[Federal Register Volume 85, Number 148 (Friday, July 31, 2020)]
[Rules and Regulations]
[Pages 46422-46530]
[FR Doc No: 2020-15525]

Vol. 85

Friday,

No. 148

July 31, 2020

Part IV

 Department of the Treasury

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 Office of the Comptroller of the Currency

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 Federal Reserve System

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 Federal Deposit Insurance Corporation

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 Commodity Futures Trading Commission

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 Securities and Exchange Commission

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12 CFR Parts 44, 248 and 351

17 CFR Parts 75 and 255

Prohibitions and Restrictions on Proprietary Trading and Certain
Interests in, and Relationships With, Hedge Funds and Private Equity
Funds; Final Rule

Federal Register / Vol. 85, No. 148 / Friday, July 31, 2020 / Rules
and Regulations

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DEPARTMENT OF TREASURY

Office of the Comptroller of the Currency

12 CFR Part 44

[Docket No. OCC-2020-0002]
RIN 1557-AE67

FEDERAL RESERVE SYSTEM

12 CFR Part 248

[Docket No. R-1694]
RIN 7100-AF70

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 351

RIN 3064-AF17

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 75

RIN 3038-AE93

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 255

[Release No. BHCA-9; File No. S7-02-20]
RIN 3235-AM70

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

AGENCY: Office of the Comptroller of the Currency, Treasury (OCC);
Board of Governors of the Federal Reserve System (Board); Federal
Deposit Insurance Corporation (FDIC); Securities and Exchange
Commission (SEC); and Commodity Futures Trading Commission (CFTC).

ACTION: Final rule.

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SUMMARY: The OCC, Board, FDIC, SEC, and CFTC (together, the agencies)
are adopting amendments to the regulations implementing section 13 of
the Bank Holding Company Act (BHC Act). Section 13 contains certain
restrictions on the ability of a banking entity or nonbank financial
company supervised by the Board to engage in proprietary trading and
have certain interests in, or relationships with, a hedge fund or
private equity fund (covered funds). These final amendments are
intended to improve and streamline the regulations implementing section
13 of the BHC Act by modifying and clarifying requirements related to
the covered fund provisions of the rules.

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

FOR FURTHER INFORMATION CONTACT:
    OCC: Roman Goldstein, Risk Specialist, Treasury and Market Risk
Policy,<PHONE_NUMBER>; Tabitha Edgens, Counsel; Mark O'Horo, Senior
Attorney, Chief Counsel's Office,<PHONE_NUMBER>; for persons who are
deaf or hearing impaired, TTY,<PHONE_NUMBER>, Office of the
Comptroller of the Currency, 400 7th Street SW, Washington, DC 20219.
    Board: Flora Ahn, Special Counsel,<PHONE_NUMBER>, Gregory
Frischmann, Senior Counsel,<PHONE_NUMBER>, Kirin Walsh, Attorney,
(202) 452-3058, or Sarah Podrygula, Attorney,<PHONE_NUMBER>, Legal
Division, Elizabeth MacDonald, Manager,<PHONE_NUMBER>, Cecily Boggs,
Senior Financial Institution Policy Analyst,<PHONE_NUMBER>, Brendan
Rowan, Senior Financial Institution Policy Analyst,<PHONE_NUMBER>,
Christopher Powell, Senior Financial Institution Policy Analyst, (202)
452-3442, Nathaniel Grant, Lead Financial Institution Policy Analyst,
(202) 452-3105, David McArthur, Senior Economist,<PHONE_NUMBER>,
Division of Supervision and Regulation; Board of Governors of the
Federal Reserve System, 20th and C Streets NW, Washington, DC 20551.
    FDIC: Bobby R. Bean, Associate Director<EMAIL_ADDRESS>Andrew D.
Carayiannis, Senior Policy Analyst<EMAIL_ADDRESS>or Brian
Cox, Senior Policy Analyst<EMAIL_ADDRESS>Capital Markets Branch,
(202) 898-6888; Michael B. Phillips, Counsel<EMAIL_ADDRESS>
Benjamin J. Klein, Counsel<EMAIL_ADDRESS>or Annmarie H. Boyd,
Counsel<EMAIL_ADDRESS>Legal Division, Federal Deposit Insurance
Corporation, 550 17th Street NW, Washington, DC 20429.
    CFTC: Cantrell Dumas, Special Counsel,<PHONE_NUMBER>,
<EMAIL_ADDRESS>Division of Swap Dealer and Intermediary Oversight;
Mark Fajfar, Assistant General Counsel,<PHONE_NUMBER>,
<EMAIL_ADDRESS>Office of the General Counsel; Stephen Kane, Research
Economist,<PHONE_NUMBER><EMAIL_ADDRESS>Office of the Chief
Economist; Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.
    SEC: Juliet M. Han, Senior Counsel, William Miller, Senior Counsel,
Benjamin A. Tecmire, Senior Counsel, or Jennifer Songer, Branch Chief
at<PHONE_NUMBER> or<EMAIL_ADDRESS>Investment Adviser Regulation
Office, Division of Investment Management, and Katherine Hsu, Office
Chief, or Benjamin Meeks, Special Counsel at<PHONE_NUMBER>, Office of
Structured Finance, Division of Corporation Finance, U.S. Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
II. Notice of Proposed Rulemaking
III. Overview of the Final Rule
IV. Summary of the Final Rule
    A. Qualifying Foreign Excluded Funds
    B. Modifications to Existing Covered Fund Exclusions
    1. Foreign Public Funds
    2. Loan Securitizations
    3. Public Welfare and Small Business Funds
    C. Additional Covered Fund Exclusions
    1. Credit Funds
    2. Venture Capital Funds
    3. Family Wealth Management Vehicles
    4. Customer Facilitation Vehicles
    D. Limitations on Relationships With a Covered Fund
    E. Ownership Interest
    F. Parallel Investments
    G. Technical Amendments
V. Administrative Law Matters
    A. Use of Plain Language
    B. Paperwork Reduction Act
    C. Regulatory Flexibility Act Analysis
    D. Riegle Community Development and Regulatory Improvement Act
    E. OCC Unfunded Mandates Reform Act
    F. SEC Economic Analysis
    G. Congressional Review Act

