billion threshold, and may affect their ability to compete
with: (i) Banking entities with $1 to $5 billion gross trading assets
and liabilities; (ii) banking entities below the $1 billion threshold;
and (iii) non-banking entities. In addition, registered broker-dealers
and security-based swap dealers that are covered banking entities
meeting the $1 billion threshold may need to redirect resources from
other functions of the broker-dealer or security-based swap dealer in
order to comply with the reporting and recordkeeping requirements.
Reallocating available resources within the registered broker-dealer or
security-based swap dealer may reduce efficiency within the covered
banking entity and may have a marginal negative impact on the extent to
which the registered broker-dealer or security-based swap dealer
continues to perform certain functions, which may include those that
serve customers or provide other market benefits. If this were to
occur, registered broker-dealers and security-based swap dealers that
are covered banking entities meeting the $5 billion threshold may face
greater efficiency effects because they will likely need to devote more
time and resources to the enhanced reporting and recordkeeping
requirements set forth in the proposal for such covered banking
entities. The increased cost of doing business that may result from the
proposed reporting and recordkeeping requirements could also cause a
registered broker-dealer or security-based swap dealer that is a
covered banking entity to pass some of the costs along to customers and
clients of their services, such as market making or underwriting. On
the other hand, the reporting and recordkeeping requirements in Sec.
--.7(a) and Appendix A could have positive efficiency effects because
these measures generally may improve compliance within covered banking
entities and thereby reduce the potential consequences associated with
noncompliance.
    The reporting and recordkeeping requirements may create an
incentive for covered banking entities that are registered broker-
dealers and security-based swap dealers to reduce their average gross
sum of trading assets and liabilities, together with their affiliates
and subsidiaries, below the $5 billion threshold or $1 billion in order
to avoid the costs of complying with some or all of the requirements in
Sec.  --.7(a) of the proposed rule and Appendix A. To the extent the
proposed rule creates such an incentive, a covered banking entity that
is a registered broker-dealer or security-based swap dealer may reduce
the amount of its trading activities to be below the applicable
threshold. If a registered broker-dealer or security-based swap dealer
that is a covered banking entity decreased the extent to which it
engaged in trading activities, the resulting effects could be decreased
competitiveness of the registered broker-dealer or security-based swap
dealer in the broader market and reduced market efficiency and
liquidity. Whether there will be a competitive impact will depend on
the way in which a registered broker-dealer or security-based swap
dealer that is a covered banking entity chooses to reduce its trading
activities. For example, if the reporting and recordkeeping requirement
lead a covered banking entity to minimize its trading in a particular
product, this may lead to a decreased competitiveness in the trading of
that particular product. The reporting and recordkeeping requirements,
however, could enhance efficiency by improving covered banking
entities' compliance and thereby reduce the potential consequences
associated with noncompliance.
    Further, a majority of the quantitative measurements in proposed
Appendix A would only be required to be calculated and reported for
trading units engaged in market making-related activity under Sec.
--.4(b) of the proposed rule. To the extent that the costs associated
with the requirements in Appendix A create a disincentive for covered
banking entities that are registered broker-dealers or security-based
swap dealers to engage in the full range of market making-related
activity that is permitted under the rule, such covered banking
entities may reduce the size or scope of their market making
activities. If this were to occur to a significant extent, the overall
reduction in market making activities would likely have a negative
impact on market efficiency and liquidity and, as a related matter,
capital formation by causing certain banking entities to provide fewer
market making-related services. This potential reduction in market
making on the part of certain registered broker-dealers or security-
based swap dealers that are covered banking entities may cause some
demand for market making-related services to migrate to smaller banking
entities not meeting the $1 billion threshold and non-banking entities.
At the same time, the quantitative measurements required under Appendix
A could have positive efficiency effects by generally improving
compliance and thereby reduce the potential consequences associated
with noncompliance.
    The documentation requirements of Sec.  --.5(c) of the proposed
rule, which provides that risk-mitigating hedging transactions must be
documented in a specified manner if the hedging transaction is
established at a level of organization that is different than the level
of organization establishing or responsible for the position, contract,
or other holding that is being hedged, may have a negative impact on
efficiency by reducing the speed with which a covered banking entity
could execute a hedge at a different level within the entity. To the
extent that the proposed documentation requirement makes it more costly
or difficult for a covered banking entity that is a registered broker-
dealer or security-based swap dealer to establish hedges at a different
level within the entity, this requirement may result in increased risks
or reduced profitability of the broker-dealer or security-based swap
dealer, which could negatively affect the competitiveness of the
broker-dealer or security-based swap dealer. Further, greater
difficulties or increased costs, such as those related to potential

systems changes and maintenance, employee resources and time, and
recordkeeping, related to establishing a hedge at a different level
within the covered banking entity may cause the registered broker-
dealer or security-based swap dealer to reduce its underwriting or
market making-related activities under the proposed rule in order to
avoid costs related to hedging underwriting or market making positions,
which could likewise harm efficiency and capital formation.
Alternatively, such costs could be passed through to clients or
customers of the registered broker-dealer or security-based swap dealer
which, in turn, could harm capital formation.
    As discussed above in Part III.D of the Supplemental Information,
Sec.  --.20 of the proposed rule requires all covered banking entities
to develop and provide for the continued administration of a program
reasonably designed to ensure and monitor compliance with the
prohibitions and restrictions of section 13 of the BHC Act and the
proposed rule, unless such covered banking entity does not engage in
activities or investments prohibited or restricted by subpart B or
subpart C of the proposed rule.\379\ In addition, covered banking
entities that meet the thresholds in Sec.  --.20(c) of the proposed
rule are required to satisfy the additional standards and requirements
in proposed Appendix C with respect to their compliance program.
---------------------------------------------------------------------------

    \379\ See proposed rule Sec. Sec.  --.20(a), (d).
---------------------------------------------------------------------------

    The SEC recognizes that the compliance program requirements in the
proposal are likely to impose certain costs, including implementation
and ongoing maintenance costs associated with hiring additional
personnel or other personnel modifications, new or additional systems
(including computer hardware or software), ongoing system maintenance,
developing exception reports, surveillance (e.g., reviewing and
monitoring exception reports), consultation with outside experts (e.g.,
attorneys, accountants), recordkeeping, independent testing, and
training. These costs may increase competitive burdens on registered
broker-dealers and security-based swap dealers that are covered banking
entities. For example, the increased compliance costs related to
implementation and ongoing maintenance of the six elements of the
compliance program (i.e., written policies and procedures, internal
controls, a management framework, independent testing, training, and
recordkeeping), as part of the overall cost of doing business, may make
it more difficult for covered banking entities that are registered
broker-dealers and security-based swap dealers to compete with non-
banking entity broker-dealers and security-based swap dealers. Further,
there may be additional competitive burdens for covered banking
entities that are registered broker-dealers and security-based swap
dealers that, together with their affiliates and subsidiaries, meet the
thresholds in Sec.  --.20(c), which determines the covered banking
entities that must comply with the minimum standards in proposed
Appendix C, as there are likely to be increased compliance costs
related to the more specific requirements for the compliance program
requirements set forth in Appendix C. Since the thresholds in Sec.
--.20(c) are based on the size of the registered broker-dealer or
security-based swap dealer, together with its affiliates and
subsidiaries, and the size of their collective covered trading
activities and covered fund activities and investments, the demand for
these trading activities may migrate to smaller banking entities or
non-banking entities.
    In addition, the costs associated with implementation and ongoing
maintenance of the compliance program requirements in Sec.  --.20 of
the proposed rule and Appendix C, where applicable, could cause the
covered banking entity to redirect resources from other business
activities that are generally beneficial to market efficiency, such as
market making and other customer-related services. This potential
reallocation of resources could have a marginal negative effect on
competition, efficiency, and capital formation. For example, the
independent testing requirement in the proposal may necessitate that
additional resources be provided to the internal audit department of
the covered banking entity that is a registered broker-dealer or
security-based swap dealer, if such testing is conducted by a qualified
internal tester. Alternatively, if an outside party is used to conduct
the independent testing, the covered banking entity would incur costs
associated with paying the qualified outside party for its services,
which would reduce the resources available for other activities of the
covered banking entity.
    Further, Sec. Sec.  --.4(a), --.4(b), and --.5 of the proposed
rule, which permit underwriting, market making-related, and risk-
mitigating hedging activities, require a covered banking entity to
establish the compliance program required in the proposed rule in order
to rely on the exemptions. To the extent that the burdens associated
with the compliance program requirements in the proposed rule create an
incentive for registered broker-dealers and security-based swap dealers
that are covered banking entities to forgo these permitted activities,
rather than incur the costs related to establishing and maintaining a
compliance program, there would likely be a negative impact on
efficiency, competition, and capital formation as a result of reduced
market making and underwriting services available to customers and
clients of such services.
    The SEC requests comment on the competitive or anticompetitive
effects of the elements of the proposed rule that are proposed under
Exchange Act authority with respect to covered banking entities that
are registered broker-dealers and security-based swap dealers. The SEC
also seeks comment on the efficiency and capital formation effects of
these components of the proposal, if adopted. The SEC encourages
commenters to identify, discuss, analyze, and supply relevant data,
information, or statistics regarding any such effects.

C. Registered Investment Advisers

    As discussed above, under the proposed rule, a covered banking
entity as defined in Sec.  --.2(j) would generally be subject to the
substantive requirements contained in the SEC's rule. These substantive
requirements implement the provisions on proprietary trading and
covered fund activities under section 13 of the BHC Act. Thus for
example, a covered banking entity that is a registered dealer would be
required to comply with subparts A through D of the SEC's proposed
rule, including Appendices A, B and C, where applicable. With respect
to covered fund activities, investments or relationships set forth in
subpart C and Sec.  --.20 of subpart D (``covered fund restrictions''),
however, the SEC's proposed rule would require that a covered banking
entity that is a covered banking entity because it is an investment
adviser for which the SEC is the primary financial regulatory agency
under section 2(12)(B)(iii) of the Dodd-Frank Act (a ``registered
adviser'') comply with the covered fund restrictions issued by the
appropriate Federal banking agency that regulates the banking entity
specified in Sec.  --.2(e)(1), (2) and (3) with which the registered
adviser is affiliated.\380\ Under

