definition of ``small entity'' that are subject to section 13 of the
BHC Act and its implementing regulations following the enactment of
EGRRCPA. Furthermore, to the extent that any Board-regulated entities
that meet the definition of ``small entity'' are or become subject to
section 13 of the BHC Act and its implementing regulations, the Board
does not expect the total number of such entities to be substantial.
Accordingly, the Board's final rule is not expected to have a
significant economic impact on a substantial number of small entities.
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    \497\ Public Law 115-174 (May 24, 2018).
    \498\ Under EGRRCPA, a community bank and its affiliates are
generally excluded from the definition of banking entity, and thus
section 13 of the BHC Act, if the bank and all companies that
control the bank have total consolidated assets equal to $10 billion
or less and trading assets and liabilities equal to five percent or
less of total consolidated assets.
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OCC
    The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq.,
requires an agency, in connection with a final rule, to prepare a Final
Regulatory Flexibility Analysis describing the impact of the rule on
small entities (defined by the Small Business Administration (SBA) for
purposes of the RFA to include commercial banks and savings
institutions with total assets of $600 million or less and trust
companies with total assets of $41.5 million or less) or to certify
that the final rule would not have a significant economic impact on a
substantial number of small entities. The OCC currently supervises
approximately 745 small entities.\499\ Under the EGRRCPA, banking
entities with total consolidated assets of $10 billion or less
generally are not ``banking entities'' within the scope of section 13
of the BHC Act if their trading assets and trading liabilities do not
exceed five percent of their total consolidated assets. In addition,
section 13 of the BHC Act generally excludes certain institutions that
function only in a trust or fiduciary capacity from the definition of
``banking entity. As a result, no OCC-supervised small entities are
subject to section 13 of the BHC Act. Thus, the final rule will not
impact any OCC-supervised small entities. Therefore, the OCC certifies
that the final rule will not have a significant impact on a substantial
number of OCC-supervised small entities.
---------------------------------------------------------------------------

    \499\ The OCC bases its estimate of the number of small entities
on the SBA's size thresholds for commercial banks and savings
institutions, and trust companies, which are $600 million and $41.5
million, respectively. Consistent with the General Principles of
Affiliation, 13 CFR 121.103(a), the OCC counts the assets of
affiliated financial institutions when determining if the OCC should
classify an OCC-supervised institution as a small entity. The OCC
uses December 31, 2019, to determine size because a ``financial
institution's assets are determined by averaging the assets reported
on its four quarterly financial statements for the preceding year.''
See footnote 8 of the SBA's Table of Size Standards.
---------------------------------------------------------------------------

FDIC
    The RFA generally requires that, in connection with a final
rulemaking, an agency prepare and make available for public comment a
final regulatory flexibility analysis describing the impact of the
final rule on small entities.\500\ However, a regulatory flexibility
analysis is not required if the agency certifies that the final rule
will not have a significant economic impact on a substantial number of
small entities. The SBA has defined ``small entities'' to include
banking organizations with total assets of less than or equal to $600
million that are independently owned and operated or owned by a holding
company with less than or equal to $600 million in total assets.\501\
Generally, the FDIC considers

a significant effect to be a quantified effect in excess of five
percent of total annual salaries and benefits per institution, or 2.5
percent of total noninterest expenses. The FDIC believes that effects
in excess of these thresholds typically represent significant effects
for FDIC-supervised institutions. For the reasons described below and
under section 605(b) of the RFA, the FDIC certifies that this final
rule will not have a significant economic impact on a substantial
number of small entities.
---------------------------------------------------------------------------

    \500\ 5 U.S.C. 601 et seq.
    \501\ The SBA defines a small banking organization as having
$600 million or less in assets, where an organization's ``assets are
determined by averaging the assets reported on its four quarterly
financial statements for the preceding year.'' See 13 CFR 121.201
(as amended by 84 FR 34261, effective August 19, 2019). In its
determination, the ``SBA counts the receipts, employees, or other
measure of size of the concern whose size is at issue and all of its
domestic and foreign affiliates.'' See 13 CFR 121.103. Following
these regulations, the FDIC uses a covered entity's affiliated and
acquired assets, averaged over the preceding four quarters, to
determine whether the covered entity is ``small'' for the purposes
of RFA.
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    As of December 31, 2019, the FDIC supervised 3,344 depository
institutions,\502\ of which 2,581 were considered small entities for
the purposes of RFA.\503\ The Economic Growth, Regulatory Relief, and
Consumer Protection Act excluded entities from the requirements of
section 13 of the BHC Act that do not have and are not controlled by a
company that has total assets of more than $10 billion or trading
assets and liabilities comprising more than five percent of total
consolidated assets.\504\ Only one small, FDIC-supervised institution
is subject to section 13 of the BHC Act, because its trading assets and
liabilities exceed five percent of total consolidated assets.\505\
---------------------------------------------------------------------------

    \502\ FDIC-supervised institutions are set forth in 12 U.S.C.
1813(q)(2).
    \503\ FDIC Call Report data, December 31, 2019.
    \504\ Public Law 115-174, May 24, 2018. https://www.congress.gov/bill/115th-congress/senate-bill/ 2155.
    \505\ FDIC Call Report data, December 2019.
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    Section 13 of the BHC Act generally prohibits any banking entity
from engaging in proprietary trading or from acquiring or retaining an
ownership interest in, sponsoring, or having certain relationships with
a covered fund. As previously discussed, the final rule modifies
existing definitions and exclusions and introduces new exclusions to
the implementing regulations. The final rule permits covered entities
to engage in additional activities with respect to covered funds,
including acquiring or retaining an ownership interest in, sponsoring,
or having certain relationships with covered funds, subject to certain
restrictions.
    This final rule excludes certain types of investment funds from the
definition of a ``covered fund'' for the purposes of section 13 of the
BHC Act. Investments in funds that are affected by this final rule
could be reported as deductions from capital on Call Report schedule
RC-R Part 1 Lines 11 or 13 if the investments qualify as ``investments
in the capital of an unconsolidated financial institution'' or as
additional deductions on Lines 17 or 24 of schedule RC-R
otherwise.\506\ The one affected small, FDIC-supervised institution did
not report any such deductions over the past five years.\507\
---------------------------------------------------------------------------

    \506\ See ``Supervisory Guidance on the Capital Treatment of
Certain Investments in Covered Funds.'' FDIC FIL-50-2015: November
6, 2015. https://www.fdic.gov/news/news/financial/2015/fil15050a.pdf.
    \507\ FDIC Call Report data, March 2015-December 2019.
---------------------------------------------------------------------------

    Based on this supporting information, the FDIC certifies that this
final rule will not have a significant economic impact on a substantial
number of small entities.
SEC
    In the 2020 proposal, the SEC certified that, pursuant to 5 U.S.C.
605(b), the 2020 proposal would not, if adopted, have a significant
economic impact on a substantial number of small entities. Although the
SEC solicited written comments regarding this certification, no
commenters responded to this request.
    As discussed in the SUPPLEMENTARY INFORMATION, the amendments
clarify and simplify compliance with the implementing regulations,
refine the extraterritorial application of the section 13 of the BHC
Act, and permit additional fund activities that do not present the
risks that section 13 was intended to address.
    The amendments will generally apply to banking entities, including
certain SEC-registered entities. These entities include bank-affiliated
SEC-registered investment advisers, broker-dealers, and security-based
swap dealers. Based on information in filings submitted by these
entities, the SEC believes that there are no banking entity registered
investment advisers or broker-dealers that are small entities for
purposes of the RFA. For this reason, the SEC certifies that the
amendments will not have a significant economic impact on a substantial
number of small entities.
CFTC
    Pursuant to 5 U.S.C. 605(b), the CFTC hereby certifies that the
final rule will not have a significant economic impact on a substantial
number of small entities for which the CFTC is the primary financial
regulatory agency.
    As discussed in this Supplementary Information, the final rule
clarifies and simplifies compliance with the implementing regulations,
refines the extraterritorial application of section 13 of the BHC Act,
and permits additional fund activities that do not present the risks
that section 13 was intended to address. To reduce the extraterritorial
impact of the implementing regulations, the final rule exempts the
activities of certain funds that are organized outside of the United
States and offered to foreign investors from certain restrictions of
the implementing regulations. The final rule also revises several
existing exclusions from the covered fund provisions, to provide
clarity and simplify compliance with the requirements of the
implementing regulations. The final rule adopts several new exclusions
from the covered fund definition in order to more closely align the
regulation with the purpose of the statute. Last, the final rule adopts
revisions to the provisions that govern the relationship between a
banking entity and a fund and the definition of ownership interest.
    The final rule will generally apply to banking entities, including
certain CFTC-registered entities. These entities include bank-
affiliated CFTC-registered swap dealers, futures commission merchants,
commodity trading advisors and commodity pool operators.\508\ The CFTC
has previously determined that swap dealers, futures commission
merchants and commodity pool operators are not small entities for
purposes of the RFA and, therefore, the requirements of the RFA do not
apply to those entities.\509\ As for commodity trading advisors, the
CFTC has found it appropriate to consider whether such registrants
should be deemed small entities for purposes of the RFA on a case-by-
case basis, in the context of the particular regulation at issue.\510\
---------------------------------------------------------------------------

    \508\ The final rule may also apply to other types of CFTC
registrants that are banking entities, such as introducing brokers,
but the CFTC believes it is unlikely that such other registrants
will have significant activities that would implicate the final
rule. See 79 FR 5808, 5813 (Jan. 31, 2014) (CFTC version of 2013
final rule).
    \509\ See Policy Statement and Establishment of Definitions of
``Small Entities'' for Purposes of the Regulatory Flexibility Act,
47 FR 18618 (Apr. 30, 1982) (futures commission merchants and
commodity pool operators); Registration of Swap Dealers and Major
Swap Participants, 77 FR 2613, 2620 (Jan. 19, 2012) (swap dealers
and major swap participants).
    \510\ See Policy Statement and Establishment of Definitions of
``Small Entities'' for Purposes of the Regulatory Flexibility Act,
47 FR 18618, 18620 (Apr. 30, 1982).
---------------------------------------------------------------------------

    In the context of the final rule, the CFTC believes it is unlikely
that a substantial number of the commodity trading advisors that are
potentially affected are small entities for purposes of the RFA. In
this regard, the CFTC notes that only commodity trading advisors that
are registered with the CFTC are covered by the implementing
regulations, and generally those that are registered have larger
businesses.

Similarly, the final rule applies to only those commodity trading
advisors that are affiliated with banks, which the CFTC expects are
larger businesses.
    The CFTC requested that commenters address in particular whether
any of these commodity trading advisors, or other CFTC registrants
covered by the proposed revisions, are small entities for purposes of
the RFA. The CFTC did not receive any public comments on this or any
other aspect of the RFA as it relates to the rule.
    Because the CFTC believes that there are not a substantial number
of registered, banking entity-affiliated commodity trading advisors
that are small entities for purposes of the RFA, and the other CFTC
registrants that may be affected by the proposed revisions have been
determined not to be small entities, the CFTC believes that the final
rule will not have a significant economic impact on a substantial
number of small entities for which the CFTC is the primary financial
regulatory agency.

D. Riegle Community Development and Regulatory Improvement Act

    Section 302(a) of the Riegle Community Development and Regulatory
Improvement Act of 1994 (RCDRIA) \511\ requires that each Federal
banking agency, in determining the effective date and administrative
compliance requirements for new regulations that impose additional
reporting, disclosure, or other requirements on insured depository
institutions, consider, consistent with principles of safety and
soundness and the public interest, any administrative burdens that such
regulations would place on depository institutions, including small
depository institutions, and customers of depository institutions, as
well as the benefits of such regulations. The agencies have considered
comment on these matters in other parts of this SUPPLEMENTARY
INFORMATION.
---------------------------------------------------------------------------

    \511\ 12 U.S.C. 4802(a).
---------------------------------------------------------------------------

    In addition, under section 302(b) of the RCDRIA, new regulations
that impose additional reporting, disclosures, or other new
requirements on insured depository institutions generally must take
effect on the first day of a calendar quarter that begins on or after
the date on which the regulations are published in final form.\512\
Therefore, the effective date for the Federal banking agencies is
October 1, 2020, the first day of the calendar quarter.\513\
---------------------------------------------------------------------------

    \512\ 12 U.S.C. 4802(b).
    \513\ Additionally, the Administrative Procedure Act generally
requires that the effective date of a rule be no less than 30 days
after publication in the Federal Register. 5 U.S.C. 553(d)(1). The
effective date, October 1, 2020, will be more than 30 days after
publication in the Federal Register.
---------------------------------------------------------------------------

E. OCC Unfunded Mandates Reform Act

    The OCC has analyzed the final rule under the factors in the
Unfunded Mandates Reform Act of 1995 (UMRA). Under this analysis, the
OCC considered whether the final rule includes a Federal mandate that
may result in the expenditure by state, local, and tribal governments,
in the aggregate, or by the private sector, of $100 million or more in
any one year (adjusted annually for inflation). The UMRA does not apply
to regulations that incorporate requirements specifically set forth in
law.
    The final rule does not impose new mandates. Therefore, the OCC
finds that the final rule does not trigger the UMRA cost threshold.
Accordingly, the OCC has not prepared the written statement described
in section 202 of the UMRA.