I. Background

    Section 13 of the BHC Act,\1\ also known as the Volcker Rule,
generally prohibits any banking entity from engaging in proprietary
trading or from acquiring or retaining an ownership interest in,
sponsoring, or having certain relationships with a hedge fund or
private equity fund (covered fund).\2\ The statute expressly exempts
from these prohibitions various activities, including, among other
things:
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    \1\ 12 U.S.C. 1851.
    \2\ Id.
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     Underwriting and market making-related activities;
     Risk-mitigating hedging activities;
     Activities on behalf of customers;
     Activities for the general account of insurance companies;
and
     Trading and covered fund activities and investments by
non-U.S. banking entities solely outside the United States.\3\
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    \3\ 12 U.S.C. 1851(d)(1).
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    In addition, section 13 of the BHC Act contains an exemption that
permits banking entities to organize and offer, including sponsor,
covered funds, subject to certain restrictions, including

that banking entities do not rescue investors in those funds from loss,
and are not themselves exposed to significant losses due to investments
in or other relationships with these funds.\4\
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    \4\ 12 U.S.C. 1851(d)(1)(G). Other restrictions and requirements
include: (1) The banking entity provides bona fide trust, fiduciary,
or investment advisory services; (2) the fund is organized and
offered only to customers in connection with the provision of such
services; (3) the banking entity does not have an ownership interest
in the fund, except for a de minimis investment; (4) the banking
entity complies with certain marketing restrictions related to the
fund; (5) no director or employee of the banking entity has an
ownership interest in the fund, with certain exceptions; and (6) the
banking entity discloses to investors that it does not guarantee the
performance of the fund. Id.
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    Authority under section 13 of the BHC Act for developing and
adopting regulations to implement the prohibitions, restrictions, and
exemptions of section 13 is shared among the Board, the FDIC, the OCC,
the SEC, and the CFTC (individually, an agency, and collectively, the
agencies).\5\ The agencies originally issued a final rule implementing
section 13 in December 2013 (the 2013 rule), and those provisions
became effective on April 1, 2014.\6\
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    \5\ 12 U.S.C. 1851(b)(2).
    \6\ Prohibitions and Restrictions on Proprietary Trading and
Certain Interests in, and Relationships with, Hedge Funds and
Private Equity Funds; Final Rule, 79 FR 5535 (Jan. 31, 2014).
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    The agencies published a notice of proposed rulemaking in July 2018
(the 2018 proposal) that proposed several amendments to the 2013
rule.\7\ These proposed revisions sought to provide greater clarity and
certainty about what activities are prohibited under the 2013 rule--in
particular, under the prohibition on proprietary trading--and to better
tailor the compliance requirements based on the risk of a banking
entity's trading activities. The agencies issued a final rule
implementing amendments to the 2013 rule in November 2019 (the 2019
amendments), and those provisions became effective in January 2020.\8\
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    \7\ Proposed Revisions to Prohibitions and Restrictions on
Proprietary Trading and Certain Interests in, and Relationships
With, Hedge Funds and Private Equity Funds, 83 FR 33432 (July 17,
2018).
    \8\ Prohibitions and Restrictions on Proprietary Trading and
Certain Interests in, and Relationships With, Hedge Funds and
Private Equity Funds, 84 FR 61974 (Nov. 14, 2019). The regulations
implementing section 13 of the BHC Act, as amended through June 1,
2020, are referred throughout as the ``implementing regulations.''
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    As part of the 2018 proposal, the agencies proposed targeted
changes to the provisions of the 2013 rule relating to acquiring or
retaining an ownership interest in, sponsoring, or having certain
relationships with a fund and sought comments on other aspects of the
covered fund provisions beyond those changes for which specific rule
text was proposed.\9\ The 2019 amendments finalized those changes to
the covered fund provisions for which specific rule text was proposed
in the 2018 proposal.\10\ The agencies indicated they would issue a
separate proposal addressing and requesting comment on the covered fund