this approach, a registered adviser would be required to comply with
the rules and related guidance issued by the appropriate Federal
banking agency. The SEC would, however, retain enforcement authority
over all activities of registered advisers (i.e., both proprietary
trading and covered fund restrictions).
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    \380\ A registered adviser would, however, be required to comply
with the provisions that implement the proprietary trading
restrictions set forth in subparts A, B and Sec.  --.20 of subpart D
of the proposed rule as promulgated by the SEC, including Appendix
C, where applicable.
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    The covered fund restrictions of section 13 of the BHC Act and the
proposed implementing rules make reference to or incorporate a number
of banking law and supervision concepts that traditionally appear in
Federal banking law and are interpreted and applied by the Federal
banking agencies. For example, as discussed in greater detail in the
Supplementary Information, the limitations on ownership interests in a
covered fund set forth in the statute and the proposed rule generally
reference the tier 1 capital of the affiliated insured depository
institution or the affiliated holding company. Similarly, capital
deductions under the proposed rule refer to the tier 1 capital of the
affiliated insured depository institution or the affiliated holding
company. In addition, the covered fund restrictions of the statute and
the proposed rule incorporate by reference sections 23A and 23B of the
FR Act and are administered by the Federal banking agencies. These
sections of the FR Act restrict and limit transactions between certain
banking organizations and their affiliates, some of which are based on
a percentage of bank capital. Further, other covered fund restrictions,
including for example exemptions for investments involving the public
welfare and bank-owned life insurance and the extension of time to
divest of investments after the seeding period, reference other banking
laws or regulations that are administered by the Federal banking
agencies.
    In light of these considerations, the SEC's proposed rule would
require a registered adviser to comply with the covered fund
restrictions contained in subpart C and Sec.  .--20 of subpart D of
rules implementing section 13 of the BHC that are issued by the
appropriate Federal banking agency that regulates the banking entity
with which the registered adviser is affiliated. Under the proposed
approach, a registered adviser complying with the SEC's rule would do
so by complying with the rule issued by the appropriate Federal banking
agency, including any related interpretations or guidance regarding
such requirements. Similarly, under the proposed approach, the
foregoing determinations regarding capital or other banking law
requirements that may be applicable to a registered adviser would be
made by the appropriate Federal banking agency that regulates the
banking entity with which the registered adviser is affiliated. This
approach would mitigate the burdens of complying with the covered fund
restrictions for registered advisers and would avoid creating
incentives for covered fund activities to be moved from a registered
adviser to a bank.\381\
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    \381\ Unless it advises a registered investment company, a bank
(as defined in section 202(a)(2) of the Advisers Act) that relies on
the exclusion from the definition of investment adviser under
section 202(a)(11)(A) of the Advisers Act would not be required to
register under the Advisers Act. If such a bank provided advisory
services, the bank would not be a ``covered banking entity'' under
the SEC's proposed rules because its primary financial regulatory
agency would not be the SEC.
---------------------------------------------------------------------------

    The SEC's proposed rule specifies that a registered adviser must
comply with the covered fund restrictions contained in subpart C and
Sec.  --.20 of subpart D that are issued by the appropriate Federal
banking agency that regulates the banking entity with which the
registered adviser is affiliated. Subpart C, which uses terms defined
in subpart A, specifies the covered fund restrictions. Subpart D Sec.
--.20 requires the establishment of a compliance program when engaging
in covered fund activities. A registered adviser complying with subpart
C and Sec.  --.20 of subpart D, as issued by the appropriate Federal
banking agency, would also rely on interpretative guidance issued by
the appropriate Federal banking agency with respect to those subparts
of the proposed rule. Because Sec.  --.20 of subpart D relates to both
the prohibitions and restrictions on proprietary trading activity as
well as the prohibitions and restrictions on covered fund activities
and investments, a registered adviser would be required to comply with
the relevant covered fund provisions issued by the appropriate Federal
banking agency. A registered adviser, however, would be subject to the
provisions set forth in subpart D of the SEC's proposed rule, including
Sec.  --.20, that relate to covered trading activities.
    Nothing set forth in the discussion above, or in Sec.  --.10(a)(2)
of the SEC's proposed rule, however, is intended, or shall be deemed,
to limit the SEC's authority under any other provision of law,
including pursuant to section 13 of the BHC Act.
    The SEC request comment on its proposed approach to implementing
section 13 of the BHC Act as it applies to registered advisers with
respect to the covered fund restrictions. In particular, the SEC
requests comment on the following:
    Question SEC-5. Should the SEC instead require registered advisers
to comply with the covered fund restrictions proposed by the SEC,
instead of those issued the appropriate Federal banking agency? If so,
could this create incentives to move the advisory business between the
registered adviser and its affiliated bank? Are there benefits to this
alternate approach? If so, please explain.
    Question SEC-6. Are there other alternative approaches to the
proposed rule that would be more effective? If yes, what alternatives
and why?
    Question SEC-7. Would registered advisers affiliated with insured
depository institutions benefit from the proposed approach? Why or why
not?
    Question SEC-8. Would a registered adviser that is affiliated with
insured depository institutions that are regulated by multiple Federal
banking agencies encounter additional burdens in implementing the
proposed approach? With respect to these registered advisers, which
Federal banking agency's rules should be applicable to the registered
adviser? For example, should the registered adviser be subject to the
rules applicable to the registered adviser's immediate parent that is
an insured depository institution?
    Question SEC-9. Is the proposed requirement that registered
advisers comply with the covered fund restrictions in Sec.  --.20
issued by the Federal banking agency that regulates the banking entity
specified in Sec.  --.2(e)(1), (2) and (3) of the proposed rule with
which the registered adviser is affiliated sufficiently clear? Are
there particular compliance program requirements in Sec.  --.20 with
respect to the covered fund restrictions that overlap with the
proprietary trading restrictions, such that it would be difficult to
identify which requirements are related to the covered fund
restrictions and which requirements are related to the proprietary
trading restrictions? If so, which requirements and how should this
overlap be addressed? Should registered advisers be required to comply
with Sec.  --.20 of the SEC's rule in its entirety? Why or why not?
    Question SEC-10. Will the SEC's proposed approach limit the
potential for inconsistent application of the proposed rules with
respect to affiliates of entities specified in Sec.  --.2(e)(1), (2)
and (3)? Why or why not?
    Question SEC-11. Will the SEC's proposed approach be effective in
avoiding the creation of incentives for covered fund activities to move
from a

registered adviser to a bank? Why or why not?

Text of the Proposed Common Rules

(All Agencies)

    The text of the proposed common rules appears below:

PART [ ]--PROPRIETARY TRADING AND CERTAIN INTERESTS IN AND
RELATIONSHIPS WITH COVERED FUNDS

Subpart A--Authority and Definitions

Sec.
--.1 Authority, purpose, scope, and relationship to other
authorities. [Reserved]
--.2 Definitions.
Subpart B--Proprietary Trading
--.3 Prohibition on proprietary trading.
--.4 Permitted underwriting and market making-related activities.
--.5 Permitted risk-mitigating hedging activities.
--.6 Other permitted proprietary trading activities.
--.7 Reporting and recordkeeping requirements applicable to trading
activities.
--.8 Limitations on permitted proprietary trading activities.
--.9 [Reserved]
Subpart C--Covered Fund Activities and Investments
--.10 Prohibition on acquiring or retaining an ownership interest in
and having certain relationships with a covered fund.
--.11 Permitted organizing and offering of a covered fund.
--.12 Permitted investment in a covered fund.
--.13 Other permitted covered fund activities and investments.
--.14 Covered fund activities and investments determined to be
permissible.
--.15 Internal controls, reporting and recordkeeping requirements
applicable to covered fund activities and investments.
--.16 Limitations on relationships with a covered fund.
--.17 Other limitations on permitted covered fund activities and
investments.
--.18 [Reserved]
--.19 [Reserved]
Subpart D--Compliance Program Requirement; Violations
--.20 Program for monitoring compliance; enforcement.
--.21 Termination of activities or investments; penalties for
violations.
Appendix A to Part [ ]--Reporting and Recordkeeping Requirements for
Covered Trading Activities
Appendix B to Part [ ]--Commentary Regarding Identification of
Permitted Market Making-Related Activities
Appendix C to Part [ ]--Minimum Standards for Programmatic
Compliance

Subpart A--Authority and Definitions

Sec.  --.1  Authority, purpose, scope, and relationship to other
authorities. [Reserved]

Sec.  --.2  Definitions.

    Unless otherwise specified, for purposes of this part:
    (a) Affiliate has the same meaning as in section 2(k) of the BHC
Act (12 U.S.C. 1841(k)).
    (b) Applicable accounting standards means U.S. generally accepted
accounting principles or such other accounting standards applicable to
a covered banking entity that [Agency] determines are appropriate, that
the covered banking entity uses in the ordinary course of its business
in preparing its consolidated financial statements.
    (c) BHC Act means the Bank Holding Company Act of 1956 (12 U.S.C.
1841 et seq.).
    (d) Bank holding company has the same meaning as in section 2 of
the BHC Act (12 U.S.C. 1841).
    (e) Banking entity means:
    (1) Any insured depository institution;
    (2) Any company that controls an insured depository institution;
    (3) Any company that is treated as a bank holding company for
purposes of section 8 of the International Banking Act of 1978 (12
U.S.C. 3106); and
    (4) Any affiliate or subsidiary of any entity described in
paragraphs (e)(1), (2), or (3) of this section, other than an affiliate
or subsidiary that is:
    (i) A covered fund that is organized, offered and held by a banking
entity pursuant to Sec.  --.11 and in accordance with the provisions of
subpart C of this part, including the provisions governing
relationships between a covered fund and a banking entity; or
    (ii) An entity that is controlled by a covered fund described in
paragraph (e)(4)(i) of this section.
    (f) Board means the Board of Governors of the Federal Reserve
System.
    (g) Buy and purchase each include any contract to buy, purchase, or
otherwise acquire. For security futures products, such terms include
any contract, agreement, or transaction for future delivery. With
respect to a commodity future, such terms include any contract,
agreement, or transaction for future delivery. With respect to a
derivative, such terms include the execution, termination (prior to its
scheduled maturity date), assignment, exchange, or similar transfer or
conveyance of, or extinguishing of rights or obligations under, a
derivative, as the context may require.
    (h) CFTC means the Commodity Futures Trading Commission.
    (i) Commodity Exchange Act means the Commodity Exchange Act (7
U.S.C. 1 et seq.).
    (j) [Reserved]
    (k) Depository institution has the same meaning as in section 3(c)
of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)).
    (l) (i) Derivative means:
    (A) Any swap, as that term is defined in section 1a(47) of the
Commodity Exchange Act (7 U.S.C. 1a(47)), or security-based swap, as
that term is defined in section 3(a)(68) of the Exchange Act (15 U.S.C.
78c(a)(68)), and as those terms are further jointly defined by the CFTC
and SEC by joint regulation, interpretation, guidance, or other action,
in consultation with the Board pursuant to section 712(d) of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (15 U.S.C.
8302(d));
    (B) Any purchase or sale of a nonfinancial commodity for deferred
shipment or delivery that is intended to be physically settled;
    (C) Any foreign exchange forward (as that term is defined in
section 1a(24) of the Commodity Exchange Act (7 U.S.C. 1a(24)) or
foreign exchange swap (as that term is defined in section 1a(25) of the
Commodity Exchange Act (7 U.S.C. 1a(25));
    (D) Any agreement, contract, or transaction in foreign currency
described in section 2(c)(2)(C)(i) of the Commodity Exchange Act (7
U.S.C. 2(c)(2)(C)(i));
    (E) Any agreement, contract, or transactions in a commodity other
than foreign currency described in section 2(c)(2)(D)(i) of the
Commodity Exchange Act (7 U.S.C. 2(c)(2)(D)(i)); and
    (F) Any transaction authorized under section 19 of the Commodity
Exchange Act (7 U.S.C. 23(a) or (b));
    (ii) A derivative does not include:
    (A) Any consumer, commercial, or other agreement, contract, or
transaction that the CFTC and SEC have further defined by joint
regulation, interpretation, guidance, or other action as not within the
definition of swap, as that term is defined in section 1a(47) of the
Commodity Exchange Act (7 U.S.C. 1a(47)), or security-based swap, as
that term is defined in section 3(a)(68) of the Exchange Act (15 U.S.C.
78c(a)(68));
    (B) Any identified banking product, as defined in section 402(b) of
the Legal Certainty for Bank Products Act of 2000 (7 U.S.C. 27(b)),
that is subject to section 403(a) of that Act (7 U.S.C. 27a(a)).
    (m) Exchange Act means the Securities Exchange Act of 1934 (15
U.S.C. 78a et seq.).