F. SEC Economic Analysis

1. Broad Economic Considerations
i. Background
    As discussed above, section 13 of the Bank Holding Company (BHC)
Act generally prohibits banking entities from acquiring or retaining an
ownership interest in, sponsoring, or having certain relationships
with, a hedge fund or private equity fund (covered funds), subject to
certain exemptions. Section 13(h)(1) of the BHC Act defines the term
``banking entity'' to include (1) any insured depository institution
(as defined by statute), (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, and (4) any affiliate or subsidiary of such an
entity.\514\ In addition, the Economic Growth, Regulatory Relief, and
Consumer Protection Act (EGRRCPA),\515\ enacted on May 24, 2018,
amended section 13 of the BHC Act to exclude from the definition of
``insured depository institution'' any institution that does not have
and is not controlled by a company that has (1) more than $10 billion
in total consolidated assets; and (2) total trading assets and trading
liabilities, as reported on the most recent applicable regulatory
filing filed by the institution, that are more than 5% of total
consolidated assets.\516\
---------------------------------------------------------------------------

    \514\ See 12 U.S.C. 1851(h)(1).
    \515\ See supra note 504.
    \516\ These and other aspects of the regulatory baseline against
which the SEC is assessing the economic effects of the final rule
being adopted here on SEC-regulated entities are discussed in the
economic baseline. On July 22, 2019, the agencies adopted a final
rule amending the definition of ``insured depository institution''
in a manner consistent with EGRRCPA. See Revisions to Prohibitions
and Restrictions on Proprietary Trading and Certain Interests in,
and Relationships with, Hedge Funds and Private Equity Funds, 84 FR
35008 (July 22, 2019). In November 2019, the agencies adopted the
2019 amendments, which tailored certain proprietary trading and
covered fund restrictions of the 2013 rule. See supra note 8.
---------------------------------------------------------------------------

    Certain SEC-regulated entities, such as broker-dealers, security-
based swap dealers (SBSDs), and registered investment advisers (RIAs)
affiliated with an insured depository institution, fall under the
definition of ``banking entity'' and are subject to the prohibitions of
section 13 of the BHC Act.\517\ The SEC's economic analysis is limited
to areas within the scope of the SEC's function as the primary
securities markets regulator in the United States. In particular, the
SEC's economic analysis focuses primarily on the potential effects of
the rule amendments being adopted here (the ``final rule'') on (1) SEC
registrants, in their capacity as such, (2) the functioning and
efficiency of the securities markets, (3) investor protection, and (4)
capital formation. SEC registrants that may be affected by the final
rule include SEC-registered broker-dealers, SBSDs, and RIAs. Thus, the
analysis below does not consider the direct effects of the final rule
on broker-dealers, SBSDs, and registered investment advisers that are
not banking entities, or banking entities that are not SEC registrants.
In addition, potential spillover effects on these and other entities
are reflected in the SEC's analysis of effects on efficiency,

competition, investor protection, and capital formation in securities
markets. This economic analysis also discusses the impact of the final
rule on private funds,\518\ to the degree that it may flow through to
SEC registrants, such as RIAs, SEC-registered broker-dealers and SBSDs,
and securities markets and investors.
---------------------------------------------------------------------------

    \517\ Throughout this economic analysis, the terms ``banking
entity'' and ``entity'' generally refer only to banking entities for
which the SEC is the primary financial regulatory agency. While
section 13 of the BHC Act and its associated rules apply to a
broader set of banking entities, this economic analysis is limited
to those banking entities for which the SEC is the primary financial
regulatory agency as defined in section 2(12)(B) of the Dodd-Frank
Act. See 12 U.S.C. 1851(b)(2), 5301(12)(B).
    Compliance with SBSD registration requirements is not yet
required and there are currently no registered SBSDs. However, the
SEC has previously estimated that as many as 50 entities may
potentially register as SBSDs and that as many as 16 of these
entities may already be SEC-registered broker-dealers. See Capital,
Margin, and Segregation Requirements for Security-Based Swap Dealers
and Major Security-Based Swap Participants and Capital and
Segregation Requirements for Broker-Dealers, 84 FR 43872 (Aug. 22,
2019) (``Capital, Margin, and Segregation Adopting Release'').
    For the purposes of this economic analysis, the term ``dealer''
generally refers to SEC-registered broker-dealers and SBSDs.
    \518\ There is significant overlap between the definitions of
``private fund'' and ``covered fund.'' For purposes of this economic
analysis, ``private fund'' means an issuer that would be an
investment company, as defined in section 3 of the Investment
Company Act (15 U.S.C. 80a-3(a)), but for section 3(c)(1) or section
3(c)(7) of that Act (15 U.S.C. 80-3(c)(1) or (7)). See also 15
U.S.C. 80b-2(a)(29). Section 13(h)(2) of the BHC Act defines ``hedge
fund'' and ``private equity fund'' to mean an issuer that would be
an investment company, but for section 3(c)(1) or 3(c)(7) of the
Investment Company Act, or ``such similar funds'' as the agencies
determine by rule (see 12 U.S.C. 1851(h)(2)). In the 2013 rule, the
agencies combined the definitions of ``hedge fund'' and ``private
equity fund'' into a single term ``covered fund'' and defined this
term to include any issuer that would be an investment company as
defined in the Investment Company Act but for section 3(c)(1) or
3(c)(7) of that Act with a number of express exclusions and
additions as determined by the agencies. Implementing regulations
Sec.  __.10(b) and (c).
---------------------------------------------------------------------------

    In implementing section 13 of the BHC Act, the agencies sought to
increase the safety and soundness of banking entities, promote
financial stability, and reduce conflicts of interest between banking
entities and their customers.\519\ The regulatory regime created by the
2013 rule may have enhanced regulatory oversight and compliance with
the substantive prohibitions of section 13 of the BHC Act, but could
also have impacted capital formation and liquidity, as well as the
provision by banking entities of a variety of financial services for
customers.
---------------------------------------------------------------------------

    \519\ See, e.g., 79 FR 5536, 5541, 5574, 5659, 5666. An
extensive body of research has examined moral hazard arising out of
federal deposit insurance, implicit bailout guarantees, and systemic
risk issues. See, e.g., Andrew G. Atkeson et al., Government
Guarantees and the Valuation of American Banks, 33 NBER
Macroeconomics Ann. 81 (2018). See also Javier Bianchi, Efficient
Bailouts? 106 Amer. Econ. Rev. 3607 (2016); Bryan Kelly, Hanno
Lustig, & Stijn Van Nieuwerburgh, Too-Systematic-to-Fail: What
Option Markets Imply about Sector-Wide Government Guarantees, 106
Amer. Econ. Rev. 1278 (2016); Deniz Anginer, Asli Demirguc-Kunt, &
Min Zhu, How Does Deposit Insurance Affect Bank Risk? Evidence from
the Recent Crisis, 48 J. Banking & Fin. 312 (2014); Andrea Beltratti
& Rene M. Stulz, The Credit Crisis Around the Globe: Why Did Some
Banks Perform Better?, 105 J. Fin. Econ. 1 (2012); Pietro Veronesi &
Luigi Zingales, Paulson's Gift, 97 J. Fin. Econ. 339 (2010). For a
literature review, see, e.g., Sylvain Benoit et al., Where the Risks
Lie: A Survey on Systemic Risk, 21 Rev. Fin. 109 (2017).
---------------------------------------------------------------------------

    Section 13 of the BHC Act also provides a number of statutory
exemptions to the general prohibitions on proprietary trading and
covered funds activities. For example, the statute exempts certain
covered funds activities, such as organizing and offering covered
funds.\520\ The 2013 rule implemented these exemptions.\521\ Banking
entities engaged in activities and investments covered by section 13 of
the BHC Act and the implementing regulations are required to establish
a compliance program reasonably designed to ensure and monitor
compliance with the implementing regulations.\522\
---------------------------------------------------------------------------

    \520\ See 12 U.S.C. 1851(d)(1)(G).
    \521\ See 2013 rule Sec. Sec.  __.4, __.5, __.6, __.11, and
__.13.
    \522\ See 2013 rule Sec.  __.20. See also 2019 amendments, 84 FR
62021-25, which, among other things, modified these requirements for
banking entities with limited trading assets and liabilities. This
SEC Economic Analysis follows earlier sections by referring to the
regulations implementing section 13 of the BHC Act, as amended
through June 1, 2020 as the ``implementing regulations.'' See supra
note 8.
---------------------------------------------------------------------------

    In the 2020 proposal, the SEC solicited comment on all aspects of
the costs and benefits associated with the proposed amendments for SEC
registrants, including spillover effects the proposed amendments may
have on efficiency, competition, and capital formation in securities
markets. The SEC has considered these comments, as discussed in greater
detail in the sections that follow.
ii. Broad Economic Effects
    Certain aspects of the implementing regulations may have resulted
in a complex and costly compliance regime that is unduly restrictive
and burdensome on some affected banking entities. Distinguishing
between permissible and prohibited activities may be complex and
costly, resulting in uncertain determinations for some entities.
Moreover, the implementing regulations may include in their scope some
groups of market participants that do not necessarily engage in the
activities or pose the risks that section 13 of the BHC Act intended to
address. For example, definition of the term ``covered fund'' may
include entities that do not engage in the activities contemplated by
section 13 of the BHC Act or may include entities that do not pose the
risks that section 13 is intended to mitigate.
    The final rule includes amendments that (1) reduce the scope of
entities that may be treated as covered funds (e.g., credit funds,
venture capital funds, family wealth management vehicles, and customer
facilitation vehicles), (2) modify existing covered fund exclusions
under the implementing regulations (e.g., foreign public funds, public
welfare funds, and small business investment companies), and (3) affect
the types of permitted activities between certain banking entities and
certain covered funds (e.g., restrictions on relationships between
banking entities and covered funds, definition of ``ownership
interest,'' and treatment of loan securitizations). The final rule also
reduces the burden on affected banking entities by codifying an
existing policy statement by the Federal banking agencies that
addresses the potential issues related to a foreign banking entity
controlling a qualifying foreign excluded fund and adopting a rule of
construction to provide clarity regarding a banking entity's
permissible investments alongside a covered fund.
    Broadly, to the extent that the final rule directly changes the
scope of permissible covered fund activities, and indirectly reduces
costs to banking entities and covered funds by reducing uncertainty
regarding the scope of permissible activities, the final rule may
enhance the beneficial economic effects of the implementing
regulations.\523\ The SEC's economic analysis continues to recognize
that the overall risk exposure of banking entities generally reflects a
combination of activities, including proprietary trading, market
making, traditional banking, asset management, investment activities,
and the extent to which banking entities engage in hedging and other
risk-mitigating activities. The overall risk exposure is also a
function of the magnitude, structure, and manner in which banking
entities engage in such activities, both within such activities
individually and across all of these activities collectively. As
discussed elsewhere,\524\ the SEC recognizes the complex baseline
effects of section 13 of the BHC Act, as amended by sections 203 and
204 of EGRRCPA, and the implementing regulations (including those made
with respect to sections 203 and 204 of EGRRCPA) on overall levels and
structure of banking entity risk exposures.
---------------------------------------------------------------------------

    \523\ See, e.g., 2019 amendments, 84 FR 62037-92.
    \524\ See id.
---------------------------------------------------------------------------