provisions of the rule and other fund-related issues, and, in February
2020, the agencies issued a separate notice of proposed rulemaking that
specifically addressed those areas (the 2020 proposal).\11\
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    \9\ 83 FR 33471-87.
    \10\ In response to the 2018 proposal, the agencies received
numerous comments related to covered fund issues for which no
specific rule text was proposed. However, in the preamble to the
2019 amendments, the agencies generally deferred public
consideration of such comments to a future proposed rulemaking. 84
FR 62016.
    \11\ Prohibitions and Restrictions on Proprietary Trading and
Certain Interests in, and Relationships With, Hedge Funds and
Private Equity Funds, 85 FR 12120 (Feb. 28, 2020).
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II. Notice of Proposed Rulemaking

    In the 2020 proposal, the agencies proposed revisions to a number
of the provisions regarding covered fund investments and activities as
well as to other provisions of the implementing regulations related to
the treatment of funds. The proposed changes, which were based on
comments received in response to the agencies' questions in the 2018
proposal and the agencies' experience with the implementing
regulations, were intended to reduce the extraterritorial impact of the
implementing regulations, improve and streamline the covered fund
provisions, and provide clarity to banking entities regarding the
provision of financial services and the conduct of permissible
activities in a manner that is consistent with the requirements of
section 13 of the BHC Act.
    To better limit the extraterritorial impact of the implementing
regulations, the 2020 proposal would have exempted the activities of
certain funds that are organized outside of the United States and
offered to foreign investors (qualifying foreign excluded funds) from
the restrictions of the implementing regulations. Under the 2013 rule,
in certain circumstances, some foreign funds that are not ``covered
funds'' may be subject to the implementing regulations as ``banking
entities,'' if they are controlled by a foreign banking entity, and
thus could be subject to more onerous compliance obligations than are
imposed on similarly-situated U.S. covered funds, even though the
foreign funds have limited nexus to the United States. Accordingly, the
2020 proposal would have codified an existing policy statement by the
Federal banking agencies (the OCC, Board, and FDIC) that addresses the
potential issues related to a foreign banking entity controlling
qualifying foreign excluded funds.
    The 2020 proposal also would have made modifications to several
existing exclusions from the covered fund provisions to provide clarity
and simplify compliance with the requirements of the implementing
regulations. First, the 2020 proposal would have revised certain
restrictions in the foreign public funds exclusion to more closely
align the provision with the exclusion for similarly-situated U.S.
registered investment companies. Second, the 2020 proposal would have
permitted loan securitizations excluded from the definition of covered
fund to hold a small amount of non-loan assets, consistent with past
industry practice, and would have codified existing staff-level
guidance regarding this exclusion. In addition, the 2020 proposal would
have revised the exclusion for small business investment companies to
account for the life cycle of those companies and requested comment on
whether to clarify the scope of the exclusion for public welfare and
other investments to include rural business investment companies and
qualified opportunity funds. Finally, the 2020 proposal would have
addressed concerns about certain components of the preamble to the 2013
rule related to calculating a banking entity's ownership interests in
covered funds.
    The agencies also included in the 2020 proposal several new
exclusions from the covered fund definition in order to more directly
align the regulation with the purpose of the statute. For example, the
agencies recognized that the implementing regulations have inhibited
banking entities' ability to extend credit by restricting their
relationships with credit funds, and the 2020 proposal would have
created a new exclusion for such funds. Under the 2020 proposal,
banking entities would have been able to invest in and have certain
relationships with credit funds that extend the type of credit that a
banking entity may provide directly, subject to certain safeguards.
Relatedly, the 2020 proposal would have established an exclusion from
the definition of covered fund for venture capital funds. This
provision was intended to facilitate banking entities' abilities to
engage in this important type of development and investment activity,
which may facilitate capital formation and provide important financing
for small