    (n) Federal banking agencies means the Board, the Office of the
Comptroller of the Currency, and the Federal Deposit Insurance
Corporation.
    (o) Foreign banking organization has the same meaning as in Sec.
211.21(o) of the Board's Regulation K (12 CFR 211.21(o)).
    (p) Insured depository institution has the same meaning as in
section 3(c) of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)),
but does not include any insured depository institution that is
described in section 2(c)(2)(D) of the BHC Act (12 U.S.C.
1841(c)(2)(D)).
    (q) Loan means any loan, lease, extension of credit, or secured or
unsecured receivable.
    (r) Nonbank financial company supervised by the Board has the
meaning specified in section 102 of the Financial Stability Act of 2010
(12 U.S.C. 5311).
    (s) Qualifying foreign banking organization means a foreign banking
organization that qualifies as such under Sec.  211.23(a) of the
Board's Regulation K (12 CFR 211.23(a)).
    (t) Resident of the United States means:
    (1) Any natural person resident in the United States;
    (2) Any partnership, corporation or other business entity organized
or incorporated under the laws of the United States or any State;
    (3) Any estate of which any executor or administrator is a resident
of the United States;
    (4) Any trust of which any trustee, beneficiary or, if the trust is
revocable, any settlor is a resident of the United States;
    (5) Any agency or branch of a foreign entity located in the United
States;
    (6) Any discretionary or non-discretionary account or similar
account (other than an estate or trust) held by a dealer or fiduciary
for the benefit or account of a resident of the United States;
    (7) Any discretionary account or similar account (other than an
estate or trust) held by a dealer or fiduciary organized or
incorporated in the United States, or (if an individual) a resident of
the United States; or
    (8) Any person organized or incorporated under the laws of any
foreign jurisdiction formed by or for a resident of the United States
principally for the purpose of engaging in one or more transactions
described in Sec.  --.6(d)(1) or Sec.  --.13(c)(1).
    (u) SEC means the Securities and Exchange Commission.
    (v) Sale and sell each include any contract to sell or otherwise
dispose of. For security futures products, such terms include any
contract, agreement, or transaction for future delivery. With respect
to a commodity future, such terms include any contract, agreement, or
transaction for future delivery. With respect to a derivative, such
terms include the execution, termination (prior to its scheduled
maturity date), assignment, exchange, or similar transfer or conveyance
of, or extinguishing of rights or obligations under, a derivative, as
the context may require.
    (w) Security has the meaning specified in section 3(a)(10) of the
Exchange Act (15 U.S.C. 78c(a)(10)).
    (x) Security future has the meaning specified in section 3(a)(55)
of the Exchange Act (15 U.S.C. 78c(a)(55)).
    (y) Securities Act means the Securities Act of 1933 (15 U.S.C. 77a
et seq.).
    (z) Separate account means an account established and maintained by
an insurance company subject to regulation by a State insurance
regulator or a foreign insurance regulator under which income, gains,
and losses, whether or not realized, from assets allocated to such
account, are, in accordance with the applicable contract, credited to
or charged against such account without regard to other income, gains,
or losses of the insurance company.
    (aa) State means any State, territory or possession of the United
States, and the District of Columbia.
    (bb) Subsidiary has the same meaning as in section 2(d) of the BHC
Act (12 U.S.C. 1841(d)).

Subpart B--Proprietary Trading

Sec.  --.3  Prohibition on proprietary trading.

    (a) Prohibition. Except as otherwise provided in this subpart, a
covered banking entity may not engage in proprietary trading.
    (b) Definition of ``proprietary trading'' and related terms. For
purposes of this subpart:
    (1) Proprietary trading means engaging as principal for the trading
account of the covered banking entity in any purchase or sale of one or
more covered financial positions. Proprietary trading does not include
acting solely as agent, broker, or custodian for an unaffiliated third
party.
    (2) Trading account.
    (i) Trading account means any account that is used by a covered
banking entity to:
    (A) Acquire or take one or more covered financial positions
principally for the purpose of:
    (1) Short-term resale;
    (2) Benefitting from actual or expected short-term price movements;
    (3) Realizing short-term arbitrage profits; or
    (4) Hedging one or more positions described in paragraphs
(b)(2)(i)(A)(1), (2), or (3) of this section;
    (B) Acquire or take one or more covered financial positions, other
than positions that are foreign exchange derivatives, commodity
derivatives, or contracts of sale of a commodity for future delivery,
that are market risk capital rule covered positions, if the covered
banking entity, or any affiliate of the covered banking entity that is
a bank holding company, calculates risk-based capital ratios under the
market risk capital rule as defined in paragraph (c)(8) of this
section; or
    (C) Acquire or take one or more covered financial position for any
purpose, if the covered banking entity is:
    (1) A dealer or municipal securities dealer that is registered with
the SEC under the Exchange Act, to the extent the position is acquired
or taken in connection with the activities of the dealer or municipal
securities dealer that require it to be registered under that Act;
    (2) A government securities dealer that is registered, or that has
filed notice, with an appropriate regulatory agency (as that term is
defined in section 3(a)(34) of the Exchange Act (15 U.S.C. 78c(a)(34)),
to the extent the position is acquired or taken in connection with the
activities of the government securities dealer that require it to be
registered, or to file notice, under that Act;
    (3) A swap dealer that is registered with the CFTC under the
Commodity Exchange Act, to the extent the position is acquired or taken
in connection with the activities of the swap dealer that require it to
be registered under that Act;
    (4) A security-based swap dealer that is registered with the SEC
under the Exchange Act, to the extent the position is acquired or taken
in connection with the activities of the security-based swap dealer
that require it to be registered under that Act; or
    (5) Engaged in the business of a dealer, swap dealer, or security-
based swap dealer outside of the United States to the extent the
position is acquired or taken in connection with the activities of such
business.
    (ii) Rebuttable presumption for certain positions. An account shall
be presumed to be a trading account if it is used to acquire or take a
covered financial position, other than a covered financial position
described in paragraph (b)(2)(i)(B) or (C) of this section, that the
covered banking entity

holds for a period of sixty days or less, unless the covered banking
entity can demonstrate, based on all the facts and circumstances, that
the covered financial position, either individually or as a category,
was not acquired or taken principally for any of the purposes described
in paragraph (b)(2)(i)(A) of this section.
    (iii) An account shall not be deemed a trading account for purposes
of paragraph (b)(2)(i) of this section to the extent that such account
is used to acquire or take a position in one or more covered financial
positions:
    (A) That arise under a repurchase or reverse repurchase agreement
pursuant to which the covered banking entity has simultaneously agreed,
in writing, to both purchase and sell a stated asset, at stated prices,
and on stated dates or on demand with the same counterparty;
    (B) That arise under a transaction in which the covered banking
entity lends or borrows a security temporarily to or from another party
pursuant to a written securities lending agreement under which the
lender retains the economic interests of an owner of such security, and
has the right to terminate the transaction and to recall the loaned
security on terms agreed by the parties;
    (C) For the bona fide purpose of liquidity management and in
accordance with a documented liquidity management plan of the covered
banking entity that:
    (1) Specifically contemplates and authorizes the particular
instrument to be used for liquidity management purposes, its profile
with respect to market, credit and other risks, and the liquidity
circumstances in which the particular instrument may or must be used;
    (2) Requires that any transaction contemplated and authorized by
the plan be principally for the purpose of managing the liquidity of
the covered banking entity, and not for the purpose of short-term
resale, benefitting from actual or expected short-term price movements,
realizing short-term arbitrage profits, or hedging a position taken for
such short-term purposes;
    (3) Requires that any position taken for liquidity management
purposes be highly liquid and limited to financial instruments the
market, credit and other risks of which the covered banking entity does
not expect to give rise to appreciable profits or losses as a result of
short-term price movements;
    (4) Limits any position taken for liquidity management purposes,
together with any other positions taken for such purposes, to an amount
that is consistent with the banking entity's near-term funding needs,
including deviations from normal operations, as estimated and
documented pursuant to methods specified in the plan; and
    (5) Is consistent with [Agency]'s supervisory requirements,
guidance and expectations regarding liquidity management; or
    (D) That are acquired or taken by a covered banking entity that is
a derivatives clearing organization registered under section 5b of the
Commodity Exchange Act (7 U.S.C. 7a-1) or a clearing agency registered
with the SEC under section 17A of the Exchange Act (15 U.S.C. 78q-1) in
connection with clearing derivatives or securities transactions.
    (3) Covered financial position.
    (i) Covered financial position means any position, including any
long, short, synthetic or other position, in:
    (A) A security, including an option on a security;
    (B) A derivative, including an option on a derivative; or
    (C) A contract of sale of a commodity for future delivery, or
option on a contract of sale of a commodity for future delivery.
    (ii) A covered financial position does not include any position
that is:
    (A) A loan;
    (B) A commodity; or
    (C) Foreign exchange or currency.
    (c) Definition of other terms related to proprietary trading. For
purposes of this subpart:
    (1) Commodity has the same meaning as in section 1a(9) of the
Commodity Exchange Act (7 U.S.C. 1a(9)), except that a commodity does
not include any security;
    (2) Contract of sale of a commodity for future delivery means a
contract of sale (as that term is defined in section 1a(13) of the
Commodity Exchange Act (7 U.S.C. 1a(13)) for future delivery (as that
term is defined in section 1a(27) of the Commodity Exchange Act (7
U.S.C. 1a(27)).
    (3) Exempted security has the same meaning as in section
3(a)(12)(A) of the Exchange Act (15 U.S.C. 78c(a)(12)(A)).
    (4) Foreign insurance regulator means the insurance commission, or
a similar official or agency, of one or more countries other than the
United States that is engaged in the supervision of insurance companies
under foreign insurance law.
    (5) General account means, with respect to an insurance company,
all of the assets of the insurance company that are not legally
segregated and allocated to separate accounts under applicable State or
foreign law.
    (6) Government securities has the same meaning as in section
3(a)(42) of the Exchange Act (15 U.S.C. 78c(a)(42)).
    (7) Market risk capital rule covered position means a covered
position as that term is defined for purposes of:
    (i) In the case of a covered banking entity that is a bank holding
company or insured depository institution, the market risk capital rule
that is applicable to the covered banking entity; and
    (ii) In the case of a covered banking entity that is affiliated
with a bank holding company, other than a covered banking entity to
which a market risk capital rule is applicable, the market risk capital
rule that is applicable to the affiliated bank holding company.
    (8) Market risk capital rule means 12 CFR 3, Appendix B, 12 CFR
208, Appendix E, 12 CFR 225, Appendix E, and 12 CFR 325, Appendix C, as
applicable.
    (9) Municipal securities has the same meaning as in section
3(a)(29) of the Exchange Act (15 U.S.C. 78c(a)(29)).
    (10) Security-based swap has the meaning specified in section
3(a)(68) of the Exchange Act (15 U.S.C. 78c(a)(68)).
    (11) Swap has the meaning specified in section 1a(47) of the
Commodity Exchange Act (7 U.S.C. 1a(47)).
    (12) State insurance regulator means the insurance commission, or a
similar official or agency, of a State that is engaged in the
supervision of insurance companies under State insurance law.