    The final rule may promote the ability of the capital markets to
intermediate between suppliers and users of capital through, for
example, increased ability and willingness of banking entities and
investors in ``covered funds'' to facilitate capital formation through
sponsorship and participation in certain types of funds and to transact
with certain groups of counterparties.\525\ For

example, exclusions from the ``covered fund'' definition of specific
types of entities may benefit banking entities by providing clarity and
removing certain constraints around potentially profitable business
opportunities and by reducing compliance costs, and may benefit
excluded funds and their banking entity sponsors and advisers by
increasing the spectrum of available counterparties and improving the
quality or cost of financial services available to customers.
---------------------------------------------------------------------------

    \525\ See, e.g., U.S. Dep't of the Treasury, A Financial System
That Creates Economic Opportunities: Banks and Credit Unions (June
2017), at 77, available at https://www.treasury.gov/press-center/press-releases/Documents/A%20Financial%20System.pdf.
---------------------------------------------------------------------------

    The final rule, however, may also facilitate risk mitigation as
well as risk-taking activities of banking entities. The final rule also
may change aspects of the relationships among banking entities and
certain other groups of market participants, including potentially
introducing new conflicts of interest, and increasing or reducing the
potential effects of conflicts of interest. To the degree that some
banking entities react to the final rule by restructuring activities
involving covered funds to take advantage of the exclusions contained
in the final rule, there may be shifts in the structure and levels of
activities of banking entities that would, in turn, decrease or
increase risk exposure. Recognizing these various potential effects,
each of the exclusions includes a number of conditions aimed at
facilitating banking entity compliance while also allowing for customer
oriented financial services provided on arms-length, market terms, and
preventing evasion of the requirements of section 13.
    In evaluating these various potential effects, it is important to
acknowledge that the exclusions made available by the final rule, such
as for credit funds and qualifying venture capital funds, allow banking
entities to engage indirectly through fund structures in the same
activities in which they are currently permitted to engage directly
(e.g., extensions of credit or direct ownership stakes). Thus, the type
of exposure permitted by engaging in those activities directly, and
indirectly through covered funds, is the same and the banking entities
may use fund structures to diversify or otherwise mitigate their risk
exposure. Other exclusions permit banking entities to provide
traditional banking and asset management services to customers through
a legal entity structure, with conditions (e.g., limitation on
ownership by the banking entity and prohibition on ``bail outs'')
intended to ensure that the risks that section 13 of the BHC Act was
intended to address are mitigated. Finally, nothing in the final rule
removes or modifies prudential capital, margin, and liquidity
requirements that are applicable to banking entities and that
facilitate the safety and soundness of banking entities and the
financial stability of the United States.
    The final rule may also impact competition, allocative efficiency,
and capital formation. To the extent that the implementing regulations
have constrained banking entities in their covered fund activities,
including providing traditional banking and asset management services
to customers through a legal entity structure, the exclusions from the
definition of ``covered fund'' made available by the final rule may
increase competition between banking entities and other entities
providing services to and otherwise transacting with those types of
funds and other entities. Such competition may reduce costs or increase
the quality of certain financial services provided to such funds and
their counterparties.
    Finally, the final rule's costs, benefits, and effects on
efficiency, competition, and capital formation will be influenced by a
variety of factors, including the prevailing macroeconomic conditions,
the financial condition of firms seeking to raise capital and of funds
seeking to transact with banking entities, competition between bank and
non-bank providers of capital, and many others. Moreover, these effects
are likely to vary widely among banking entities and funds. The SEC
recognizes that the economic effects of the final rule may be dampened
or magnified in different phases of the macroeconomic cycle, depend on
monetary and fiscal policy developments and other government actions,
and may vary across different types of banking entities.
    The SEC also considered the implications of the final rule for
investors. Broadly, the final rule should increase the number of funds
and other entities that will be excluded from the covered fund
definition. This is likely to result in an increase in offerings of
such funds or an increase in the number of banking entities providing
services to customers through entities such as customer facilitation
vehicles and family wealth management vehicles. If the final rule
increases the ability of investors to access public and private markets
through funds and other entities, the final rule may result in the
relaxing of constraints on investors' portfolio optimization and, thus,
enhance the efficiency of portfolio allocations. The ability of
additional investors to access these markets through funds and other
entities may, in addition to providing those investors with greater
choice, benefit the issuers of the securities held by those funds and
other entities by potentially increasing demand for those securities.
Increased demand typically results in increased liquidity which can
benefit investors because it may enable them to enter or exit their
positions in fund instruments, products, and portfolios in a more
timely manner and at a more attractive price.
    Moreover, investors who seek access to public capital markets
investments or other investments through foreign public funds may
benefit to the extent the final rule results in banking entities
offering more foreign public funds or offering these funds at a lower
cost. Further, investors that prefer to implement a trading or
investing strategy through a legal entity structure may benefit from
the final rule, which allows banking entities to implement or
facilitate such a trading or investing strategy while providing other
banking and asset management services to the investor.\526\ At the same
time, it is possible that, as a result of banking entities sponsoring
or investing in more funds that are excluded from the definition of
covered fund by the final rule, general market risk could increase and
that risk could adversely affect markets generally, including through
the impact on financial stability. However, due to the mitigation
effects of the various conditions of the exclusions from the definition
of covered fund contained in the final rule as well as expectations
regarding the relative size and mix of the investments in the
aggregate, the SEC believes this risk to be small. For example, the
final rule permits a banking entity to act as a sponsor, investment
adviser, or commodity trading advisor to certain excluded funds (e.g.,
credit funds and qualifying venture capital funds) only to the extent
the banking entity ensures that the activities of the funds are
consistent with safety and soundness standards that are substantially
similar to those that would apply if the banking entity engaged in the
activities directly.
---------------------------------------------------------------------------

    \526\ See supra Section IV.B.1. (Foreign Public Funds).
---------------------------------------------------------------------------

iii. Analytical Approach
    The SEC's economic analysis is informed by research \527\ on the
effects of section 13 of the BHC Act and the 2013 rule, comments
received by the agencies from a variety of interested parties, and
experience administering the implementing regulations. Throughout this
economic analysis, the SEC discusses how different market

participants \528\ may respond to various aspects of the final rule.
This analysis also considers the potential effects of the final rule on
activities by banking entities that involve risk, their willingness and
ability to engage in client-facilitation activities, and competition,
market quality, and capital formation.
---------------------------------------------------------------------------

    \527\ See 2019 amendments, 84 FR 62044-54.
    \528\ As discussed above, supra Section V.F.1.i. (Background),
the SEC's economic analysis is focused on the potential effects of
the final rule on (1) SEC registrants, (2) the functioning and
efficiency of the securities markets, (3) investor protection, and
(4) capital formation. Thus, the below analysis does not consider
the direct effects of the final rule on broker-dealers, SBSDs, or
investment advisers that are not banking entities, or banking
entities that are not SEC registrants, in either case for purposes
of section 13 of the BHC Act, beyond the potential spillover effects
on these entities and effects on efficiency, competition, investor
protection, and capital formation in securities markets. See infra
Section V.F.2.i. (Affected Participants).
---------------------------------------------------------------------------

    The final rule tailors, removes, or alters the scope of various
covered fund requirements in the implementing regulations. Since
section 13 of the BHC Act and the implementing regulations impose a
number of different requirements, and, as discussed above, the type and
level of risk exposure of a banking entity is the result of a
combination of activities,\529\ it is difficult to attribute the
observed effects to a specific provision or subset of requirements. In
addition, analysis of the effects of the implementation of the 2013
rule is confounded by macroeconomic factors, other policy
interventions, and post-crisis changes to market participants' risk
aversion and return expectations.\530\ Because of the extended timeline
of implementation of section 13 of the BHC Act and the overlap of the
period during which the 2013 rule was in effect with other post-crisis
changes affecting the same group or certain sub-groups of SEC
registrants, the SEC cannot rely on quantitative methods that might
otherwise provide insight into causal attribution and quantification of
the effects of section 13 of the BHC Act and the 2013 rule on measures
of capital formation, liquidity, competition, and informational or
allocative efficiency. Moreover, empirical measures of capital
formation or liquidity are substantially limited by the fact that they
do not provide insight into security issuance and transaction activity
that does not occur (or occurs in a sector of the market for which data
is not readily available) as a result of the implementing regulations.
Accordingly, it is difficult to quantify the primary security issuance
and secondary market liquidity that would have been observed since the
financial crisis absent various provisions of section 13 of the BHC Act
and the implementing regulations.
---------------------------------------------------------------------------

    \529\ See, e.g., 2013 rule at 5541.
    \530\ With respect to the 2019 amendments, supra note 8,
analysis of the effects is difficult because of the relatively short
time that has passed since they became effective.
---------------------------------------------------------------------------

    Importantly, the existing securities markets--including market
participants, their business models, market structure, etc.--differ in
significant ways from the securities markets that existed prior to
enactment of section 13 of the BHC Act and the implementation of the
2013 rule. For example, the role of dealers in intermediating trading
activity has changed in important ways, including the following: (1) In
recent years, on both an absolute and relative basis, bank dealers
generally committed less capital to intermediation activities while
non-bank dealers generally committed more, although not always in the
same manner or on the same terms as bank dealers; (2) the volume and
profitability of certain trading activities after the financial crisis
may have decreased for bank dealers while it may have increased for
other intermediaries, including non-bank entities that provide intraday
liquidity, but generally not overnight liquidity, including in some
sectors of the market through the use of electronic trading algorithms
and high speed access to data and trading venues; and (3) the
introduction of alternative credit markets, including non-bank direct
lending markets, may have contributed to liquidity fragmentation across
markets while potentially increasing access to capital.\531\
---------------------------------------------------------------------------

    \531\ See U.S. Sec. & Exch. Comm'n, Access to Capital and Market
Liquidity (Aug. 2017), available at https://www.sec.gov/files/access-to-capital-and-market-liquidity-study-dera-2017.pdf.
---------------------------------------------------------------------------

    Where possible, the SEC has attempted to quantify the costs and
benefits it expects to result from the final rule. In many cases,
however, the SEC is unable to quantify these potential economic
effects. Some of the primary economic effects, such as the effect on
incentives that may give rise to conflicts of interest in various
regulated entities and the degree to which the implementing regulations
may be impeding activity of banking entities with respect to certain
investment vehicles, are inherently difficult to quantify. Moreover,
some of the intended benefits of the implementing regulations'
definitions and prohibitions that the agencies are amending include the
potential for more resilient markets during a financial crisis or
during periods of severe market stress. These intended benefits are
less readily observable under periods of strong economic conditions,
periods of significant government credit accommodation, and when
markets have significant liquidity and are less volatile. Even
following an economic shock, identification of these intended benefits
requires a sufficient amount of data covering a relevant sample period.
Moreover, identifying these benefits following an economic shock could
prove difficult if the effects of past regulation are confounded by
other interventions aimed at mitigating the impact of the shock on
financial markets, including regulation, credit accommodation, and
fiscal stimulus. Finally, it is difficult to quantify the net economic
effects of any individual amendment because of overlapping
implementation periods of various post-crisis regulations. Further, it
is difficult to quantify the net economic effects of any individual
amendment because of the fact that many market participants changed
their behavior in anticipation of future changes in regulation.
    In some instances, the SEC lacks the information or data necessary
to provide reasonable estimates for the economic effects of the final
rule. For example, the SEC lacks information and data on how market
participants may choose to restructure their relationships with various
types of entities in response to the final rule; the amount of capital
formation in covered funds that does not occur because of current
covered fund provisions, including those concerning the definition of
covered fund, restrictions on relationships with covered funds, the
definition of ownership interest, and the exclusion for loan
securitizations; the volume of loans, guarantees, securities lending,
and derivatives activity dealers may wish to engage in with related
covered funds; as well as the extent of risk reduction associated with
the covered fund provision of the 2013 rule. Where the SEC cannot
quantify the relevant economic effects, they are discussed in
qualitative terms.
2. Economic Baseline
    In the context of this economic analysis, the economic costs and
benefits, and the impact of the final rule on efficiency, competition,
and capital formation, are considered relative to a baseline that
includes the implementing regulations (including the 2013 rule and the
2019 amendments), legislative amendments in EGRRCPA, and current
practices aimed at compliance with these regulations.
i. Regulation
    The SEC is assessing the economic impact of the final rule against
a baseline that includes the legal and regulatory framework as it
exists at the

time of this release. Thus, the regulatory baseline for the SEC's
economic analysis includes section 13 of the BHC Act as amended by
EGRRCPA, and the 2013 rule. Further, the baseline accounts for the fact
that since the adoption of the 2013 rule, the agencies have adopted the
2019 amendments, which, among other things, relate to the ability of
banking entities to engage in certain activities, including
underwriting, market-making, and risk-mitigating hedging, with respect
to ownership interests in covered funds, as well as amendments
conforming the 2013 rule to sections 203 and 204 of EGRRCPA. In
addition, the agencies' staffs have provided FAQ responses related to
the regulatory obligations of banking entities, including SEC-regulated
entities that are also banking entities under the 2013 rule, which
likely influenced these entities' decisions about how to comply with
the 2013 rule and may influence these entities' decisions about how to
comply with the 2019 amendments.\532\ The Federal banking agencies also
issued the policy statement in 2017 with respect to foreign excluded
funds, and has since extended the policy statement to 2021.\533\
---------------------------------------------------------------------------