businesses, particularly in areas where such financing may not be
readily available. In addition, the agencies believed that excluding
such activities would be consistent with the purpose of the statute, as
it would exclude fund activities that do not present the risks that
section 13 of the BHC Act was intended to address.
    The 2020 proposal also would have allowed a banking entity to
provide certain traditional financial services to its customers via a
fund structure, subject to certain safeguards and limitations. First,
the 2020 proposal would have excluded from the definition of covered
fund an entity created and used to facilitate customer exposures to a
transaction, investment strategy, or other service. Second, the 2020
proposal would have excluded from the covered fund definition wealth
management vehicles that manage the investment portfolio of a family
and certain other closely related persons. Both of these provisions
were intended to allow a banking entity to provide such services in the
manner best suited to its customers.
    In addition, the 2020 proposal would have permitted a banking
entity to engage in a limited set of covered transactions with a
covered fund that the banking entity sponsors or advises or with which
the banking entity has certain other relationships. The implementing
regulations generally prohibit all covered transactions between a
covered fund and its banking entity sponsor or investment adviser. The
agencies, in the 2020 proposal, recognized that the existing
restrictions have prevented banking entities from providing certain
traditional banking services to covered funds, such as standard
payment, clearing, and settlement services.
    Lastly, the 2020 proposal would have clarified certain aspects of
the definition of ownership interest. Currently, due to the broad
definition of ownership interest, some loans by banking entities to
covered funds could be deemed ownership interests. The 2020 proposal
included a safe harbor for bona fide senior loans or senior debt
instruments to make clear that an ``ownership interest'' in a fund
would not include such credit interests in the fund. In addition, the
2020 proposal would have clarified the types of creditor rights that
may attach to an interest without necessarily causing such an interest
to fall within the scope of the definition of ownership interest.
Finally, the 2020 proposal would have simplified compliance efforts by
tailoring the calculation of a banking entity's compliance with the
implementing regulations' aggregate fund limit and covered fund
deduction and provided clarity to banking entities regarding their
permissible investments made alongside covered funds.\12\
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    \12\ Separately, the agencies proposed various technical edits
to the implementing regulations. See infra Section IV.G (Technical
Amendments).
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    The agencies invited comment on all aspects of the 2020 proposal,
including specific proposed revisions and questions posed by the
agencies. The agencies received approximately 40 unique comments from
banking entities and industry groups, public interest groups, and other
organizations and individuals. In addition, the agencies received six
letters related to the subject matter considered in the 2020 proposal
prior to the formal comment period. The agencies are now finalizing the
2020 proposal, with certain changes based on public comments, as
described in detail below.\13\
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    \13\ Comments are generally discussed in the relevant sections,
infra. The agencies also received several miscellaneous comments.
One commenter suggested revising Sec.  __.21 (Termination of
activities or investments; penalties for violations) of the
implementing regulations to provide for mandatory prison time for
violations of the implementing regulations. Anonymous. The agencies
believe that this comment is beyond the scope of the current
rulemaking. Another commenter encouraged the agencies to exempt from
the implementing regulations international banks with a small
presence in the United States. Institute of International Bankers
(IIB). The agencies believe that this comment is beyond the scope of
the current rulemaking. A third commenter claimed that the 2020
proposal improperly assumed that the implementing regulations have
certain burdens and that it did not adequately assess the costs and
benefits of the proposed revisions to the implementing regulations.
Occupy the SEC (Occupy). Contrary to the commenter's suggestions,
the Federal Register notice for the 2020 proposal contained
extensive discussion of the costs and benefits of the 2020 proposal.
See 85 FR 12151-76. This final rule contains similar analyses. See
infra, Section IV (Administrative Law Matters). Several commenters
expressed support for the comment letters submitted by other
organizations. E.g., IIB; European Banking Federation (EBF); Goldman
Sachs Group, Inc. (Goldman Sachs); and Canadian Bankers Association
(CBA). Finally, one comment was not relevant. See Charity Colleen
Crouse.
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III. Overview of the Final Rule