Sec.  --.4  Permitted underwriting and market making-related
activities.

    (a) Underwriting activities.
    (1) Permitted underwriting activities. The prohibition on
proprietary trading contained in Sec.  ----.3(a) does not apply to the
purchase or sale of a covered financial position by a covered banking
entity that is made in connection with the covered banking entity's
underwriting activities.
    (2) Requirements. For purposes of paragraph (a)(1) of this section,
a purchase or sale of a covered financial position shall be deemed to
be made in connection with a covered banking entity's underwriting
activities only if:
    (i) The covered banking entity has established the internal
compliance program required by subpart D of this part that is designed
to ensure the covered banking entity's compliance with the requirements
of paragraph (a)(2) of this section, including reasonably designed
written policies and procedures, internal controls, and independent
testing;
    (ii) The covered financial position is a security;
    (iii) The purchase or sale is effected solely in connection with a
distribution of securities for which the covered banking entity is
acting as underwriter;

    (iv) The covered banking entity is:
    (A) With respect to a purchase or sale effected in connection with
a distribution of one or more covered financial positions that are
securities, other than exempted securities, security-based swaps,
commercial paper, bankers' acceptances, or commercial bills:
    (1) A dealer that is registered with the SEC under section 15 of
the Exchange Act (15 U.S.C. 78o), or a person that is exempt from
registration or excluded from regulation as a dealer thereunder; or
    (2) Engaged in the business of a dealer outside of the United
States and subject to substantive regulation of such business in the
jurisdiction where the business is located;
    (B) With respect to a purchase or sale effected as part of a
distribution of one or more covered financial positions that are
municipal securities, a municipal securities dealer that is registered
under section 15B of the Exchange Act (15 U.S.C. 78o-4) or exempt from
registration thereunder; or
    (C) With respect to a purchase or sale effected as part of a
distribution of one or more covered financial positions that are
government securities, a government securities dealer that is
registered, or that has filed notice, under section 15C of the Exchange
Act (15 U.S.C. 78o-5) or exempt from registration thereunder;
    (v) The underwriting activities of the covered banking entity with
respect to the covered financial position are designed not to exceed
the reasonably expected near term demands of clients, customers, or
counterparties;
    (vi) The underwriting activities of the covered banking entity are
designed to generate revenues primarily from fees, commissions,
underwriting spreads or other income not attributable to:
    (A) Appreciation in the value of covered financial positions
related to such activities; or
    (B) The hedging of covered financial positions related to such
activities; and
    (vii) The compensation arrangements of persons performing
underwriting activities are designed not to reward proprietary risk-
taking.
    (3) Definition of distribution. For purposes of paragraph (a) of
this section, a distribution of securities means an offering of
securities, whether or not subject to registration under the Securities
Act, that is distinguished from ordinary trading transactions by the
magnitude of the offering and the presence of special selling efforts
and selling methods.
    (4) Definition of underwriter. For purposes of paragraph (a) of
this section, underwriter means:
    (i) A person who has agreed with an issuer of securities or selling
security holder:
    (A) To purchase securities for distribution;
    (B) To engage in a distribution of securities for or on behalf of
such issuer or selling security holder; or
    (C) To manage a distribution of securities for or on behalf of such
issuer or selling security holder; and
    (ii) A person who has an agreement with another person described in
paragraph (a)(4)(i) of this section to engage in a distribution of such
securities for or on behalf of the issuer or selling security holder.
    (b) Market making-related activities.
    (1) Permitted market making-related activities. The prohibition on
proprietary trading contained in Sec.  ----.3(a) does not apply to the
purchase or sale of a covered financial position by a covered banking
entity that is made in connection with the covered banking entity's
market making-related activities.
    (2) Requirements. For purposes of paragraph (b)(1) of this section,
a purchase or sale of a covered financial position shall be deemed to
be made in connection with a covered banking entity's market making-
related activities only if:
    (i) The covered banking entity has established the internal
compliance program required by subpart D that is designed to ensure the
covered banking entity's compliance with the requirements of paragraph
(b)(2) of this section, including reasonably designed written policies
and procedures, internal controls, and independent testing;
    (ii) The trading desk or other organizational unit that conducts
the purchase or sale holds itself out as being willing to buy and sell,
including through entering into long and short positions in, the
covered financial position for its own account on a regular or
continuous basis;
    (iii) The market making-related activities of the trading desk or
other organizational unit that conducts the purchase or sale are, with
respect to the covered financial position, designed not to exceed the
reasonably expected near term demands of clients, customers, or
counterparties;
    (iv) The covered banking entity is:
    (A) With respect to a purchase or sale of one or more covered
financial positions that are securities, other than exempted
securities, security-based swaps, commercial paper, bankers'
acceptances, or commercial bills:
    (1) A dealer that is registered with the SEC under section 15 of
the Exchange Act (15 U.S.C. 78o), or a person that is exempt from
registration or excluded from regulation as a dealer thereunder; or
    (2) Engaged in the business of a dealer outside of the United
States and subject to substantive regulation of such business in the
jurisdiction where the business is located;
    (B) With respect to a purchase or sale of one or more covered
financial positions that are swaps:
    (1) A swap dealer that is registered with the CFTC under the
Commodity Exchange Act (7 U.S.C. 1a) or a person that is exempt from
registration thereunder; or
    (2) Engaged in the business of a swap dealer outside the United
States and subject to substantive regulation of such business in the
jurisdiction where the business is located;
    (C) With respect to a purchase or sale of one or more covered
financial positions that are security-based swaps:
    (1) A security-based swap dealer that is registered with the SEC
under section 15F of the Exchange Act (15 U.S.C. 78o-10) or a person
that is exempt from registration thereunder; or
    (2) Engaged in the business of a security-based swap dealer outside
of the United States and subject to substantive regulation of such
business in the jurisdiction where the business is located;
    (D) With respect to a purchase or sale of one or more covered
financial positions that are municipal securities, a municipal
securities dealer that is registered under section 15B of the Exchange
Act (15 U.S.C. 78o-4) or a person that is exempt from registration
thereunder; or
    (E) With respect to a purchase or sale of one or more covered
financial positions that are government securities, a government
securities dealer that is registered, or that has filed notice, under
section 15C of the Exchange Act (15 U.S.C. 78o-5) or a person that is
exempt from registration thereunder;
    (v) The market making-related activities of the trading desk or
other organizational unit that conducts the purchase or sale are
designed to generate revenues primarily from fees, commissions, bid/ask
spreads or other income not attributable to:
    (A) Appreciation in the value of covered financial positions it
holds in trading accounts; or
    (B) The hedging of covered financial positions it holds in trading
accounts;
    (vi) The market making-related activities of the trading desk or
other organizational unit that conducts the purchase or sale are
consistent with the

commentary provided in Appendix B; and
    (vii) The compensation arrangements of persons performing the
market making-related activities are designed not to reward proprietary
risk-taking.
    (3) Market making-related hedging. For purposes of paragraph (b)(1)
of this section, a purchase or sale of a covered financial position
shall also be deemed to be made in connection with a covered banking
entity's market making-related activities if:
    (i) The covered financial position is purchased or sold to reduce
the specific risks to the covered banking entity in connection with and
related to individual or aggregated positions, contracts, or other
holdings acquired pursuant to paragraph (b) of this section; and
    (ii) The purchase or sale meets all of the requirements described
in Sec.  --.5(b) and, if applicable, Sec.  --.5(c).

Sec.  ----.5  Permitted risk-mitigating hedging activities.

    (a) Permitted risk-mitigating hedging activities. The prohibition
on proprietary trading contained in Sec.  ----.3(a) does not apply to
the purchase or sale of a covered financial position by a covered
banking entity that is made in connection with and related to
individual or aggregated positions, contracts, or other holdings of a
covered banking entity and is designed to reduce the specific risks to
the covered banking entity in connection with and related to such
positions, contracts, or other holdings.
    (b) Requirements. For purposes of paragraph (a) of this section, a
purchase or sale of a covered financial position shall be deemed to be
in connection with and related to individual or aggregated positions,
contracts, or other holdings of a covered banking entity and designed
to reduce the specific risks to the covered banking entity in
connection with and related to such positions, contracts, or other
holdings only if:
    (1) The covered banking entity has established the internal
compliance program required by subpart D designed to ensure the covered
banking entity's compliance with the requirements of paragraph (b) of
this section, including reasonably designed written policies and
procedures regarding the instruments, techniques and strategies that
may be used for hedging, internal controls and monitoring procedures,
and independent testing;
    (2) The purchase or sale:
    (i) Is made in accordance with the written policies, procedures and
internal controls established by the covered banking entity pursuant to
subpart D of this part;
    (ii) Hedges or otherwise mitigates one or more specific risks,
including market risk, counterparty or other credit risk, currency or
foreign exchange risk, interest rate risk, basis risk, or similar
risks, arising in connection with and related to individual or
aggregated positions, contracts, or other holdings of a covered banking
entity;
    (iii) Is reasonably correlated, based upon the facts and
circumstances of the underlying and hedging positions and the risks and
liquidity of those positions, to the risk or risks the purchase or sale
is intended to hedge or otherwise mitigate;
    (iv) Does not give rise, at the inception of the hedge, to
significant exposures that were not already present in the individual
or aggregated positions, contracts, or other holdings of a covered
banking entity and that are not hedged contemporaneously;
    (v) Is subject to continuing review, monitoring and management by
the covered banking entity that:
    (A) Is consistent with the written hedging policies and procedures
required under paragraph (b)(1) of this section; and
    (B) Maintains a reasonable level of correlation, based upon the
facts and circumstances of the underlying and hedging positions and the
risks and liquidity of those positions, to the risk or risks the
purchase or sale is intended to hedge or otherwise mitigate; and
    (C) Mitigates any significant exposure arising out of the hedge
after inception; and
    (vi) The compensation arrangements of persons performing the risk-
mitigating hedging activities are designed not to reward proprietary
risk-taking.
    (c) Documentation. With respect to any purchase, sale, or series of
purchases or sales conducted by a covered banking entity pursuant to
this Sec.  --.5 for risk-mitigating hedging purposes that is
established at a level of organization that is different than the level
of organization establishing or responsible for the positions,
contracts, or other holdings the risks of which the purchase, sale, or
series of purchases or sales are designed to reduce, the covered
banking entity must, at a minimum, document, at the time the purchase,
sale, or series of purchases or sales are conducted:
    (1) The risk-mitigating purpose of the purchase, sale, or series of
purchases or sales;
    (2) The risks of the individual or aggregated positions, contracts,
or other holdings of a covered banking entity that the purchase, sale,
or series of purchases or sales are designed to reduce; and
    (3) The level of organization that is establishing the hedge.