    \532\ See supra note 14.
    \533\ See supra Section VI.A. (Qualifying Foreign Excluded
Funds) and notes 26 and 28 (discussion of ``the policy statement'').
---------------------------------------------------------------------------

    Although the 2013 rule also included restrictions on proprietary
trading and compliance requirements (as modified by the 2019
amendments), the most relevant portion of the 2013 rule for
establishing an economic baseline is that involving covered fund
restrictions.\534\ The features of the regulatory framework under the
2013 rule most relevant to the baseline include the definition of the
term ``covered fund''; restrictions on a banking entity's relationships
with covered funds; and restrictions on parallel investment, co-
investment, and investments in the fund by banking entity employees.
---------------------------------------------------------------------------

    \534\ See 84 FR 61974.
---------------------------------------------------------------------------

Scope of the Covered Fund Definition
    The definition of ``covered fund'' impacts the scope of the
substantive prohibitions on banking entities acquiring or retaining an
ownership interest in, sponsoring, and having certain relationships
with, covered funds. The implementing regulations define covered funds,
in part, as issuers that would be investment companies but for section
3(c)(1) or 3(c)(7) of the Investment Company Act and then excludes
specific types of entities from the definition. The definition also
includes certain commodity pools as well as certain foreign funds.
Funds that rely on the exclusions in sections 3(c)(1) or 3(c)(7) of the
Investment Company Act are covered funds unless an exclusion from the
covered fund definition is available. Funds that rely on any exclusion
or exemption from the definition of ``investment company'' under the
Investment Company Act, other than the exclusion contained in section
3(c)(1) or 3(c)(7), such as real estate and mortgage funds that rely on
the exclusion in section 3(c)(5)(C), are not covered funds under the
implementing regulations. The covered fund provisions of the
implementing regulations may reduce the ability and incentives of
banking entities to bail out affiliated funds to mitigate reputational
risk, limit conflicts of interest with clients, customers, and
counterparties, and reduce the ability of banking entities to engage in
proprietary trading indirectly through funds.
    The broad definition of covered funds encompasses many different
types of vehicles, and the implementing regulations exclude some of
them from the definition of a covered fund.\535\ The excluded fund
types relevant to the baseline are funds that are regulated by the SEC
under the Investment Company Act: Registered investment companies
(RICs) and business development companies (BDCs). Seeding vehicles for
these funds are also excluded from the covered fund definition during
their seeding period.\536\
---------------------------------------------------------------------------

    \535\ The exclusions from the covered fund definition are set
forth in Sec.  __.10(c) of the implementing regulations.
    \536\ See implementing regulations Sec. Sec.  __.10(c)(12)(i)
and __.10(c)(12)(iii).
---------------------------------------------------------------------------

Restrictions on Relationships Between Banking Entities and Covered
Funds
    Under the baseline, banking entities are limited in the types of
transactions in which they are able to engage with covered funds with
which they have certain relationships. Banking entities that serve,
directly or indirectly, as the investment manager, adviser, or sponsor
to a covered fund are prohibited from engaging in a ``covered
transaction,'' as defined in section 23A of the Federal Reserve Act,
with the covered fund or with any other covered fund that is controlled
by such covered fund.\537\ Similarly, a banking entity that organizes
and offers a covered fund pursuant to Sec.  __.11 or that continues to
hold an ownership interest in a covered fund in accordance with Sec.
__.11(b) is prohibited from engaging in such a ``covered transaction.''
This prohibits all ``covered transactions'' that cause the banking
entity to have credit exposure to the affiliated covered fund,
including short-term extensions of credit and various other
transactions required for a banking entity to provide an affiliated
covered fund payment, clearing, and settlement services.
---------------------------------------------------------------------------

    \537\ See implementing regulations Sec.  __.14(a).
---------------------------------------------------------------------------

Definition of ``Banking Entity''
    For foreign banking entities,\538\ certain funds organized under
foreign law and offered to foreign investors (``foreign excluded
funds'') are not ``covered funds'' under the implementing regulations,
but may be subject to the implementing regulations as ``banking
entities'' under certain circumstances. Through the policy statement,
the Federal banking agencies (in consultation with the staffs of the
SEC and the CFTC) have provided temporary relief, that is currently
scheduled to expire on July 21, 2021, for qualifying foreign excluded
funds that may otherwise be subject to the implementing regulations as
banking entities.\539\
---------------------------------------------------------------------------

    \538\ For purposes of this analysis, ``foreign banking entity''
has the same meaning as used in the policy statement, supra note 27,
i.e., a banking entity that is not, and is not controlled directly
or indirectly by, a banking entity that is located in or organized
under the laws of the United States or any state.
    \539\ See supra note 26 and 28. For purposes of the policy
statement, a ``qualifying foreign excluded fund'' means, with
respect to a foreign banking entity, an entity that (1) is organized
or established outside the United States and the ownership interests
of which are offered and sold solely outside the United States; (2)
would be a covered fund were the entity organized or established in
the United States, or is, or holds itself out as being, an entity or
arrangement that raises money from investors primarily for the
purpose of investing in financial instruments for resale or other
disposition or otherwise trading in financial instruments; (3) would
not otherwise be a banking entity except by virtue of the foreign
banking entity's acquisition or retention of an ownership interest
in, or sponsorship of, the entity; (4) is established and operated
as part of a bona fide asset management business; and (5) is not
operated in a manner that enables the foreign banking entity to
evade the requirements of section 13 or implementing regulations.
---------------------------------------------------------------------------

Definition of ``Ownership Interest''
    The implementing regulations prohibit a banking entity, as
principal, from directly or indirectly acquiring or retaining an
``ownership interest'' in a covered fund.\540\ The implementing
regulations define an ``ownership interest'' in a covered fund to mean
any equity, partnership, or other similar interest. Under the
implementing regulations, ``other similar interest'' is defined as an
interest that:
---------------------------------------------------------------------------

    \540\ Implementing regulations Sec.  __.10(a).
---------------------------------------------------------------------------

    (A) Has the right to participate in the selection or removal of a
general partner, managing member, member of the board of directors or
trustees,

investment manager, investment adviser, or commodity trading advisor of
the covered fund (excluding the rights of a creditor to exercise
remedies upon the occurrence of an event of default or an acceleration
event);
    (B) Has the right under the terms of the interest to receive a
share of the income, gains or profits of the covered fund;
    (C) Has the right to receive the underlying assets of the covered
fund after all other interests have been redeemed and/or paid in full
(excluding the rights of a creditor to exercise remedies upon the
occurrence of an event of default or an acceleration event);
    (D) Has the right to receive all or a portion of excess spread (the
positive difference, if any, between the aggregate interest payments
received from the underlying assets of the covered fund and the
aggregate interest paid to the holders of other outstanding interests);
    (E) Provides under the terms of the interest that the amounts
payable by the covered fund with respect to the interest could be
reduced based on losses arising from the underlying assets of the
covered fund, such as allocation of losses, write-downs or charge-offs
of the outstanding principal balance, or reductions in the amount of
interest due and payable on the interest;
    (F) Receives income on a pass-through basis from the covered fund,
or has a rate of return that is determined by reference to the
performance of the underlying assets of the covered fund; or
    (G) Any synthetic right to have, receive, or be allocated any of
the rights above.\541\
---------------------------------------------------------------------------

    \541\ Implementing regulations Sec.  __.10(d)(6)(i).
---------------------------------------------------------------------------

    The implementing regulations permit a banking entity to acquire and
retain an ownership interest in a covered fund that the banking entity
organizes and offers pursuant to Sec.  __.11, but limits such ownership
interests to three percent of the total number or value of the
outstanding ownership interests of such fund (the per-fund limit).\542\
---------------------------------------------------------------------------

    \542\ Implementing regulations Sec. Sec.  __.12(a)(1)(ii) and
__.12(a)(2)(ii)(A). The implementing regulations also require that
the aggregate value of all ownership interests of a banking entity
and its affiliates in all covered funds acquired or retained under
Sec.  __.12 may not exceed three percent of the tier 1 capital of
the banking entity. Implementing regulations Sec.  __.12(a)(2)(iii)
(the aggregate funds limit).
---------------------------------------------------------------------------

Loan Securitizations
    As discussed above, section 13 of the BHC Act provides a rule of
construction that explicitly allows the sale and securitization of
loans as otherwise permitted by law.\543\ Accordingly, the implementing
regulations exclude from the covered fund definition entities that
issue asset-backed securities if they meet specified conditions,
including that they hold only loans, certain rights and assets, and a
small set of other financial instruments (permissible assets).\544\ In
addition, the baseline includes the FAQs issued by agencies' staff in
June 2014 regarding the servicing asset provision of the loan
securitization exclusion.\545\
---------------------------------------------------------------------------

    \543\ 13 U.S.C. 1851(g)(2). See also supra Section IV.B.2 (Loan
Securitizations).
    \544\ See implementing regulations Sec.  __.10(c)(8). Loan is
further defined as any loan, lease, extension of credit, or secured
or unsecured receivable that is not a security or derivative.
Implementing regulations rule Sec.  __.2(t).
    \545\ See supra Section IV.B.2 (Loan Securitizations, discussion
of servicing assets).
---------------------------------------------------------------------------

Public Welfare and SBIC Exclusions
    Under the implementing regulations, issuers in the business of
making investments that are 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),\546\ are
excluded from the covered fund definition. Similarly, the implementing
regulations exclude from the covered fund definition small business
investment companies (SBICs) and issuers that have received notice from
the Small Business Administration to proceed to qualify for a license
as a SBIC and for which the notice or license has not been
revoked.\547\
---------------------------------------------------------------------------

    \546\ See implementing regulations Sec.  __.10(c)(11)(ii).
    \547\ See implementing regulations Sec.  __.10(c)(11)(i).
---------------------------------------------------------------------------

Attribution of Certain Investments to a Banking Entity
    As discussed above, the implementing regulations include a per-fund
limit and aggregate fund limit on a banking entity's ownership of
covered funds that the banking entity organizes and offers.\548\ The
preamble to the 2013 rule stated, ``if a banking entity makes
investments side by side in substantially the same positions as a
covered fund, then the value of such investments shall be included for
purposes of determining the value of the banking entity's investment in
the covered fund.'' \549\ The agencies also stated that a banking
entity that sponsors a covered fund should not make any additional
side-by-side co-investment with the covered fund in a privately
negotiated investment unless the value of such co-investment is less
than 3% of the value of the total amount co-invested by other investors
in such investment.\550\ The 2019 amendments eliminated the aggregate
fund limit and capital deduction requirement under Sec.  __.12(d) for
the value of ownership interests held by banking entities in third-
party covered funds (e.g., covered funds that those banking entities do
not organize or offer), acquired or retained as a result of certain
underwriting or market-making activities. However, the 2019 amendments
did not change or amend the application of the per-fund limit or
aggregate funds limit to co-investments alongside a covered fund.
---------------------------------------------------------------------------

    \548\ See implementing regulations Sec.  __.12(a). See also
supra Section IV.E.2. (Ownership Interest--Fund Limits and Covered
Fund Deduction).
    \549\ 79 FR 5734.
    \550\ See id.
---------------------------------------------------------------------------