    Similar to the 2020 proposal, the final rule clarifies and
simplifies compliance with the implementing regulations, refines the
extraterritorial application of section 13 of the BHC Act, and permits
additional fund activities that do not present the risks that section
13 was intended to address. The agencies received comments from a
diverse set of commenters: Comments from banking entities and financial
services industry trade groups were generally supportive of the 2020
proposal and recommended additional modifications, while several
organizations and individuals were generally opposed to the 2020
proposal. As described further below, the agencies have adopted many of
the proposed changes to the implementing regulations, with certain
targeted adjustments.
    To reduce the extraterritorial impact of the implementing
regulations, the final rule, similar to the 2020 proposal, exempts the
activities of certain funds that are organized outside of the United
States and offered to foreign investors (qualifying foreign excluded
funds) from certain restrictions of the implementing regulations.
Specifically, the final rule codifies an existing policy statement by
the Federal banking agencies that addresses the potential issues
related to a foreign banking entity controlling a qualifying foreign
excluded fund. The final rule contains some modifications to the
proposed exemption--the anti-evasion provision and compliance program
requirements--to address comments that the proposed exemption would
have unintentionally continued to subject qualifying foreign excluded
funds to these requirements.
    The final rule also revises, as proposed, but with some
modifications, several existing exclusions from the covered fund
provisions, to provide clarity and simplify compliance with the
requirements of the implementing regulations. First, the final rule
revises certain restrictions in the foreign public funds exclusion to
more closely align the provision with the exclusion for similarly
situated U.S. registered investment companies. Second, the final rule
permits loan securitizations excluded from the definition of covered
fund to hold a small amount of debt securities, consistent with past
industry practice, and codifies existing staff-level guidance regarding
this exclusion. In addition, the final rule revises the exclusion for
small business investment companies to account for the life cycle of
those companies and clarifies the scope of the exclusion for public
welfare and other investments to include rural business investment
companies and qualified opportunity funds. Finally, the final rule
clarifies the calculation of ownership interests in covered funds that
are attributed to a banking entity.
    The final rule adopts--as proposed, with some modifications--
several new exclusions from the covered fund definition to more closely
align the regulation with the purpose of the statute. First, the final
rule establishes a new exclusion for funds that extend credit to permit
the same credit-related activities that banking entities can engage in
directly. In addition, the final rule creates an exclusion for venture
capital funds to help ensure that banking entities can indirectly
facilitate

this important type of development and investment activity to the same
degree that banking entities can do so directly. Finally, the final
rule adopts two exclusions for family wealth management and customer
facilitation vehicles to provide banking entities flexibility to
provide advisory and other traditional banking services to customers
through a fund structure.
    In an effort to clarify and simplify compliance with the
implementing regulations, the final rule adopts revisions to the
provisions that govern the relationship between a banking entity and a
fund and the definition of ownership interest. Specifically, the final
rule permits established, codified categories of limited low-risk
transactions between a banking entity and a related fund, including
riskless principal transactions, and allows a banking entity to engage
in certain transactions with a related fund in connection with payment,
clearing, and settlement activities. In addition, the final rule would
provide an express safe harbor for senior loans and senior debt and
provide clarity about the types of creditor rights that would be
considered within the scope of the definition of ownership interest.
Finally, the agencies are adopting revisions, as proposed, to provide
clarity regarding a banking entity's permissible investments in the
same investments as a covered fund organized or offered by such banking
entity.