Sec.  --.6  Other permitted proprietary trading activities.

    (a) Permitted trading in government obligations.
    (1) The prohibition on proprietary trading contained in Sec.
--.3(a) does not apply to the purchase or sale by a covered banking
entity of a covered financial position that is:
    (i) An obligation of the United States or any agency thereof;
    (ii) An obligation, participation, or other instrument of or issued
by the Government National Mortgage Association, the Federal National
Mortgage Association, the Federal Home Loan Mortgage Corporation, a
Federal Home Loan Bank, the Federal Agricultural Mortgage Corporation
or a Farm Credit System institution chartered under and subject to the
provisions of the Farm Credit Act of 1971 (12 U.S.C. 2001 et seq.); or
    (iii) An obligation of any State or any political subdivision
thereof.
    (2) An obligation or other instrument described in paragraphs
(a)(1)(i), (ii) or (iii) of this section shall include both general
obligations and limited obligations, such as revenue bonds.
    (b) Permitted trading on behalf of customers. (1) The prohibition
on proprietary trading contained in Sec.  --.3(a) does not apply to the
purchase or sale of a covered financial position by a covered banking
entity on behalf of customers.
    (2) For purposes of paragraph (b)(1) of this section, a purchase or
sale of a covered financial position by a covered banking entity shall
be considered to be on behalf of customers if:
    (i) The purchase or sale:
    (A) Is conducted by a covered banking entity acting as investment
adviser, commodity trading advisor, trustee, or in a similar fiduciary
capacity for a customer;
    (B) Is conducted for the account of the customer; and
    (C) Involves solely covered financial positions of which the
customer, and not the covered banking entity or any subsidiary or
affiliate of the covered banking entity, is beneficial owner (including
as a result of having long or short exposure under the relevant covered
financial position);
    (ii) The covered banking entity is acting as riskless principal in
a transaction in which the covered banking entity, after receiving an
order to purchase (or sell) a covered financial

position from a customer, purchases (or sells) the covered financial
position for its own account to offset a contemporaneous sale to (or
purchase from) the customer; or
    (iii) The covered banking entity is an insurance company that
purchases or sells a covered financial position for a separate account,
if:
    (A) The insurance company is directly engaged in the business of
insurance and subject to regulation by a State insurance regulator or
foreign insurance regulator;
    (B) The insurance company purchases or sells the covered financial
position solely for a separate account established by the insurance
company in connection with one or more insurance policies issued by
that insurance company;
    (C) All profits and losses arising from the purchase or sale of a
covered financial position are allocated to the separate account and
inure to the benefit or detriment of the owners of the insurance
policies supported by the separate account, and not the insurance
company; and
    (D) The purchase or sale is conducted in compliance with, and
subject to, the insurance company investment and other laws,
regulations, and written guidance of the State or jurisdiction in which
such insurance company is domiciled.
    (c) Permitted trading by a regulated insurance company. The
prohibition on proprietary trading contained in Sec.  --.3(a) does not
apply to the purchase or sale of a covered financial position by an
insurance company or any affiliate of an insurance company if:
    (1) The insurance company is directly engaged in the business of
insurance and subject to regulation by a State insurance regulator or
foreign insurance regulator;
    (2) The insurance company or its affiliate purchases or sells the
covered financial position solely for the general account of the
insurance company;
    (3) The purchase or sale is conducted in compliance with, and
subject to, the insurance company investment laws, regulations, and
written guidance of the State or jurisdiction in which such insurance
company is domiciled; and
    (4) The appropriate Federal banking agencies, after consultation
with the Financial Stability Oversight Council and the relevant
insurance commissioners of the States, have not jointly determined,
after notice and comment, that a particular law, regulation, or written
guidance described in paragraph (c)(3) of this section is insufficient
to protect the safety and soundness of the covered banking entity, or
of the financial stability of the United States.
    (d) Permitted trading outside of the United States.
    (1) The prohibition on proprietary trading contained in Sec.
--.3(a) does not apply to the purchase or sale of a covered financial
position by a covered banking entity if:
    (i) The covered banking entity is not directly or indirectly
controlled by a banking entity that is organized under the laws of the
United States or of one or more States;
    (ii) The purchase or sale is conducted pursuant to paragraph (9) or
(13) of section 4(c) of the BHC Act; and
    (iii) The purchase or sale occurs solely outside of the United
States.
    (2) A purchase or sale shall be deemed to be conducted pursuant to
paragraph (9) or (13) of section 4(c) of the BHC Act only if:
    (i) With respect to a covered banking entity that is a foreign
banking organization, the banking entity is a qualifying foreign
banking organization and is conducting the purchase or sale in
compliance with subpart B of the Board's Regulation K (12 CFR 211.20
through 211.30); or
    (ii) With respect to a covered banking entity that is not a foreign
banking organization, the covered banking entity meets at least two of
the following requirements:
    (A) Total assets of the covered banking entity held outside of the
United States exceed total assets of the covered banking entity held in
the United States;
    (B) Total revenues derived from the business of the covered banking
entity outside of the United States exceed total revenues derived from
the business of the covered banking entity in the United States; or
    (C) Total net income derived from the business of the covered
banking entity outside of the United States exceeds total net income
derived from the business of the covered banking entity in the United
States.
    (3) A purchase or sale shall be deemed to have occurred solely
outside of the United States only if:
    (i) The covered banking entity conducting the purchase or sale is
not organized under the laws of the United States or of one or more
States;
    (ii) No party to the purchase or sale is a resident of the United
States;
    (iii) No personnel of the covered banking entity who is directly
involved in the purchase or sale is physically located in the United
States; and
    (iv) The purchase or sale is executed wholly outside of the United
States.

Sec.  --.7  Reporting and recordkeeping requirements applicable to
trading activities.

    A covered banking entity engaged in any proprietary trading
activity permitted under Sec. Sec.  --.4 through --.6 shall comply
with:
    (a) The reporting and recordkeeping requirements described in
Appendix A to this part, if the covered banking entity has, together
with its affiliates and subsidiaries, trading assets and liabilities
the average gross sum of which (on a worldwide consolidated basis) is,
as measured as of the last day of each of the four prior calendar
quarters, equal to or greater than $1 billion;
    (b) The recordkeeping requirements required under Sec.  --.20 and
appendix C to this part, as applicable; and
    (c) Such other reporting and recordkeeping requirements as [Agency]
may impose to evaluate the covered banking entity's compliance with
this subpart.

Sec.  --.8  Limitations on permitted proprietary trading activities.

    (a) No transaction, class of transactions, or activity may be
deemed permissible under Sec. Sec.  --.4 through --.6 if the
transaction, class of transactions, or activity would:
    (1) Involve or result in a material conflict of interest between
the covered banking entity and its clients, customers, or
counterparties;
    (2) Result, directly or indirectly, in a material exposure by the
covered banking entity to a high-risk asset or a high-risk trading
strategy; or
    (3) Pose a threat to the safety and soundness of the covered
banking entity or to the financial stability of the United States.
    (b) Definition of material conflict of interest. For purposes of
this section, a material conflict of interest between a covered banking
entity and its clients, customers, or counterparties exists if the
covered banking entity engages in any transaction, class of
transactions, or activity that would involve or result in the covered
banking entity's interests being materially adverse to the interests of
its client, customer, or counterparty with respect to such transaction,
class of transactions, or activity, unless:
    (1) Timely and effective disclosure and opportunity to negate or
substantially mitigate. Prior to effecting the specific transaction or
class or type of transactions, or engaging in the specific activity,
for which a conflict of interest may arise, the covered banking entity:
    (i) Makes clear, timely, and effective disclosure of the conflict
of interest,

together with other necessary information, in reasonable detail and in
a manner sufficient to permit a reasonable client, customer, or
counterparty to meaningfully understand the conflict of interest; and
    (ii) Makes such disclosure explicitly and effectively, and in a
manner that provides the client, customer, or counterparty the
opportunity to negate, or substantially mitigate, any materially
adverse effect on the client, customer, or counterparty created by the
conflict of interest; or
    (2) Information barriers. The covered banking entity has
established, maintained, and enforced information barriers that are
memorialized in written policies and procedures, such as physical
separation of personnel, or functions, or limitations on types of
activity, that are reasonably designed, taking into consideration the
nature of the covered banking entity's business, to prevent the
conflict of interest from involving or resulting in a materially
adverse effect on a client, customer, or counterparty. A covered
banking entity may not rely on such information barriers if, in the
case of any specific transaction, class or type of transactions or
activity, the banking entity knows or should reasonably know that,
notwithstanding the covered banking entity's establishment of
information barriers, the conflict of interest may involve or result in
a materially adverse effect on a client, customer, or counterparty.
    (c) Definition of high-risk asset and high-risk trading strategy.
For purposes of this section:
    (1) High-risk asset means an asset or group of related assets that
would, if held by a covered banking entity, significantly increase the
likelihood that the covered banking entity would incur a substantial
financial loss or would fail.
    (2) High-risk trading strategy means a trading strategy that would,
if engaged in by a covered banking entity, significantly increase the
likelihood that the covered banking entity would incur a substantial
financial loss or would fail.

Sec.  --.9  [Reserved]

Subpart C--Covered Funds Activities and Investments

Sec.  --.10  Prohibition on acquiring or retaining an ownership
interest in and having certain relationships with a covered fund.