    For purposes of calculating the aggregate fund limit and the
capital deduction requirement, the implementing regulations require
attribution to a banking entity of restricted profit interests in a
covered fund as ownership interests in the covered fund for which the
banking entity serves as investment manager, investment adviser,
commodity trading advisor, or other service provider.\551\ Under the
implementing regulations, for purposes of calculating a banking
entity's compliance with the aggregate fund limit and the capital
deduction requirement, a banking entity must include any amounts paid
by the banking entity or an employee in connection with obtaining a
restricted profit interest in the covered fund.\552\
---------------------------------------------------------------------------

    \551\ Implementing regulations Sec. Sec.  __.10(d)(6)(ii) and
__.12(c)(1), (d). See also 12 U.S.C. 1851(d)(1)(G).
    \552\ Implementing regulations Sec. Sec.  __.12(c)(1), (d).
---------------------------------------------------------------------------

ii. Affected Participants
    The SEC-regulated entities directly affected by the final rule
include broker-dealers, security-based swap dealers, and investment
advisers. The implementing regulations impose a range of restrictions
and compliance obligations on banking entities with respect to their
covered fund activities and investments. To the degree that the final
rule reduces or otherwise alters the scope of private funds subject to
covered fund restrictions, SEC-registered banking entities, including
broker-dealers, security-based swap dealers, and investment advisers
may be affected.
Broker-Dealers \553\
---------------------------------------------------------------------------

    \553\ This analysis is based on data from Reporting Form FR Y-9C
for domestic holding companies on a consolidated basis and Report of
Condition and Income for banks regulated by the Board, FDIC, and OCC
for the most recent available four-quarter average, as well as data
from S&P Market Intelligence LLC on the estimated amount of global
trading activity of U.S. and non-U.S. bank holding companies.
Broker-dealer bank affiliations were obtained from the Federal
Financial Institutions Examination Council's National Information
Center. Broker-dealer assets and holdings were obtained from FOCUS
Report data for Q4 2019.
---------------------------------------------------------------------------

    Under the implementing regulations, some of the largest SEC-
regulated

broker-dealers are banking entities. Table 1 reports the number, total
assets, and holdings of broker-dealers affiliated with banks and
broker-dealers that are not.
    While the 3,487 domestic broker-dealers that are not affiliated
with banks greatly outnumber the 202 banking entity broker-dealers
subject to the implementing regulations, banking entity broker-dealers
dominate non-banking entity broker-dealers in terms of total assets
(72% of total broker-dealer assets) and aggregate holdings (66% of
total broker-dealer holdings).

                        Table 1--Broker-Dealer Count, Assets, and Holdings by Affiliation
----------------------------------------------------------------------------------------------------------------
                                                                                Holdings
            Broker-dealer affiliation                 Number       Total assets,  Holdings, $mln  (alternative),
                                                                    $mln \554\         \555\        $mln \556\
----------------------------------------------------------------------------------------------------------------
Affected bank broker-dealers \557\..............             202       3,240,045         777,192         607,086
Non-bank broker-dealers \558\...................           3,487       1,258,510         404,754         255,380
                                                 ---------------------------------------------------------------
    Total.......................................           3,689       4,498,556       1,181,946         862,466
----------------------------------------------------------------------------------------------------------------

Security-Based Swap Dealers
    The final rule may also affect bank-affiliated SBSDs. As compliance
with SBSD registration requirements is not yet required, there are
currently no registered SBSDs. However, the SEC has previously
estimated that as many as 50 entities may potentially register with the
SEC as security-based swap dealers and that as many as 16 may already
be SEC-registered broker-dealers.\559\ Given the analysis of DTCC
Derivatives Repository Limited Trade Information Warehouse (TIW)
transaction and positions data on single-name credit-default swaps and
consistent with other recent SEC rulemakings, the SEC preliminarily
believes that 41 entities that may register with the SEC as SBSDs are
bank-affiliated firms, including those that are SEC-registered broker-
dealers. Therefore, the SEC preliminarily estimates that, in addition
to the bank-affiliated SBSDs that are already registered as broker-
dealers and included in the discussion above, as many as 25 other bank-
affiliated SBSDs may be affected by the final rule.\560\ Similarly, the
SEC's analysis of TIW data suggests that none of the entities that may
register with the SEC as Major Security-Based Swap Participants are
affected by the final rule.
---------------------------------------------------------------------------

    \554\ Broker-dealer total assets are based on FOCUS report data
for ``Total Assets.''
    \555\ Broker-dealer holdings are based on FOCUS report data for
securities and spot commodities owned at market value, including
bankers' acceptances, certificates of deposit and commercial paper,
state and municipal government obligations, corporate obligations,
stocks and warrants, options, arbitrage, other securities, U.S. and
Canadian government obligations, and spot commodities.
    \556\ This alternative measure excludes U.S. and Canadian
government obligations and spot commodities.
    \557\ This category includes all bank-affiliated broker-dealers
except those exempted by section 203 of EGRRCPA.
    \558\ This category includes both bank affiliated broker-dealers
subject to section 203 of EGRRCPA and broker-dealers that are not
affiliated with banks or holding companies.
    \559\ See Recordkeeping and Reporting Requirements for Security-
Based Swap Dealers, Major Security-Based Swap Participants, and
Broker-Dealers, 84 FR 68550, 68607 (Dec. 16, 2019).
    \560\ See id.
---------------------------------------------------------------------------

    October 6, 2021 is the compliance date for the SEC's registration
rules for SBSDs, as well as several rules applicable to those entities,
including segregation requirements and non-bank capital and margin
requirements, recordkeeping and reporting requirements, business
conduct standards, and risk mitigation techniques.\561\ Accordingly,
the SEC recognizes that in anticipation of the compliance date for
registration, firms may choose to restructure their security-based swap
trading activity into (or out of) an affiliated bank or an affiliated
broker-dealer instead of registering as a standalone SBSD if bank or
broker-dealer capital and other regulatory requirements are less (or
more) costly than those that may be imposed on SBSDs under Title VII.
As a result, the above figures may overestimate or underestimate the
number of SBSDs that are not broker-dealers and that may become SEC-
registered entities affected by the final rule.
---------------------------------------------------------------------------

    \561\ See Capital, Margin, and Segregation Adopting Release,
supra note 517, at 43954. See also Rule Amendments and Guidance
Addressing Cross-Border Application of Certain Security-Based Swap
Requirements, 85 FR 6270, 6345-49 (Feb. 4, 2020).
---------------------------------------------------------------------------

Private Funds and Private Fund Advisers \562\
---------------------------------------------------------------------------

    \562\ These estimates are calculated from Form ADV data as of
December 31, 2019. An investment adviser is defined as a ``private
fund adviser'' for the purposes of this economic analysis if it
indicates that it is an adviser to any private fund on Form ADV Item
7.B. An investment adviser is defined as a ``banking entity RIA'' if
it indicates on Form ADV Item 6.A.(7) that it is actively engaged in
business as a bank, or it indicates on Form ADV Item 7.A.(8) that it
has a ``related person'' that is a banking or thrift institution.
For purposes of Form ADV, a ``related person'' is any advisory
affiliate and any person that is under common control with the
adviser. The definition of ``control'' for purposes of Form ADV,
which is used in identifying related persons on the form, differs
from the definition of ``control'' under the BHC Act. In addition,
this analysis does not exclude SEC-registered investment advisers
affiliated with banks that have consolidated total assets less than
or equal to $10 billion and trading assets and liabilities less than
or equal to 5% of total assets. Those banks are no longer subject to
the requirements of the 2013 rule following enactment of the
EGRRCPA. Thus, these figures may overestimate or underestimate the
number of banking entity RIAs.
---------------------------------------------------------------------------

    This section describes RIAs advising private funds that may be
affected by the final rule. Using Form ADV data, Table 2 reports the
number of RIAs advising private funds by fund type as defined in Form
ADV.\563\ Private funds rely on either section 3(c)(1) or 3(c)(7) of
the Investment Company Act and so meet the implementing regulations'
definition of ``covered fund.'' Table 3
---------------------------------------------------------------------------

    \563\ RIAs may also advise foreign public funds that are
excluded from the covered fund definition in the implementing
regulations, are the subject of the final rule discussed below, and
are not reported on Form ADV.

---------------------------------------------------------------------------

reports the number and gross assets of private funds advised by RIAs
and separately reports these statistics for banking entity RIAs. As can
be seen from Table 2, the two largest categories of private funds
advised by RIAs are hedge funds and private equity funds.\564\
    Banking entity RIAs advise a total of 4,387 private funds with
approximately $2.089 trillion in gross assets. From Form ADV data,
banking entity RIAs' gross private fund assets under management are
concentrated in hedge funds and private equity funds. The SEC estimates
on the basis of this data that banking entity RIAs advise 890 hedge
funds with approximately $606 billion in gross assets and 1,518 private
equity funds with approximately $466 billion in assets.

  Table 2--SEC-Registered Investment Advisers Advising Private Funds by
                             Fund Type \565\
------------------------------------------------------------------------
                                                          Banking entity
                Fund type                     All RIA           RIA
------------------------------------------------------------------------
Hedge Funds.............................           2,620             151
Private Equity Funds....................           1,738              96
Real Estate Funds.......................             551              51
Securitized Asset Funds.................             233              44
Venture Capital Funds...................             223               8
Liquidity Funds.........................              44              16
Other Private Funds.....................           1,060             140
                                         -------------------------------
    Total Private Fund Advisers.........           4,781             282
------------------------------------------------------------------------

    Table 3--The Number and Gross Assets of Private Funds Advised by SEC-Registered Investment Advisers \566\
----------------------------------------------------------------------------------------------------------------
                                                      Number of private funds           Gross assets, $bln
                                                 ---------------------------------------------------------------
                    Fund type                                     Banking entity                  Banking entity
                                                      All RIA           RIA           All RIA           RIA
----------------------------------------------------------------------------------------------------------------
Hedge Funds.....................................          10,445             890           8,048             606
Private Equity Funds............................          16,217           1,518           4,119             466
Real Estate Funds...............................           3,699             320             732              94
Securitized Asset Funds.........................           2,000             380             767             145
Venture Capital Funds...........................           1,387              44             174               3
Liquidity Funds.................................              76              30             304             231
Other Private Funds.............................           4,757           1,206           1,543             542
                                                 ---------------------------------------------------------------
    Total Private Funds.........................          38,581           4,387          15,685           2,089
----------------------------------------------------------------------------------------------------------------

    In addition,  the SEC's economic analysis is informed by private
fund statistics submitted by certain RIAs of private funds through Form
PF as summarized in quarterly ``Private Fund Statistics.'' \567\
---------------------------------------------------------------------------

    \564\ For purposes of Form ADV, ``private equity fund'' is
defined as ``any private fund that is not a hedge fund, liquidity
fund, real estate fund, securitized asset fund, or venture capital
fund and does not provide investors with redemption rights in the
ordinary course.'' See Form ADV: Instructions for Part 1A,
Instruction 6. For purposes of Form ADV, ``hedge fund'' is defined
as ``any private fund (other than a securitized asset fund): (a)
With respect to which one or more investment advisers (or related
persons of investment advisers) may be paid a performance fee or
allocation calculated by taking into account unrealized gains (other
than a fee or allocation the calculation of which may take into
account unrealized gains solely for the purpose of reducing such fee
or allocation to reflect net unrealized losses); (b) that may borrow
an amount in excess of one-half of its net asset value (including
any committed capital) or may have gross notional exposure in excess
of twice its net asset value (including any committed capital); or
(c) that may sell securities or other assets short or enter into
similar transactions (other than for the purpose of hedging currency
exposure or managing duration).
    \565\ This table includes only the advisers that list private
funds on section 7.B.(1) of Form ADV. The number of advisers in the
``Total Private Fund Advisers'' row is not the sum of the rows that
precede it since an adviser may advise multiple types of private
funds. Each listed private fund type (e.g., real estate funds and
liquidity funds) is defined in Form ADV, and those definitions are
the same for purposes of the SEC's Form PF.
    \566\ Gross assets include uncalled capital commitments on Form
ADV. The large decrease in Gross assets for Liquidity Funds from
that reported in the proposing release is due, in part, to the
removal of certain Form ADV data from one filer that contained an
erroneous value for gross assets.
    \567\ See U.S. Sec. and Exchange Comm'n, Div. of Inv. Mgmt.
Analytics Office, Private Fund Statistics, Third Calendar Quarter
2019 (May 14, 2020), available at https://www.sec.gov/divisions/investment/private-funds-statistics/private-funds-statistics-2019-q3-accessible.pdf. Statistics for preceding quarters are available
at https://www.sec.gov/divisions/investment/private-funds-statistics.shtml.
---------------------------------------------------------------------------