Frequently Asked Questions

    The staffs of the agencies have addressed several questions
concerning the implementing regulations through a series of staff
Frequently Asked Questions (FAQs).\14\ In the 2020 proposal, the
agencies indicated that the proposed rule would not modify or revoke
any previously issued staff FAQs, unless otherwise specified.\15\
Several commenters recommended codifying specific FAQs and making
explicit that other FAQs would continue to be in effect,
unmodified.\16\ Consistent with the 2020 proposal and commenters'
suggestions, the final rule does not modify or revoke any previously
issued staff FAQs, unless otherwise specified.\17\
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    \14\ See https://www.occ.treas.gov/topics/capitalmarkets/financial-markets/trading-volckerrule/volcker-rule-implementation-faqs.html (OCC); https://www.federalreserve.gov/bankinforeg/volcker-rule/faq.htm (Board); https://www.fdic.gov/regulations/reform/volcker/faq.html (FDIC); https://www.sec.gov/divisions/marketreg/faq-volcker-rule-section13.htm (SEC); https://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_28_VolckerRule/index.htm
(CFTC).
    \15\ 85 FR 12122-23.
    \16\ E.g., Securities Industry and Financial Markets Association
(SIFMA); Financial Services Forum (FSF); and IIB.
    \17\ 85 FR 12122-23.
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Comment Period

    Since the issuance of the 2020 proposal, the COVID-19 global
pandemic has substantially disrupted activity in the United States and
in other countries. The effects of the COVID-19 disruptions have
created many challenges for households and businesses, and the agencies
received comments requesting that the agencies extend the comment
period for the 2020 proposal or delay the rulemaking more
generally.\18\ In contrast, one commenter expressed support for the
rapid approval of the 2020 proposal, to provide banking entities
regulatory relief during a period of financial stress.\19\ The agencies
announced on April 2, 2020, that they would consider comments submitted
before May 1, 2020.\20\ The agencies, however, do not believe that
further delay of the rule is warranted, given the volume, depth, and
diversity of comments submitted. The agencies believe, as well, that
the final rule may provide clarity to banking entities that will enable
banking entities to engage in financial services and other permissible
activities in a manner that both is consistent with the requirements of
section 13 of the BHC Act and will facilitate capital formation and
economic activity.
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    \18\ E.g., Better Markets, Inc. (Better Markets) and Kathy
Bowman.
    \19\ American Bankers Association (ABA).
    \20\ https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200402a.htm.
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Effective and Compliance Dates

    The Federal Register notice accompanying the finalization of the
2019 amendments provided for a rolling compliance system.\21\ The
effective date of the amendments was January 1, 2020, and firms are
required to comply with the revisions by January 1, 2021. Until the
mandatory compliance date, banking entities are required to comply with
the 2013 rule, or alternatively, a banking entity may voluntarily
comply, in whole or in part, with the 2019 amendments prior to the
compliance date.
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    \21\ 84 FR 61974.
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    Several commenters on the 2020 proposal suggested that the agencies
provide for voluntary early compliance with the final rule.\22\ One
commenter also suggested establishing a transition period of at least
one year.\23\
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    \22\ E.g., SIFMA; FSF; Japanese Bankers Association (JBA); and
ABA.
    \23\ JBA.
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    The effective date for the final rule will be October 1, 2020, to
accommodate the requirements of the Riegle Community Development and
Regulatory Improvement Act.\24\ The agencies do not believe an extended
compliance or transition period is necessary because the final rule
largely tailors the regulations implementing section 13 of the BHC Act
rather than increases compliance burdens.
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    \24\ See infra, Section V.D (Riegle Community Development and
Regulatory Improvement Act).
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IV. Summary of the Final Rule