    (a) Prohibition. Except as otherwise provided in this subpart, a
covered banking entity may not, as principal, directly or indirectly,
acquire or retain any ownership interest in or sponsor a covered fund.
    (b) Definitions. For purposes of this part:
    (1) Covered fund means:
    (i) An issuer that would be an investment company, as defined in
the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.), but for
section 3(c)(1) or 3(c)(7) of that Act (15 U.S.C. 80a-3(c)(1) or (7));
    (ii) A commodity pool, as defined in section 1a(10) of the
Commodity Exchange Act (7 U.S.C. 1a(10));
    (iii) Any issuer, as defined in section 2(a)(22) of the Investment
Company Act of 1940 (15 U.S.C. 80a-2(a)(22)), that is organized or
offered outside of the United States that would be a covered fund as
defined in paragraphs (b)(1)(i), (ii), or (iv) of this section, were it
organized or offered under the laws, or offered to one or more
residents, of the United States or of one or more States; and
    (iv) Any such similar fund as the appropriate Federal banking
agencies, the SEC, and the CFTC may determine, by rule, as provided in
section 13(b)(2) of the BHC Act.
    (2) Director has the same meaning as provided in Sec.  215.2(d)(1)
of the Board's Regulation O (12 CFR 215.2(d)(1)).
    (3) Ownership interest.
    (i) Ownership interest means any equity, partnership, or other
similar interest (including, without limitation, a share, equity
security, warrant, option, general partnership interest, limited
partnership interest, membership interest, trust certificate, or other
similar instrument) in a covered fund, whether voting or nonvoting, or
any derivative of such interest.
    (ii) Ownership interest does not include, with respect to a covered
fund:
    (A) Carried interest. An interest held by a covered banking entity
(or an affiliate, subsidiary or employee thereof) in a covered fund for
which the covered banking entity (or an affiliate, subsidiary or
employee thereof) serves as investment manager, investment adviser or
commodity trading adviser, so long as:
    (1) The sole purpose and effect of the interest is to allow the
covered banking entity (or the affiliate, subsidiary or employee
thereof) to share in the profits of the covered fund as performance
compensation for services provided to the covered fund by the covered
banking entity (or the affiliate, subsidiary or employee thereof),
provided that the covered banking entity (or the affiliate, subsidiary
or 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 covered
banking entity (or the affiliate, subsidiary or employee thereof)
promptly after being earned or, if not so distributed, the reinvested
profit of the covered banking entity (or the affiliate, subsidiary or
employee thereof) does not share in the subsequent profits and losses
of the covered fund;
    (3) The covered banking entity (or the affiliate, subsidiary or
employee thereof) does not provide funds to the covered fund in
connection with acquiring or retaining this interest; and
    (4) The interest is not transferable by the covered banking entity
(or the affiliate, subsidiary or employee thereof) except to another
affiliate or subsidiary thereof.
    (4) Prime brokerage transaction means one or more products or
services provided by a covered banking entity to a covered fund, such
as custody, clearance, securities borrowing or lending services, trade
execution, or financing, data, operational, and portfolio management
support.
    (5) Sponsor, with respect to a covered fund, means:
    (i) To serve as a general partner, managing member, trustee, or
commodity pool operator of a covered fund;
    (ii) In any manner to select or to control (or to have employees,
officers, or directors, or agents who constitute) a majority of the
directors, trustees, or management of a covered fund; or
    (iii) To share with a covered fund, for corporate, marketing,
promotional, or other purposes, the same name or a variation of the
same name.
    (6) Trustee. (i) For purposes of this subpart, a trustee does not
include a trustee that does not exercise investment discretion with
respect to a covered fund, including a directed trustee, as that term
is used in section 403(a)(1) of the Employee's Retirement Income
Security Act (29 U.S.C. 1103(a)(1)).
    (ii) Any covered banking entity that directs a person identified in
paragraph (b)(6)(i) of this section, or that possesses authority and
discretion to manage and control the assets of a covered fund for which
such person identified in paragraph (b)(6)(i) of this section serves as
trustee, shall be considered a trustee of such covered fund.

Sec.  --.11  Permitted organizing and offering of a covered fund.

    Section --.10(a) does not prohibit a covered banking entity from,
directly or indirectly, organizing and offering a covered fund,
including serving as a general partner, managing member, trustee, or
commodity pool operator of the covered fund and in any manner

selecting or controlling (or having employees, officers, directors, or
agents who constitute) a majority of the directors, trustees, or
management of the covered fund, including any necessary expenses for
the foregoing, only if:
    (a) The covered banking entity provides bona fide trust, fiduciary,
investment advisory, or commodity trading advisory services;
    (b) The covered fund is organized and offered only in connection
with the provision of bona fide trust, fiduciary, investment advisory,
or commodity trading advisory services and only to persons that are
customers of such services of the covered banking entity, pursuant to a
credible plan or similar documentation outlining how the covered
banking entity intends to provide advisory or similar services to its
customers through organizing and offering such fund;
    (c) The covered banking entity does not acquire or retain an
ownership interest in the covered fund except as permitted under this
subpart;
    (d) The covered banking entity complies with the restrictions under
Sec.  --.16 of this subpart;
    (e) The covered banking entity does not, directly or indirectly,
guarantee, assume, or otherwise insure the obligations or performance
of the covered fund or of any covered fund in which such covered fund
invests;
    (f) The covered fund, for corporate, marketing, promotional, or
other purposes:
    (1) Does not share the same name or a variation of the same name
with the covered banking entity (or an affiliate or subsidiary
thereof); and
    (2) Does not use the word ``bank'' in its name;
    (g) No director or employee of the covered banking entity takes or
retains an ownership interest in the covered fund, except for any
director or employee of the covered banking entity who is directly
engaged in providing investment advisory or other services to the
covered fund; and
    (h) The covered banking entity:
    (1) Clearly and conspicuously discloses, in writing, to any
prospective and actual investor in the covered fund (such as through
disclosure in the covered fund's offering documents):
    (i) That ``any losses in [such covered fund] will be borne solely
by investors in [the covered fund] and not by [the covered banking
entity and its affiliates or subsidiaries]; therefore, [the covered
banking entity's and its affiliates' or subsidiaries'] losses in [such
covered fund] will be limited to losses attributable to the ownership
interests in the covered fund held by the [covered banking entity and
its affiliates or subsidiaries] in their capacity as investors in the
[covered fund]'';
    (ii) That such investor should read the fund offering documents
before investing in the covered fund;
    (iii) That the ``ownership interests in the covered fund are not
insured by the FDIC, and are not deposits, obligations of, or endorsed
or guaranteed in any way, by any banking entity'' (unless that happens
to be the case);
    (iv) The role of the covered banking entity and its affiliates,
subsidiaries and employees in sponsoring or providing any services to
the covered fund; and
    (2) Complies with any additional rules of the appropriate Federal
banking agencies, the SEC, or the CFTC, as provided in section 13(b)(2)
of the BHC Act, designed to ensure that losses in such covered fund are
borne solely by investors in the covered fund and not by the covered
banking entity and its affiliates or subsidiaries.

Sec.  --.12  Permitted investment in a covered fund.

    (a) Authority and limitations on permitted investments in covered
funds. (1) The prohibition contained in Sec.  --.10(a) does not apply
with respect to a covered banking entity acquiring and retaining any
ownership interest in a covered fund that the covered banking entity or
an affiliate or subsidiary thereof organizes and offers, for the
purposes of:
    (i) Establishment. Establishing the covered fund and providing the
fund with sufficient initial equity for investment to permit the fund
to attract unaffiliated investors as required by paragraph (a)(2)(i) of
this section; or
    (ii) De minimis investment. Making and retaining an investment in
the covered fund that does not exceed 3 percent of the total
outstanding ownership interests in the fund.
    (2) Ownership limits.
    (i) With respect to an investment in any covered fund pursuant to
paragraph (a)(1)(i) of this section, the covered banking entity:
    (A) Must actively seek unaffiliated investors to reduce through
redemption, sale, dilution, or other methods the aggregate amount of
all ownership interests of the covered banking entity in any covered
fund under Sec.  --.12 to the amount permitted in paragraph
(a)(2)(i)(B) of this section; and
    (B) May not exceed 3 percent of the total amount or value of
outstanding ownership interests of the fund not later than 1 year after
the date of establishment of the fund (or such longer period as may be
provided by the Board pursuant to paragraph (e) of this section); and
    (ii) The aggregate value of all ownership interests of the covered
banking entity in all covered funds under Sec.  --.12 may not exceed 3
percent of the tier 1 capital of the covered banking entity, as
provided under paragraph (c) of this section.
    (b) Limitations on investments in a single covered fund. For
purposes of determining whether a covered banking entity is in
compliance with the limitations and restrictions on permitted
investments in covered funds contained in paragraph (a) of this
section, a covered banking entity shall calculate its amount and value
of a permitted investment in a single covered fund as follows:
    (1) Attribution of ownership interests to a covered banking entity.
The amount and value of a banking entity's permitted investment in any
single covered fund shall include:
    (i) Controlled investments. Any ownership interest held under Sec.
--.12 by any entity that is controlled, directly or indirectly, by the
covered banking entity for purposes of this part; and
    (ii) Noncontrolled investments. The pro rata share of any ownership
interest held under Sec.  --.12 by any covered fund that is not
controlled by the covered banking entity but in which the covered
banking entity owns, controls, or holds with the power to vote more
than 5 percent of the voting shares.
    (2) Calculation of amount of ownership interests in a single
covered fund. For purposes of determining whether an investment in a
single covered fund does not exceed 3 percent of the total outstanding
ownership interests of the fund under paragraph (a)(2)(i)(B) of this
section:
    (i) The aggregate amount of all ownership interests of the covered
banking entity shall be the greater of (without regard to committed
funds not yet called for investment):
    (A) The value of any investment or capital contribution made with
respect to all ownership interests held under Sec.  --.12 by the
covered banking entity in the covered fund, divided by the value of all
investments or capital contributions, respectively, made by all persons
in that covered fund; or
    (B) The total number of ownership interests held under Sec.  --.12
by the covered banking entity in a covered fund divided by the total
number of ownership interests held by all persons in that covered fund.
    (ii) Inclusion of certain parallel investments. To the extent that
a covered banking entity is contractually obligated to directly invest
in, or is