Registered Investment Companies and Business Development Companies
    The baseline also reflects the potential that a RIC or a BDC would
be treated as a banking entity where the RIC or BDC's sponsor is a
banking entity that holds 25% or more of the RIC or BDC's voting
securities after a seeding period.\568\ On the basis of SEC filings and
public data, the SEC estimates that, as of December 2019, there were
approximately 15,300 RICs \569\ and 101 BDCs. Although RICs and BDCs
are generally not themselves banking entities subject to the
implementing regulations, they may be indirectly affected by the
implementing regulations and the final rule, for example, if their
sponsors or advisers are banking entities. For instance, bank-
affiliated RIAs or their affiliates may reduce their level of
investment in the RICs or BDCs they advise, or potentially close those
funds, to eliminate the risk of those funds becoming banking entities
themselves.
---------------------------------------------------------------------------

    \568\ See, e.g., 2019 amendments, 84 FR 61979.
    \569\ This estimate includes open-end companies, exchange-traded
funds, closed-end funds, and non-insurance unit investment trusts
and does not include fund of funds. The inclusion of fund of funds
increases this estimate to approximately 16,800.
---------------------------------------------------------------------------

Small Business Investment Companies
    Small business investment companies are generally ``privately owned
and managed investment funds, licensed and regulated by the Small
Business Administration (SBA), that use their own capital plus funds
borrowed with

an SBA guarantee to make equity and debt investments in qualifying
small businesses.'' \570\ The final rule provides relief with respect
to banking entity investments in SBICs during the wind-down process by
excluding from the definition of ``covered fund'' those SBICs.\571\
While the SEC does not have data to quantify the number of SBICs
undergoing wind-down, trends in the number of SBIC licenses can be
indicative of the turnover in the total number of SBIC licensees. For
example, according to SBA data, there were 295 SBIC licensees as of
March 31, 2020 \572\ and 299 SBIC licensees as of December 31,
2019.\573\ By contrast, as of September 30, 2017, there were 315 SBICs
licensed by the SBA.\574\
---------------------------------------------------------------------------

    \570\ See U.S. Small Bus. Admin., SBIC Program Overview,
available at https://www.sba.gov/content/sbic-program-overview.
    For purposes of the Advisers Act, an SBIC is (other than an
entity that has elected to be regulated or is regulated as a
business development company pursuant to section 54 of the
Investment Company Act of 1940): (A) A small business investment
company that is licensed under the Small Business Investment Act of
1958, (B) an entity that has received from the Small Business
Administration notice to proceed to qualify for a license as a small
business investment company under the Small Business Investment Act
of 1958, which notice or license has not been revoked, or (C) an
applicant that is affiliated with 1 or more licensed small business
investment companies described in subparagraph (A) and that has
applied for another license under the Small Business Investment Act
of 1958, which application remains pending. 15 U.S.C. 80b-3(b)(7).
    \571\ Specifically, the final rule excludes from the definition
of ``covered fund'' any SBIC that has voluntarily surrendered its
license to operate as an SBIC in accordance with 13 CFR 107.1900 and
does not make any new investments (with some exceptions) after such
voluntary surrender. See Sec.  __.10(c)(11)(i).
    \572\ See U.S. Small Bus. Admin., SBIC Program Overview as of
March 31, 2020, available at: https://www.sba.gov/sites/default/files/2020-05/SBIC%20Quarterly%20Report%20as%20of%
20March_31_2020%20Amended%205.14.2020.pdf.
    \573\ See U.S. Small Bus. Admin., SBIC Program Overview as of
December 31, 2019, available at https://www.sba.gov/sites/default/files/2020-02/SBIC%20Quarterly%20Report%20as%20of%20December_31_2019.pdf.
    \574\ See id.
---------------------------------------------------------------------------

    The final rule includes an exclusion for rural business investment
companies (RBICs) from the implementing regulations similar to that
provided to SBICs.\575\ As the SEC has discussed elsewhere,\576\ an
RBIC is defined in section 384A of the Consolidated Farm and Rural
Development Act as a company that is approved by the Secretary of
Agriculture and that has entered into a participation agreement with
the Secretary.\577\ Because SBICs and RBICs share the common purpose of
promoting capital formation in their respective sectors, advisers to
SBICs and RBICs are treated similarly under the Advisers Act in that
they have the opportunity to take advantage of expanded exemptions from
investment adviser registration.\578\ As of August 2019, there were 5
RBICs who were licensed by the USDA managing approximately $352 million
in assets.\579\
---------------------------------------------------------------------------

    \575\ Under the implementing regulations, an SBIC is excluded
from the ``covered fund'' definition. See implementing regulations
Sec.  __.10(c)(11)(i).
    \576\ See Exemptions from Investment Adviser Registration for
Advisers to Certain Rural Business Investment Companies, 85 FR 13734
(Mar. 10, 2020) (``RBIC Investment Adviser Adopting Release'').
    \577\ See the RBIC Advisers Relief Act of 2018, Public Law 115-
417, 132 Stat. 5438 (2019) (the ``RBIC Advisers Relief Act''). To be
eligible to participate as an RBIC, the company must be a newly
formed for-profit entity or a newly formed for-profit subsidiary of
such an entity, have a management team with experience in community
development financing or relevant venture capital financing, and
invest in enterprises that will create wealth and job opportunities
in rural areas, with an emphasis on smaller enterprises. See 7
U.S.C. 2009cc-3(a).
    \578\ Following enactment of the RBIC Advisers Relief Act, supra
note 577, advisers to solely RBICs and advisers to solely SBICs are
exempt from investment adviser registration pursuant to Advisers Act
sections 203(b)(8) and 203(b)(7), respectively. The venture capital
fund adviser exemption deems RBICs and SBICs to be venture capital
funds for purposes of the registration exemption 15 U.S.C. 80b-3(l).
Accordingly, the exclusion for certain venture capital funds
discussed below (see infra text accompanying notes 672 and 673)
which require that a fund be a venture capital fund as defined in
the SEC regulations implementing the registration exemption, could
include RBICs and SBICs to the extent that they satisfy the other
elements of the exclusion.
    \579\ See RBIC Investment Adviser Adopting Release, supra note
576.
---------------------------------------------------------------------------

    The Tax Cuts and Jobs Act established the ``opportunity zone''
program to provide tax incentives for long-term investing in designated
economically distressed communities.\580\ The program allows taxpayers
to defer and reduce taxes on capital gains by reinvesting gains in
``qualified opportunity funds'' (QOFs) that are required to have at
least 90 percent of their assets in designated low-income zones.\581\
In this regard, QOFs are similar to SBICs and public welfare companies.
The final rule provides relief to QOFs from the implementing
regulations that is similar to the relief provided to SBICs.\582\ SEC
staff is not aware of an official source for data regarding QOFs that
are available for investment, but some private firms collect and report
such data. One such firm reports that, as of April 2020, there were 406
QOFs that report raising $10.09 billion in equity, and have a
fundraising goal of $31.89 billion.\583\
---------------------------------------------------------------------------

    \580\ Tax Cuts and Jobs Act of 2017, Public Law 115-97, 131
Stat. 2054 (2017).
    \581\ See U.S. Sec. and Exchange Comm'n & NASAA, Staff Statement
on Opportunity Zones: Federal and State Securities Laws
Considerations, available at https://www.sec.gov/2019_Opportunity-Zones_FINAL_508v2.pdf (``Opportunity Zone Statement'').
    \582\ See supra note 575.
    \583\ As reported by Novogradac, a national professional
services organization that collects and reports information on QOFs.
See https://www.novoco.com/resource-centers/opportunity-zone-resource-center/opportunity-funds-listing.
---------------------------------------------------------------------------

3. Costs and Benefits
    Section 13 of the BHC Act generally prohibits banking entities from
acquiring or retaining an ownership interest in, sponsoring, or having
certain relationships with covered funds, subject to certain
exemptions.\584\ The SEC's economic analysis concerns the potential
costs, benefits, and effects on efficiency, competition, and capital
formation of the final rule for five groups of market participants.
First, the final rule may impact SEC-registered investment advisers
that are banking entities, including those that sponsor or advise
covered funds and those that do not, as well as SEC-registered
investment advisers that are not banking entities that sponsor or
advise covered funds and compete with banking entity RIAs. Second, the
final rule permits dealers greater flexibility in providing services to
more types of funds since dealers can provide a broader array of
services to funds that would be excluded from the covered fund
definition. Third, banking entities that are broker-dealers or RIAs may
enjoy reduced uncertainty and greater flexibility in making direct
investments alongside covered funds. Fourth, the final rule may impact
private funds and other vehicles, including those entities scoped in or
out of the covered fund provisions of the implementing regulations, as
well as private funds competing with such funds. One such impact may be
seen to the extent that the final rule permits banking entities to
provide a full range of traditional customer-facing banking and asset
management services to certain entities, such as customer facilitation
vehicles and family wealth management vehicles. Fifth, to the extent
that the final rule impacts efficiency, competition, and capital
formation in covered funds or underlying securities, investors in, and
sponsors of, covered funds and underlying securities and issuers may be
affected as well.
---------------------------------------------------------------------------

    \584\ See 12 U.S.C. 1851.
---------------------------------------------------------------------------

    As discussed below, the agencies carefully considered the competing
effects that could potentially result from the final rule and
alternatives. For example, the final rule could result in enhanced
competition among, and capital formation driven by, entities that would
be treated as covered funds under the implementing regulations.

The final rule could also potentially increase (or decrease) financial
and other risks posed by the ability to make investments in covered
funds in addition to or in lieu of direct investments; however, the
agencies have sought to mitigate the potential for increased risk and
other concerns by imposing various conditions on the exclusions
designed to address such risks.
    In addition, to the extent that the covered fund provisions of the
implementing regulations limit fund formation, the final rule could
provide a greater ability for banking entities to organize funds and
attract capital from third party investors. This could increase
revenues for banking entities while reducing long-term compliance
costs; increase the availability of venture, credit, and other
financing, including for small businesses and start-ups; and, as a
result, increase capital formation. The SEC is not currently aware of
any information or data that would allow a quantification of the extent
to which the covered fund provisions of the implementing regulations
are inhibiting capital formation via funds. Therefore, the bulk of the
analysis below is necessarily qualitative. To the extent that the
covered fund provisions of the implementing regulations limit alignment
of interests between banking entities and their clients, customers, or
counterparties, and to the extent the final rule alters the alignment
of interests, the final rule could have a positive or negative effect
on conflict of interest concerns.
    The final rule creates new recordkeeping requirements and revise
certain disclosure requirements. Specifically, a banking entity may
only rely on the exclusion for customer facilitation vehicles if the
banking entity and its affiliates maintain documentation outlining how
the banking entity intends to facilitate the customer's exposure to a
transaction, investment strategy or service provided by the banking
entity. As discussed above in Section V.B. (Paperwork Reduction Act)
\585\ and discussed further below, these new recordkeeping burdens may
impose an initial burden of $1,078,650 \586\ and an ongoing annual
burden of $1,078,650.\587\ In addition, under certain circumstances, a
banking entity must make certain disclosures with respect to an
excluded credit fund, venture capital fund, family wealth vehicle, or
customer facilitation vehicle, as if the entity were a covered fund. As
discussed above in Section V.B, these disclosure requirements may
impose an initial burden of $53,933 \588\ and an ongoing burden of
$1,402,245.\589\
---------------------------------------------------------------------------