A. Qualifying Foreign Excluded Funds

    Since the adoption of the 2013 rule, a number of foreign banking
entities, foreign government officials, and other market participants
have expressed concerns regarding instances in which certain funds
offered and sold outside of the United States are excluded from the
covered fund definition but still could be considered banking entities
in certain circumstances (foreign excluded funds).\25\ This situation
may occur if a foreign banking entity controls the foreign fund. A
foreign banking entity could be considered to control the fund based on
common corporate governance structures abroad, such as where the fund's
sponsor selects the majority of the fund's directors or trustees, or
the foreign banking entity otherwise controls the fund for purposes of
section 13 of the BHC Act. As a result, such a fund would be subject to
the requirements of section 13 and the implementing regulations,
including restrictions on proprietary trading, restrictions on
investing in or sponsoring covered funds, and compliance obligations.
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    \25\ The implementing regulations generally exclude covered
funds from the definition of ``banking entity.'' 2013 rule Sec.
__.2(c)(2)(i). However, because foreign excluded funds are not
covered funds, they can become banking entities through affiliation
with other banking entities.
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    The Federal banking agencies released a policy statement on July
21, 2017 (the policy statement), to address concerns about the possible
unintended consequences and extraterritorial impact of section 13 and
the implementing regulations for foreign excluded funds.\26\ The policy
statement noted that the Federal banking agencies would not take action
against a foreign banking entity \27\ based on attribution of

the activities and investments of a qualifying foreign excluded fund to
a foreign banking entity, or against a qualifying foreign excluded fund
as a banking entity, for a period of one year while staffs of the
agencies considered alternative ways in which the implementing
regulations could be amended, or other appropriate action could be
taken, to address the issue. The policy statement has since been
extended and is currently scheduled to expire on July 21, 2021.\28\
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    \26\ Statement regarding Treatment of Certain Foreign Funds
under the Rules Implementing Section 13 of the Bank Holding Company
Act (July 21, 2017), available at https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20170721a1.pdf.
    \27\ ``Foreign banking entity'' was defined for purposes of the
policy statement to mean a banking entity that is not, and is not
controlled directly or indirectly by, a banking entity that is
located in or organized under the laws of the United States or any
State. Id.
    \28\ Statement regarding Treatment of Certain Foreign Funds
under the Rules Implementing Section 13 of the Bank Holding Company
Act (July 17, 2019), available at https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20190717a1.pdf.
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    For purposes of the policy statement, a ``qualifying foreign
excluded fund'' means, with respect to a foreign banking entity, an
entity that:
    (1) Is organized or established outside the United States and the
ownership interests of which are offered and sold solely outside the
United States;
    (2) Would be a covered fund were the entity organized or
established in the United States, or is, or holds itself out as being,
an entity or arrangement that raises money from investors primarily for
the purpose of investing in financial instruments for resale or other
disposition or otherwise trading in financial instruments;
    (3) Would not otherwise be a banking entity except by virtue of the
foreign banking entity's acquisition or retention of an ownership
interest in, or sponsorship of, the entity;
    (4) Is established and operated as part of a bona fide asset
management business; and
    (5) Is not operated in a manner that enables the foreign banking
entity to evade the requirements of section 13 or implementing
regulations.
    To be eligible for this relief, the foreign banking entity's
acquisition or retention of any ownership interest in, or sponsorship
of, the qualifying foreign excluded fund must meet the requirements for
permitted covered fund activities and investments solely outside the
United States, as provided in section 13(d)(1)(I) of the BHC Act and
Sec.  __.13(b) of the implementing regulations, as if the qualifying
foreign excluded fund were a covered fund. To provide greater clarity
and certainty to banking entities and qualifying foreign excluded
funds, and to limit the extraterritoriality of the rule, the 2020
proposal included a permanent exemption from the section 13
restrictions on proprietary trading and investing in or sponsoring
covered funds for the activities of qualifying foreign excluded funds.
The proposed exemption generally included the same eligibility criteria
from the policy statement, although it included a modified version of
the anti-evasion provision such that, in order to qualify, a fund could
not be operated in a manner that enables ``any other banking entity''
(rather than ``the foreign banking entity'') to evade the requirements
of section 13 or the implementing regulations.
    The agencies requested comment on all aspects of this exemption.
Commenters were generally supportive of the 2020 proposal to exempt
qualifying foreign excluded funds from certain requirements of the
implementing regulations.\29\ Two commenters expressed opposition to
the proposed exemption.\30\
---------------------------------------------------------------------------