found to be acting in concert through knowing participation in a joint
activity or parallel action toward a common goal of investing in, one
or more investments with a covered fund that is organized and offered
by the covered banking entity, whether or not pursuant to an express
agreement, such investments shall be included in any calculation
required under paragraph (a)(2) of this section.
    (3) Timing of single covered fund investment calculation. The
aggregate amount of all ownership interests of a covered banking entity
in a single covered fund may at no time exceed the limits in this
paragraph after the conclusion of the period provided in paragraph
(a)(2)(i)(B) of this section.
    (4) Methodology and standards for calculation. For purposes of
determining the amount or value of its investment in a covered fund
under this paragraph (b), a covered banking entity must calculate its
investment in the same manner and according to the same standards
utilized by the covered fund for determining the aggregate value of the
fund's assets and ownership interests.
    (c) Aggregate permitted investments in all covered funds. (1) For
purposes of determining the aggregate value of all permitted
investments in all covered funds by a covered banking entity under
paragraph (a)(2)(ii) of this section, the aggregate value of all
ownership interests held by that covered banking entity shall be the
sum of the value of each investment in a covered fund held under Sec.
--.12, as determined in accordance with applicable accounting
standards.
    (2) Calculation of tier 1 capital. For purposes of determining
compliance with paragraph (a)(2)(ii) of this section:
    (i) Entities that are required to hold and report tier 1 capital.
If a covered banking entity is required to calculate and report tier 1
capital, the covered banking entity's tier 1 capital shall be equal to
the amount of tier 1 capital calculated by that covered banking entity
as of the last day of the most recent calendar quarter that has ended,
as reported to its primary financial regulatory agency, as defined in
section 2(12) of the Dodd-Frank Wall Street Reform and Consumer
Protection Act; and
    (ii) If a covered banking entity is not required to calculate and
report tier 1 capital, the covered banking entity's tier 1 capital
shall be determined to be equal to:
    (A) In the case of a covered banking entity that is controlled,
directly or indirectly, by a depository institution that calculates and
reports tier 1 capital, the amount of tier 1 capital reported by such
controlling depository institution pursuant to paragraph (c)(2)(i) of
this section;
    (B) In the case of a covered banking entity that is not controlled,
directly or indirectly, by a depository institution that calculates and
reports tier 1 capital:
    (1) Bank holding company subsidiaries. If the covered banking
entity is a subsidiary of a bank holding company or company that is
treated as a bank holding company, the amount of tier 1 capital
reported by the top-tier affiliate of such covered banking entity that
calculates and reports tier 1 capital, pursuant to paragraph (c)(2)(i)
of this section; and
    (2) Other holding companies and any subsidiary or affiliate
thereof. If the covered banking entity is not a subsidiary of a bank
holding company or a company that is treated as a bank holding company,
the total amount of shareholders' equity of the top-tier affiliate
within such organization as of the last day of the most recent calendar
quarter that has ended, as determined under applicable accounting
standards.
    (3) A covered banking entity's aggregate permitted investment in
all covered funds shall be calculated as of the last day of each
calendar quarter.
    (d) Capital treatment for a permitted investment in a covered fund.
For purposes of calculating capital pursuant to the applicable capital
rules, a covered banking entity shall deduct the aggregate value of all
permitted investments in all covered funds made or retained by a
covered banking entity pursuant to this section (as determined under
paragraph (c)(1) of this section) from the banking entity's tier 1
capital (as determined under paragraph (c)(2) of this section).
    (e) Extension of time to divest an ownership interest. (1) Upon
application by a covered banking entity, the Board may extend the
period of time to meet the requirements under paragraphs (a)(2)(i)(A)
and (B) of this section for up to 2 additional years, if the Board
finds that an extension would be consistent with safety and soundness
and not detrimental to the public interest. An application for
extension must:
    (i) Be submitted to the Board at least 90 days prior to the
expiration of the applicable time period;
    (ii) Provide the reasons for application, including information
that addresses the factors in paragraph (e)(2) of this section; and
    (iii) Explain the covered 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)(i) of this
section.
    (2) Factors governing Board determinations. In reviewing any
application under paragraph (e)(1) of this section, the Board may
consider all the facts and circumstances related to the permitted
investment in a covered fund, including:
    (i) Whether the investment would:
    (A) Involve or result in material conflicts of interest between the
covered banking entity and its clients, customers or counterparties;
    (B) Result, directly or indirectly, in a material exposure by the
covered banking entity to high-risk assets or high-risk trading
strategies;
    (C) Pose a threat to the safety and soundness of the covered
banking entity; or
    (D) Pose a threat to the financial stability of the United States;
    (ii) Market conditions;
    (iii) The contractual terms governing the covered banking entity's
interest in the covered fund;
    (iv) The date on which the covered fund is expected to have
attracted sufficient investments from investors unaffiliated with the
covered banking entity to enable the covered banking entity to comply
with the limitations in paragraph (a)(2)(i) of this section;
    (v) 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 covered banking entity
and the financial stability of the United States;
    (vi) The cost to the covered banking entity of divesting or
disposing of the investment within the applicable period;
    (vii) Whether the divestiture or conformance of the investment
would involve or result in a material conflict of interest between the
covered banking entity and unaffiliated clients, customers or
counterparties to which it owes a duty;
    (viii) The covered 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; and
    (ix) Any other factor that the Board believes appropriate.
    (3) Consultation. In the case of a covered 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 approval of an
application by the covered banking entity for an extension under
paragraph (e)(1) of this section.

    (4) Authority to impose restrictions on activities or investment
during any extension period. (i) 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 covered 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 (12 U.S.C. 1851) and this part.
    (ii) Consultation. In the case of a covered 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 imposing
conditions on the approval of a request by the covered banking entity
for an extension under paragraph (e)(1) of this section.

Sec.  --.13  Other permitted covered fund activities and investments.

    (a) Permitted investments in SBICs and related investments. The
prohibition contained in Sec.  --.10(a) does not apply with respect to
acquiring or retaining an ownership interest in, or acting as sponsor
to, a covered fund by a covered banking entity or an affiliate or
subsidiary thereof:
    (1) In one or more small business investment companies, as defined
in section 102 of the Small Business Investment Act of 1958 (15 U.S.C.
662);
    (2) That is designed primarily to promote the public welfare, of
the type permitted under paragraph (11) of section 5136 of the Revised
Statutes of the United States (12 U.S.C. 24), including the welfare of
low- and moderate-income communities or families (such as providing
housing, services, or jobs); or
    (3) That is a qualified rehabilitation expenditure with respect to
a qualified rehabilitation 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.
    (b) Permitted risk-mitigating hedging activities.
    (1) The prohibition contained in Sec.  --.10(a) does not apply with
respect to an ownership interest in a covered fund by a covered banking
entity, provided that the acquisition or retention of the ownership
interest is:
    (i) Made in connection with and related to individual or aggregated
obligations or liabilities of the covered banking entity that are:
    (A) Taken by the covered banking entity when acting as 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, or
    (B) Directly connected to a compensation arrangement with an
employee that directly provides investment advisory or other services
to the covered fund; and
    (ii) Designed to reduce the specific risks to the covered banking
entity in connection with and related to such obligations or
liabilities.
    (2) Requirements. For purposes of paragraph (b)(1) of this section,
acquiring or retaining an ownership interest in a covered fund by a
covered banking entity shall be a permissible risk-mitigating hedging
activity under this section only if:
    (i) The covered banking entity has established the internal
compliance program required by subpart D designed to ensure the covered
banking entity's compliance with the requirements of this paragraph
(b)(2) of this section including reasonably designed written policies
and procedures regarding the instruments, techniques and strategies
that may be used for hedging, internal controls and monitoring
procedures, and independent testing;
    (ii) The acquisition or retention of an ownership interest in a
covered fund:
    (A) Is made in accordance with the written policies, procedures and
internal controls established by the covered banking entity pursuant to
subpart D;
    (B) Hedges or otherwise mitigates an exposure to a covered fund
through an offsetting exposure to the same covered fund and in the same
amount of ownership interest in that covered fund that:
    (1) Arises out of a transaction conducted solely to accommodate a
specific customer request with respect to, or
    (2) Is directly connected to its compensation arrangement with an
employee that directly provides investment advisory or other services
to, that covered fund;
    (C) Does not give rise, at the inception of the hedge, to
significant exposures that were not already present in individual or
aggregated positions, contracts, or other holdings of a covered banking
entity and that are not hedged contemporaneously; and
    (D) Is subject to continuing review, monitoring and management by
the covered banking entity that:
    (1) Is consistent with its written hedging policies and procedures;
    (2) Maintains a substantially similar offsetting exposure to the
same amount and type of ownership interest, based upon the facts and
circumstances of the underlying and hedging positions and the risks and
liquidity of those positions, to the risk or risks the purchase or sale
is intended to hedge or otherwise mitigate; and
    (3) Mitigates any significant exposure arising out of the hedge
after inception; and
    (iii) The compensation arrangements of persons performing the risk-
mitigating hedging activities are designed not to reward proprietary
risk-taking.
    (3) Documentation. With respect to any acquisition or retention of
an ownership interest in a covered fund by a covered banking entity
pursuant to this paragraph (b), the covered banking entity must
document, at the time the transaction is conducted:
    (i) The risk-mitigating purpose of the acquisition or retention of
an ownership interest in a covered fund;
    (ii) The risks of the individual or aggregated obligation or
liability of a covered banking entity that the acquisition or retention
of an ownership interest in a covered fund is designed to reduce; and
    (iii) The level of organization that is establishing the hedge.
    (c) Certain permitted covered fund activities and investments
outside of the United States.
    (1) The prohibition contained in Sec.  --.10(a) does not apply to
the acquisition or retention of any ownership interest in, or the
sponsorship of, a covered fund by a covered banking entity if:
    (i) The covered banking entity is not directly or indirectly
controlled by a banking entity that is organized under the laws of the
United States or of one or more States;
    (ii) The activity is conducted pursuant to paragraph (9) or (13) of
section 4(c) of the BHC Act;
    (iii) No ownership interest in such covered fund is offered for
sale or sold to a resident of the United States; and
    (iv) The activity occurs solely outside of the United States.
    (2) An activity shall be considered to be conducted pursuant to
paragraph (9) or (13) of section 4(c) of the BHC Act only if:
    (i) With respect to a covered banking entity that is a foreign
banking organization, the covered banking entity is a qualifying
foreign banking organization and is conducting the activity in
compliance with subpart B of the Board's Regulation K (12 CFR 211.20 et
seq.); or
    (ii) With respect to a covered banking entity that is not a foreign
banking organization, the covered banking entity

meets at least two of the following requirements:
    (A) Total assets of the covered banking entity held outside of the
United States exceed total assets of the covered banking entity held in
the United States;
    (B) Total revenues derived from the business of the covered banking
entity outside of the United States exceed total revenues derived from
the business of the covered banking entity in the United States; or
    (C) Total net income derived from the business of the covered
banking entity outside of the United States exceeds total net income
derived from the business of the covered banking entity in the United
States.
    (3) An activity shall be considered to have occurred solely outside
of the United States only if:
    (i) The covered banking entity engaging in the activity is not
organized under the laws of the United States or of one or more States;
    (ii) No subsidiary, affiliate, or employee of the covered banking
entity that is involved in the offer or sale of an ownership interest
in the covered fund is incorporated or physically located in the United
States or in one or more States; and
    (iii) No ownership interest in such covered fund is offered for
sale or sold to a resident of the United States.
    (d) Loan securitizations. The prohibition contained in Sec.
--.10(a) does not apply with respect to the acquisition or retention by
a covered banking entity of any ownership interest in, or acting as
sponsor to, a covered fund that is an issuer of asset-backed
securities, the assets or holdings of which are solely comprised of:
    (1) Loans;
    (2) Contractual rights or assets directly arising from those loans
supporting the asset-backed securities; and
    (3) Interest rate or foreign exchange derivatives that:
    (i) Materially relate to the terms of such loans or contractual
rights or assets; and
    (ii) Are used for hedging purposes with respect to the
securitization structure.