    \585\ For the purposes of the burden estimates in this release,
we are assuming the cost of $423 per hour for an attorney, from
SIFMA's Management and Professional Earnings in the Securities
Industry 2013 (available at https://www.sifma.org/resources/research/management-and-professional-earnings-in-the-securities-industry-2013/), modified to account for an 1800-hour work year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits, and overhead, and adjusted for inflation.
    \586\ In the 2019 amendments, amendments that sought, among
other things, to provide greater clarity and certainty about what
activities were prohibited by the 2013 rule--in particular, under
the prohibition on proprietary trading--and to better tailor the
compliance requirements to the risk of a banking entity's
activities, banking entity PRA-related burdens were apportioned to
SEC-regulated entities on the basis of the average weight of broker-
dealer assets in holding company assets. See 2019 amendments, 84 FR
62074. The SEC believes that such an approach would be inappropriate
for the PRA-related burdens associated with the final rule because
we do not have a comparable proxy for an investment adviser's
significance within the holding company. Since we do not have
sufficient information to determine the extent to which the costs
associated with any of the new recordkeeping and disclosure
requirements would be borne by SEC registrants specifically, we
report the entire burden estimated based on information in supra
Section V.B (Paperwork Reduction Act).
    Initial recordkeeping burdens: (10 hours) x (255 entities) x
(Attorney at $423 per hour) = $1,078,650.
    \587\ Annual recordkeeping burdens: (10 hours) x (255 entities)
x (Attorney at $423 per hour) = $1,078,650.
    \588\ Initial recordkeeping burdens: (0.5 hours) x (255
entities) x (Attorney at $423 per hour) = $53,933.
    \589\ Annual recordkeeping burdens: (0.5 hours) x (255 entities)
x (26 disclosures per year) x (Attorney at $423 per hour) =
$1,402,245.
---------------------------------------------------------------------------

    The sections that follow discuss how each of the amendments in the
final rule change the implementing regulations, and the anticipated
costs and benefits of the amendments, subject to the caveat that not
all anticipated costs and benefits can be meaningfully quantified.\590\
---------------------------------------------------------------------------

    \590\ See supra Section V.F.1.iii. (SEC Economic Analysis--
Analytical Approach).
---------------------------------------------------------------------------

i. Amendments Related to Specific Types of Funds
    As discussed above, the final rule modifies a number of the
provisions of the implementing regulations related to the treatment of
certain types of funds (e.g., credit funds, family wealth management
vehicles, small business investment companies, qualifying venture
capital funds, customer facilitation vehicles, foreign excluded funds,
foreign public funds, and loan securitizations).\591\
---------------------------------------------------------------------------

    \591\ See supra Section IV. (Summary of the Final Rule).
---------------------------------------------------------------------------

    Broadly, such modifications reduce the number and types of funds
that are within the scope of the implementing regulations, impacting
the economic effects of section 13 of the BHC Act and the implementing
regulations.\592\
---------------------------------------------------------------------------

    \592\ See, e.g., 2019 amendments, 84 FR 62037-92.
---------------------------------------------------------------------------

    Form ADV data is not sufficiently granular to allow the SEC to
estimate the number of funds and fund advisers affected by the
exclusions from the covered fund definition added or modified by the
final rule and other relief addressed by the final rule. However, Table
2 and Table 3 in the economic baseline quantify the number and asset
size of private funds advised by banking entity RIAs by the type of
private fund they advise, as those fund types are defined in Form
ADV.\593\
---------------------------------------------------------------------------

    \593\ These fund types include hedge funds, private equity
funds, real estate funds, securitized asset funds, venture capital
funds, liquidity, and other private funds. See supra note 564.
---------------------------------------------------------------------------

    Using Form ADV data, the SEC estimates that approximately 151
banking entity RIAs advise hedge funds and 96 banking entity RIAs
advise private equity funds (as those terms are defined in Form
ADV).\594\ As can be seen from Table 2 in the economic baseline, 44
banking entity RIAs advise securitized asset funds. Table 3 shows that
banking entity RIAs advise 380 securitized asset funds with $145
billion in gross assets. Another 51 banking entity RIAs advise real
estate funds, and banking entity RIAs advise 320 real estate funds with
$94 billion in gross assets. Venture capital funds are advised by only
8 banking entity RIAs, and all 44 venture capital funds advised by
banking entity RIAs have in aggregate approximately $3 billion in gross
assets.
---------------------------------------------------------------------------

    \594\ As noted in the economic baseline, a single RIA may advise
multiple types of funds. See supra note 565.
---------------------------------------------------------------------------

    As noted elsewhere, the covered fund provisions of the implementing
regulations may limit the ability of banking entities to use covered
funds to circumvent the proprietary trading prohibition, reduce bank
incentives to bail out their covered funds, and mitigate conflicts of
interest between banking entities and their clients, customers, or
counterparties. As discussed in the 2020 proposal, the implementing
regulations may limit the ability of banking entities to conduct
traditional asset management activities and reduce the availability of
capital by imposing significant costs on some banking entities without
providing commensurate benefits.\595\ Moreover, the 2013 rule's
limitations on banking entities' investment in covered funds may be
more significant for certain covered funds that are typically small in
size such as many venture capital funds, with potentially more negative
spillover

effects on capital formation in the types of underlying securities in
which these types of funds invest.\596\
---------------------------------------------------------------------------

    \595\ See 85 FR 12164.
    \596\ See id.
---------------------------------------------------------------------------

    The final rule could reduce the scope of funds that need to be
analyzed for covered fund status or could simplify this analysis and
enable banking entities to own, sponsor, and have relationships with
the types of entities that the final rule excludes from the covered
fund definition. Accordingly, the final rule may reduce costs of
banking entity ownership in, sponsorship of, and transactions with
certain funds; may promote greater capital formation in, and
competition among such funds; and may improve access to capital for
issuers of the underlying debt or equity that those funds may purchase.
    The final rule may also benefit banking entity dealers through
higher profits or greater demand for derivatives, margin, payment,
clearing, and settlement services. Reducing restrictions on banking
entities by further tailoring the covered fund definition may encourage
more launches of funds that are excluded from the definition, capital
formation and, possibly, competition in those types of funds. If
competition increases the quality of funds available to investors or
reduces the fees funds charge, investors in funds may benefit.
Moreover, to the degree that the final rule may increase the spectrum
of funds available to investors, the final rule may relax constraints
around investor portfolio optimization and increase the efficiency of
capital allocation.
    The SEC received comments from a diverse set of commenters.
Comments from banking entities and financial services industry trade
groups were generally supportive of the proposal, although many
recommended additional modifications.\597\ There were also several
organizations and individuals that were generally opposed to the 2020
proposal.\598\ The sections that follow further discuss the economic
costs, benefits, and effects on competition, efficiency, and capital
formation with respect to specific types of funds and specific
amendments in the final rule.
---------------------------------------------------------------------------

    \597\ See supra Section IV. (Summary of the Final Rule) for
discussion of comments and recommendations for each of the proposed
amendments.
    \598\ See id.
---------------------------------------------------------------------------

Foreign Excluded Funds
    Under the baseline, foreign excluded funds are excluded from the
covered fund definition, but could be considered banking entities if a
foreign banking entity controls the foreign fund in certain
circumstances.\599\ As discussed above, the policy statement released
by Federal banking agencies provides that the Federal banking agencies
would not propose to take action (1) against a foreign banking entity
based on attribution of the activities and investments of a qualifying
foreign excluded fund to the foreign banking entity \600\ or (2)
against a qualifying foreign excluded fund as a banking entity, in each
case where the foreign banking entity's acquisition or retention of any
ownership interest in, or sponsorship of, the qualifying foreign
excluded fund would meet the requirements for permitted covered fund
activities and investments solely outside the United States, as
provided in section 13(d)(1)(I) of the BHC Act and Sec.  __.13(b) of
the implementing regulations, as if the qualifying foreign excluded
fund were a covered fund.\601\ As in the 2020 proposal, the final rule
provides a permanent exemption from the proprietary trading and covered
fund prohibitions for certain foreign excluded funds that is
substantively similar to the relief currently provided to qualifying
foreign excluded funds by the policy statement.\602\
---------------------------------------------------------------------------

    \599\ See supra Section IV.A. (Qualifying Foreign Excluded
Funds).
    \600\ Foreign banking entity was defined for purposes of the
policy statement to mean a banking entity that is not, and is not
controlled directly or indirectly by, a banking entity that is
located in or organized under the laws of the United States or any
State.
    \601\ See supra note 26. The policy statement was subsequently
extended for a two-year period ending on July 21, 2021. See also
supra Section IV.A. (Qualifying Foreign Excluded Funds) and note 28.
    \602\ See final rule Sec. Sec.  __.6(f) and __.13(d).
---------------------------------------------------------------------------

    Commenters were generally supportive of the proposal to exempt
qualifying foreign excluded funds from certain requirements of the
rule.\603\ Two commenters expressed opposition to the proposed
exemption.\604\
---------------------------------------------------------------------------

    \603\ SIFMA; BPI; BVI; AIC; ABA; EFAMA; SAF; IIB; JBA; CBA; and
Credit Suisse. See also supra Section IV.A. (Qualifying Foreign
Excluded Funds) for a discussion of individual comments.
    \604\ See Occupy and Data Boiler.
---------------------------------------------------------------------------

    The SEC recognizes that failing to exclude such funds from the
definition of ``banking entity'' in the implementing regulations
imposed proprietary trading restrictions, covered fund prohibitions,
and compliance obligations on qualifying foreign excluded funds that
may be more burdensome than the requirements that would apply under the
implementing regulations to covered funds.
    The SEC believes that, absent the qualifying foreign excluded fund
exemption and upon expiry of the policy statement, the implementing
regulations may have significant adverse effects on foreign banking
entities' ability to organize and offer certain private funds for
foreign investments, disrupting foreign asset management activities.
The SEC recognizes that the exemption of qualifying foreign excluded
funds from the proprietary trading and covered fund prohibitions that
apply to ``banking entities'' may result in increased activity by
foreign banking entities in organizing and offering such funds, and
that such activity may involve risk for those banking entities. At the
same time, the SEC recognizes a statutory purpose of certain portions
of section 13 of the BHC Act is to limit the extraterritorial impact on
foreign banking entities.\605\ Accordingly, the final rule may benefit
foreign banking entities and their foreign counterparties seeking to
transact with and through such funds.
---------------------------------------------------------------------------

    \605\ See 85 FR 12123-26.
---------------------------------------------------------------------------

    The agencies received comments on the 2020 proposal that expressed
concern that although qualifying foreign excluded funds would be
exempted from the proprietary trading and covered funds restrictions of
the implementing regulations, these funds would still be required to
put in place compliance programs.\606\ However, since these qualifying
foreign excluded funds are exempted from the proprietary trading
requirements of Sec.  __.3(a) and covered fund restrictions of Sec.
__.10(a), the agencies believe that requiring compliance programs to be
established for the qualifying foreign excluded fund itself would be
overly burdensome and unnecessary. Therefore, under the final rule, in
addition to the proposed exemptions from the proprietary trading and
covered fund prohibitions, qualifying foreign excluded funds will also
not be required to have compliance programs under Sec.  __.20. However,
any banking entity that owns or sponsors a qualifying foreign excluded
fund will still be required to have in place the appropriate compliance
programs as required by Sec.  __.20.
---------------------------------------------------------------------------

    \606\ See IIB; JBA; CBA; EBF; and Credit Suisse.
---------------------------------------------------------------------------

    The exemption is also expected to promote capital formation in the
United States. While qualifying foreign excluded funds have a limited
nexus to the United States, such funds are permitted to invest in U.S.
companies. Therefore, to the extent that these funds have any direct
impact on capital formation and U.S. financial stability, the exemption
would promote U.S. financial stability by providing additional capital
and liquidity to U.S. capital markets without a concomitant increase in
risk borne by U.S. banking entities.