Sec.  --.14  Covered fund activities determined to be permissible.

    (a) The prohibition contained in Sec.  --.10(a) does not apply to
the acquisition or retention by a covered banking entity of any
ownership interest in or acting as sponsor to:
    (1) Bank owned life insurance. A separate account which is used
solely for the purpose of allowing a covered banking entity to purchase
an insurance policy for which the covered banking entity is the
beneficiary, provided that the covered banking entity that purchases
the insurance policy:
    (i) Does not control the investment decisions regarding the
underlying assets or holdings of the separate account; and
    (ii) Holds its ownership interest in the separate account in
compliance with applicable supervisory guidance regarding bank owned
life insurance.
    (2) Certain other covered funds. Any of the following entities that
would otherwise qualify as a covered fund:
    (i) A joint venture between the covered banking entity or one of
its affiliates and any other person, provided that the joint venture:
    (A) Is an operating company; and
    (B) Does not engage in any activity or make any investment that is
prohibited under this part;
    (ii) An acquisition vehicle, provided that the sole purpose and
effect of such entity is to effectuate a transaction involving the
acquisition or merger of one entity with or into the covered banking
entity or one of its affiliates;
    (iii) An issuer of an asset-backed security, but only with respect
to that amount or value of economic interest in a portion of the credit
risk for an asset-backed security that is retained by a covered banking
entity that is a ``securitizer'' or ``originator'' in compliance with
the minimum requirements of section 15G of the Exchange Act (15 U.S.C.
78o-11) and any implementing regulations issued thereunder;
    (iv) A wholly-owned subsidiary of the covered banking entity that
is:
    (A) Engaged principally in performing bona fide liquidity
management activities described in Sec.  --.3(b)(2)(iii)(C); and
    (B) Carried on the balance sheet of the covered banking entity; and
    (v) A covered fund that is an issuer of asset-backed securities
described in Sec.  --.13(d), the assets or holdings of which are solely
comprised of:
    (A) Loans;
    (B) Contractual rights or assets directly arising from those loans
supporting the asset-backed securities; and
    (C) Interest rate or foreign exchange derivatives that:
    (1) Materially relate to the terms of such loans or contractual
rights or assets, and
    (2) Are used for hedging purposes with respect to the
securitization structure.
    (b) The prohibition contained in Sec.  --.10(a) does not apply to
the acquisition or retention by a covered banking entity of any
ownership interest in, or acting as sponsor to, a covered fund, but
only if such ownership interest is acquired or retained by a covered
banking entity (or an affiliate or subsidiary thereof):
    (1) In the ordinary course of collecting a debt previously
contracted in good faith, if the covered banking entity divests the
ownership interest within applicable time periods provided for by
[Agency]; or
    (2) Pursuant to and in compliance with the conformance or extended
transition period authorities provided for in subpart E of the Board's
rules implementing section 13 of the BHC Act (12 CFR 248.30 through
248.35).

Sec.  --.15  Internal controls, reporting and recordkeeping
requirements applicable to covered fund activities and investments.

    A covered banking entity engaged in any covered fund activity or
making or holding any investment permitted under this subpart shall
comply with:
    (a) The internal controls, reporting, and recordkeeping
requirements required under Sec.  --.20 and appendix C to this part, as
applicable; and
    (b) Such other reporting and recordkeeping requirements as [Agency]
may deem necessary to appropriately evaluate the covered banking
entity's compliance with this subpart.

Sec.  --.16  Limitations on relationships with a covered fund.

    (a) Relationships with a covered fund.
    (1) Except as provided for in paragraph (a)(2) of this section, no
covered banking entity that serves, directly or indirectly, as the
investment manager, investment adviser, commodity trading advisor, or
sponsor to a covered fund, or that organizes and offers a covered fund
pursuant to Sec.  --.11, and no affiliate of such entity, may enter
into a transaction with the covered fund, or with any other covered
fund that is controlled by such covered fund, that would be a covered
transaction as defined in section 23A of the Federal Reserve Act (12
U.S.C. 371c), as if such covered banking entity and the affiliate
thereof were a member bank and the covered fund were an affiliate
thereof.
    (2) Notwithstanding paragraph (a)(1) of this section, a covered
banking entity may:
    (i) Acquire and retain any ownership interest in a covered fund in
accordance with the requirements of this subpart; and
    (ii) Enter into any prime brokerage transaction with any covered
fund in which a covered fund managed,

sponsored, or advised by such covered banking entity (or an affiliate
or subsidiary thereof) has taken an ownership interest, if:
    (A) The covered banking entity is in compliance with each of the
limitations set forth in Sec.  --.11 with respect to a covered fund
organized and offered by such covered banking entity (or an affiliate
or subsidiary thereof);
    (B) The chief executive officer (or equivalent officer) of the top-
tier affiliate of the covered banking entity certifies in writing
annually (with a duty to update the certification if the information in
the certification materially changes) that the covered banking entity
does not, directly or indirectly, guarantee, assume, or otherwise
insure the obligations or performance of the covered fund or of any
covered fund in which such covered fund invests; and
    (C) The Board has not determined that such transaction is
inconsistent with the safe and sound operation and condition of the
covered banking entity.
    (b) Restrictions on transactions with covered funds. A covered
banking entity that serves, directly or indirectly, as the investment
manager, investment adviser, commodity trading advisor, or sponsor to a
covered fund, or that organizes and offers a covered fund pursuant to
Sec.  --.11, shall be subject to section 23B of the Federal Reserve Act
(12 U.S.C. 371c-1), as if such covered banking entity were a member
bank and such covered fund were an affiliate thereof.
    (c) Restrictions on prime brokerage transactions. A prime brokerage
transaction permitted under paragraph (a)(2)(ii) of this section shall
be subject to section 23B of the Federal Reserve Act (12 U.S.C. 371c-1)
as if the counterparty were an affiliate of the covered banking entity.

Sec.  --.17  Other limitations on permitted covered fund activities.

    (a) No transaction, class of transactions, or activity may be
deemed permissible under Sec. Sec.  --.11 through --.14 and Sec.  --.16
if the transaction, class of transactions, or activity would:
    (1) Involve or result in a material conflict of interest between
the covered banking entity and its clients, customers, or
counterparties;
    (2) Result, directly or indirectly, in a material exposure by the
covered banking entity to a high-risk asset or a high-risk trading
strategy; or
    (3) Pose a threat to the safety and soundness of the covered
banking entity or the financial stability of the United States.
    (b) Definition of material conflict of interest. For purposes of
this section, a material conflict of interest between a covered banking
entity and its clients, customers, or counterparties exists if the
covered banking entity engages in any transaction, class of
transactions, or activity that would involve or result in the covered
banking entity's interests being materially adverse to the interests of
its client, customer, or counterparty with respect to such transaction,
class of transactions, or activity, unless:
    (1) Timely and effective disclosure and opportunity to negate or
substantially mitigate. Prior to effecting the specific transaction or
class or type of transactions, or engaging in the specific activity,
for which a conflict of interest may arise, the covered banking entity:
    (i) Makes clear, timely, and effective disclosure of the conflict
of interest, together with other necessary information, in reasonable
detail and in a manner sufficient to permit a reasonable client,
customer, or counterparty to meaningfully understand the conflict of
interest; and
    (ii) Makes such disclosure explicitly and effectively, and in a
manner that provides the client, customer, or counterparty the
opportunity to negate, or substantially mitigate, any materially
adverse effect on the client, customer, or counterparty created by the
conflict of interest; or
    (2) Information barriers. The covered banking entity has
established, maintained, and enforced information barriers that are
memorialized in written policies and procedures, such as physical
separation of personnel, or functions, or limitations on types of
activity, that are reasonably designed, taking into consideration the
nature of the covered banking entity's business, to prevent the
conflict of interest from involving or resulting in a materially
adverse effect on a client, customer, or counterparty. A covered
banking entity may not rely on such information barriers if, in the
case of any specific transaction, class or type of transactions or
activity, the banking entity knows or should reasonably know that,
notwithstanding the covered banking entity's establishment of
information barriers, the conflict of interest may involve or result in
a materially adverse effect on a client, customer, or counterparty.
    (c) Definition of high-risk asset and high-risk trading strategy.
For purposes of this section:
    (1) High-risk asset means an asset or group of related assets that
would, if held by a covered banking entity, significantly increase the
likelihood that the covered banking entity would incur a substantial
financial loss or would fail.
    (2) High-risk trading strategy means a trading strategy that would,
if engaged in by a covered banking entity, significantly increase the
likelihood that the covered banking entity would incur a substantial
financial loss or would fail.

Sec.  --.18  [Reserved]

Sec.  --.19  [Reserved]

Subpart D--Compliance Program Requirement; Violations

Sec.  --.20  Program for monitoring compliance; enforcement.

    (a) Program requirement. Except as provided in paragraph (d) of
this section, each covered banking entity shall develop and provide for
the continued administration of a 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, and such program
shall be appropriate for the size, scope and complexity of activities
and business structure of the covered banking entity.
    (b) Contents of compliance program. The compliance program required
by paragraph (a) of this section, at a minimum, shall include:
    (1) Internal written policies and procedures reasonably designed to
document, describe, and monitor trading activities subject to subpart B
of this part and activities and investments with respect to a covered
fund subject to subpart C of this part (including those permitted under
Sec. Sec.  --.4 through --.6 or Sec. Sec.  --.11 through --.16) to
ensure that such activities and investments comply with section 13 of
the BHC Act and this part;
    (2) A system of internal controls reasonably designed to monitor
and identify potential areas of noncompliance with section 13 of the
BHC Act and this part in the covered banking entity's trading
activities subject to subpart B of this part and activities and
investments with respect to a covered fund subject to subpart C of this
part (including those permitted under Sec. Sec.  --.4 through --.6 or
Sec. Sec.  --.11 through --.16) and to prevent the occurrence of
activities or investments that are prohibited by section 13 of the BHC
Act and this part;
    (3) A management framework that clearly delineates responsibility
and accountability for compliance with section 13 of the BHC Act and
this part;
    (4) Independent testing for the effectiveness of the compliance
program

conducted by qualified personnel of the covered banking entity or by a
qualified outside party;