    The final rule may increase the incentive for some foreign banking
entities seeking to organize and offer qualifying foreign excluded
funds to reorganize their activities so that these funds' activities
qualify for the exemptions. The costs and feasibility of such
reorganization will depend on the complexity and existing compliance
structures for banking entities, the degree to which there is unmet
demand for investment funds that may be organized as qualifying foreign
excluded funds, and the profitability of such banking activities.
Importantly, the principal risk of foreign banking entities' activities
related to foreign excluded funds generally resides outside the United
States. As discussed above,\607\ because the exemption requires that
the foreign banking entity's acquisition of an ownership interest in or
sponsorship of the fund meets the requirements in Sec.  __.13(b) of the
final rule, the exemption will help to ensure that the risks of the
investments made by these foreign funds would be booked to foreign
entities in foreign jurisdictions. The agencies believe that exempting
the activities of qualifying foreign excluded funds promotes and
protects the safety and soundness of banking entities and U.S.
financial stability,\608\ and relatedly the SEC believes the exemption
is unlikely to impact negatively SEC registrants.
---------------------------------------------------------------------------

    \607\ See supra Section IV.A. (Qualifying Foreign Excluded
Funds).
    \608\ See id.
---------------------------------------------------------------------------

Foreign Public Funds
    The implementing regulations exclude from the covered fund
definition any foreign public fund that satisfies three sets of
conditions. First, the issuer must be organized or established outside
of the United States, be authorized to offer and sell ownership
interests to retail investors in the issuer's home jurisdiction (the
``home jurisdiction'' requirement), and sell ownership interests
predominantly through one or more public offerings outside of the
United States. The agencies stated in the preamble to the 2013 rule
that they generally expect that an offering is made predominantly
outside of the United States if 85 percent or more of the fund's
interests are sold to investors that are not residents of the United
States.\609\ Second, for funds that are sponsored by a U.S. banking
entity, or by a banking entity controlled by a U.S. banking entity, the
ownership interests in the issuer must be sold ``predominantly'' to
persons other than the sponsoring banking entity, the issuer, their
affiliates, directors of such entities, or employees of such entities
(the sales limitation). The agencies stated in the preamble to the 2013
rule that, consistent with the agencies' view concerning whether a
foreign public fund has been sold predominantly outside of the United
States, the agencies generally expect that a foreign public fund would
satisfy this additional condition if 85 percent or more of the fund's
interests are sold to persons other than the sponsoring U.S. banking
entity and the specified persons connected to that banking entity.\610\
Third, such public offerings must occur outside the United States, must
comply with applicable jurisdictional requirements (the compliance
obligation), may not restrict availability to investors having a
minimum level of net worth or net investment assets, and must have
publicly available offering disclosure documents filed or submitted
with the relevant jurisdiction.
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    \609\ 79 FR 5678.
    \610\ Id.
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    The final rule makes several changes to the foreign public fund
exclusion. First, the final rule removes the home jurisdiction
requirement.\611\ Second, the final rule makes the exclusion available
with respect to issuers authorized to offer and sell ownership
interests through one or more public offerings, removing the
requirement that the issuer sells ownership interests ``predominantly''
through such public offerings.\612\ Third, the agencies are also
modifying the definition of ``public offering'' from the implementing
regulations to add a new requirement that the distribution is subject
to substantive disclosure and retail investor protection laws or
regulations in one or more jurisdictions where ownership interests are
sold.\613\ Fourth, the final rule applies the compliance obligation
only in instances in which the banking entity serves as the investment
manager, investment adviser, commodity trading advisor, commodity pool
operator, or sponsor.\614\ Finally, the final rule narrows the sales
limitation to the sponsoring banking entity, the issuer, affiliates,
and directors and senior executive officers of such entities, and
requires more than 75 percent of the fund's interest to be sold to such
entities and persons.\615\
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    \611\ See final rule Sec.  __.10(c)(1)(i)(B).
    \612\ See final rule Sec.  __.10(c)(1)(i)(B).
    \613\ See final rule Sec.  __.10(c)(1)(iii)(A).
    \614\ See final rule Sec.  __.10(c)(1)(iii)(B).
    \615\ See final rule Sec.  __.10(c)(1)(ii).
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    As discussed in the 2020 proposal, the SEC has received comments
indicating that the foreign public fund exclusion under the
implementing regulations is impractical, overly narrow, and
prescriptive, and results in competitive disparities between foreign
public funds and RICs.\616\ The SEC also received comment that the home
jurisdiction requirement under the implementing regulations is narrow
and fails to recognize the prevalence of non-U.S. retail funds
organized in one jurisdiction and authorized to sell interests in other
jurisdictions.\617\
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    \616\ See 85 FR 12166.
    \617\ Such funds could be organized in a particular jurisdiction
for reasons including tax treatment, investment strategy, or
flexibility to distribute into multiple markets (for instance, in
the European Union), even though such funds are authorized to sell
interests in other jurisdictions. See also id.
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    As adopted in the final rule, the elimination of the home
jurisdiction requirement may benefit such foreign public funds and may
facilitate greater capital formation through such funds, with the
potential to create more capital allocation choices for investors. To
the degree that the implementing regulations have disadvantaged foreign
public funds relative to otherwise comparable RICs, the elimination of
the home jurisdiction requirement may dampen such competitive
disparities.
    As also discussed in the 2020 proposal, the SEC has received
comment that the requirement that ownership interests be sold
``predominantly'' through one or more public offerings outside of the
United States has been burdensome and poses significant compliance
burdens.\618\ For example, banking entities may not fully observe and
predict both historical and potential future distributions of funds
that are sponsored by third parties, listed on exchanges, or sold
through third-party intermediaries or distributors.\619\ In response to
the 2020 proposal, commenters supported the elimination of the home
jurisdiction requirement and the requirement that the fund be sold
predominantly through one or more public offerings.\620\
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    \618\ See 85 FR 12166.
    \619\ See id.
    \620\ IIB; SIFMA; BPI; ABA; EBF; EFAMA; FSF; ICI; BVI; and CBA.
See also supra Section IV.B.1. (Foreign Public Funds).
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    To the degree that some banking entities restrict their activities
because they are unable to quantify the volumes of distributions
through foreign public offerings relative to, for instance, foreign
private placements, the final rule may enable greater activity by
banking entities relating to foreign public funds. Similar to the above
discussion, this aspect of the final rule also treats foreign public
funds in a manner more similar to RICs (which are not required to

monitor or assess distributions), with corresponding competitive
effects.
    Commenters on the 2020 proposal also supported the proposed change
to the ``public offering'' definition to include a requirement that the
distribution be subject to substantive disclosure and retail investor
protection laws or regulations.\621\ The final rule adopts that change,
as proposed. Accordingly, the final rule tailors the scope of
disclosure and compliance obligations for those jurisdictions where
ownership interests are sold in recognition of the prevalence of
foreign retail fund sales across jurisdictions. Similarly, the final
rule limits the compliance obligation to settings in which the banking
entity serves as the investment manager, investment adviser, commodity
trading advisor, commodity pool operator, or sponsor--settings that may
involve greater conflicts of interest between banking entities and fund
investors than when the banking entity is only an investor in the fund.
---------------------------------------------------------------------------

    \621\ IIB; EFAMA; FSF; ICI; and BVI.
---------------------------------------------------------------------------

    The final rule also replaces the employee sales limitation with a
limitation on sales to senior executive officers.\622\ As discussed in
the 2020 proposal, the SEC has received comment that banking entities
may face significant costs and logistical and interpretive challenges
monitoring investments by their employees, including those who transact
in fund shares through unaffiliated brokers or through independent
exchange trading.\623\ The SEC has also received comment that the
employee sales limitation serves no discernible anti-evasion
purpose.\624\ In addition, commenters noted that employee ownership
interest can be a meaningful mechanism of promoting incentive
alignment.\625\ The final rule replaces the employee sales limitation
with a corresponding sales limitation with respect only to senior
executive officers. This change may reduce these reported compliance
challenges and burdens while preserving, in part, the original anti-
evasion purpose of the limitations on employee ownership.
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    \622\ Final rule Sec.  __.10(c)(1)(ii)(D).
    \623\ See 85 FR 12166.
    \624\ See id.
    \625\ See id.
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    The SEC received comments to the 2020 proposal that recommended the
agencies modify their expectation of the level of ownership of a
foreign public fund that would satisfy the requirement that a fund be
``predominantly'' sold to persons other than its U.S. banking entity
sponsor and associated parties,\626\ which the preamble to the 2013
rule stated was 85 percent or more (which would permit the U.S. banking
entity sponsor and associated parties to own the remaining 15 percent).
These commenters asserted that the relevant ownership threshold for
U.S. registered investment companies is 25 percent, and that, for
foreign public funds, the threshold should be the same. The agencies
agree that the permitted ownership level of a foreign public fund by a
U.S. banking entity sponsor and associated parties should be aligned
with the functionally equivalent threshold for banking entity
investments in U.S. registered investment companies, which is 24.9
percent.\627\ Accordingly, the agencies have amended this provision in
the final rule to require that more than 75 percent of a foreign public
fund's interests must be sold to persons other than the U.S. banking
entity sponsor and associated parties.\628\
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    \626\ BPI; FSF; ICI; and CCMC. See also supra Section IV.B.1.
(Foreign Public Funds).
    \627\ Although the implementing regulations do not explicitly
prohibit a banking entity from acquiring 25 percent or more of a
U.S. registered investment company, a U.S. registered investment
company would become a banking entity if it is affiliated with
another banking entity (other than as described in Sec.
__.12(b)(1)(ii) of the implementing regulations). See 79 FR 5732
(``[F]or purposes of section 13 of the BHC Act and the final rule, a
registered investment company . . . will not be considered to be an
affiliate of the banking entity if the banking entity owns,
controls, or holds with the power to vote less than 25 percent of
the voting shares of the company or fund, and provides investment
advisory, commodity trading advisory, administrative, and other
services to the company or fund only in a manner that complies with
other limitations under applicable regulation, order, or other
authority.'').
    \628\ See supra note 69.
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    Commenters on the 2020 proposal generally supported the proposed
changes to the foreign public funds exclusion; \629\ however, as
discussed in this section and above, the agencies are making certain
targeted adjustments in response to comments received.\630\ One
commenter stated that the proposed changes were less than ideal for
maximum control but acceptable from a practical implementation
standpoint to balance compliance costs and benefits.\631\
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    \629\ IIB; SIFMA; BPI; ABA; EBF; EFAMA; FSF; ICI; BVI; CBA;
CCMR; Data Boiler; GS; IAA; JBA; SAF; and CCMC.
    \630\ See supra Section IV.B.1. (Foreign Public Funds).
    \631\ See Data Boiler.
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    As discussed above, the SEC believes that the foreign public fund
provisions of the final rule may facilitate greater capital formation
through such funds, with the potential to create more capital
allocation choices for investors. In particular, to the degree that
some banking entities restrict their activities relating to foreign
public funds because they are unable to quantify the distributions
through public offerings or determine the holdings of their employees,
the final rule may enable greater activity by banking entities relating
to foreign public funds. The final rule also limits the compliance
obligation to settings in which the banking entity serves as the
investment manager, investment adviser, commodity trading advisor,
commodity pool operator, or sponsor--settings that may involve greater
conflicts of interest between banking entities and fund investors than
when the banking entity is only an investor in the fund.
    The agencies could have adopted a variety of alternatives offering
more or less relief with respect to foreign public funds. For example,
the agencies could have eliminated altogether the limit on sales to
affiliated entities, directors and employees, which would have provided
an even greater alignment of treatment between foreign public funds and
RICs.\632\ Alternatives providing greater relief with respect to
foreign public funds may have facilitated greater banking entity
activity and intermediation of such funds on the one hand, but they may
also have strengthened the competitive positioning of foreign public
funds relative to U.S. registered funds. Moreover, providing greater
relief with respect to foreign public funds may have allowed banking
entities greater flexibility in the formation and operation of foreign
public funds, but may also have increased the risk that banking
entities would be able to use foreign public funds to engage in
activities that the restrictions on covered funds were intended to
prohibit, thereby reducing the magnitude of the expected economic
benefits of section 13 of the BHC Act and the implementing regulations.
Similarly, relative to the final rule, alternatives providing less
relief with respect to foreign public funds may have strengthened the
competitive positioning of U.S. RICs relative to foreign public funds
and posed lower compliance or evasion risks, but may also have reduced
the benefits of the relief for capital formation in foreign public
funds and their investors.
---------------------------------------------------------------------------

    \632\ See 2020 proposal at 12166.
---------------------------------------------------------------------------

Loan Securitizations
    The 2013 rule excludes from the definition of covered fund any loan
securitization that issues asset-backed securities, holds only loans,
certain

rights and assets that arise from the structure of the loan
securitization or from the loans supporting a loan securitization, and
a small set of other financial instruments (permissible assets), and
meets other criteria.\633\ As discussed in the 2020 proposal, the SEC
received comment that, as a result of the 2013 rule, some banking
entities may have divested or restructured their interests in loan
securitizations due to the narrowly-drawn conditions of the exclusion,
and that a limited holding of non-loan assets may enable banking
entities to provide traditional securitization products and services
demanded by customers, clients, and counterparties.\634\
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    \633\ See 2013 rule Sec.  __.10(c)(8). Loan is further defined
as any loan, lease, extension of credit, or secured or unsecured
receivable that is not a security or derivative. See also 2013 rule
Sec.  __.2(t).
    \634\ See 85 FR 12173.