    \29\ SIFMA; Bank Policy Institute (BPI); Bundesverband
Investment und Asset Management e.V. (BVI); American Investment
Council (AIC); ABA; European Fund and Asset Management Association
(EFAMA); Shareholder Advocacy Forum (SAF); IIB; JBA; CBA; and Credit
Suisse.
    \30\ Occupy and Data Boiler Technologies LLC (Data Boiler).
---------------------------------------------------------------------------

    Some commenters requested that qualifying foreign excluded funds be
excluded from the definition of banking entity.\31\ One commenter
expressed concern that the 2020 proposal would require qualifying
foreign excluded funds to establish section 13 of the BHC Act
compliance programs, imposing costs on qualifying foreign excluded
funds.\32\ This commenter noted that there may be situations under
section 13 of the BHC Act where a foreign banking entity controls a
qualifying foreign excluded fund, but under foreign law does not have
the necessary authority to require it to adopt a section 13 compliance
program. As such, this commenter advocated for either excluding this
type of fund from the definition of banking entity or exempting this
type of fund from the compliance program requirements under the
rule.\33\ One commenter expressed concern that a qualifying foreign
excluded fund would still need to comply with various restrictions
under section 13, including the provisions of Sec.  __.14 of the
implementing regulations (i.e., Super 23A) and the compliance program
requirements.\34\
---------------------------------------------------------------------------

    \31\ IIB; JBA; CBA; Credit Suisse; and EBF.
    \32\ JBA.
    \33\ JBA.
    \34\ Credit Suisse.
---------------------------------------------------------------------------

    Some commenters requested that the agencies change the anti-evasion
provision of the qualifying foreign excluded funds definition so that
it would only apply to the specific foreign banking entity, in a manner
consistent with the policy statement.\35\ One of these commenters
suggested, as an alternative, revising the provision so that it would
only apply to ``any affiliated banking entities.'' \36\
---------------------------------------------------------------------------

    \35\ IIB; JBA; Credit Suisse; and EBF.
    \36\ Credit Suisse.
---------------------------------------------------------------------------

    One commenter requested an anti-evasion safe harbor and changes to
allow a fund to be a qualifying foreign excluded fund when a non-U.S.
banking entity serves as a management company to the fund and is
approved to provide fund management in accordance with local law.\37\
This commenter also requested that the agencies limit the requirements
in the proposed qualifying foreign excluded funds definition to only
those set forth in Sec.  __.13(b) of the rule for covered fund
activities conducted by foreign banking entities solely outside the
United States, and treat as qualifying foreign excluded funds those
funds for which the foreign banking entity cannot exercise voting
rights.
---------------------------------------------------------------------------

    \37\ JBA.
---------------------------------------------------------------------------

    Pursuant to their authority under section 13(d)(1)(J) of the BHC
Act, the agencies are adopting the exemption for the activities of
qualifying foreign excluded funds substantially as proposed, but with
modifications to the anti-evasion provision and compliance program
requirements. Specifically, the agencies are exempting the activities
of qualified foreign excluded funds from the restrictions on
proprietary trading and investing in or sponsoring covered funds, if
the acquisition or retention of the ownership interest in, or
sponsorship of, the qualifying foreign excluded fund by the foreign
banking entity meets the requirements for permitted covered fund
activities and investments conducted solely outside the United States,
as provided in Sec.  __.13(b) of the rule.\38\ Under the final rule, a
qualifying foreign excluded fund has the same meaning as in the policy
statement as described above and in the 2020 proposal, except for the
modification to the anti-evasion provision, as described below.
---------------------------------------------------------------------------

    \38\ See final rule Sec.  __.13(b).
---------------------------------------------------------------------------

    Section 13(d)(1)(J) of the BHC Act gives the agencies rulemaking
authority to exempt activities from the prohibitions of section 13,
provided the agencies determine that the activity in question would
promote and protect the safety and soundness of the banking entity and
the financial stability of the

United States.\39\ For the reasons described below, the agencies have
determined that exempting the activities of qualifying foreign excluded
funds promotes and protects the safety and soundness of banking
entities and U.S. financial stability.
---------------------------------------------------------------------------

    \39\ 12 U.S.C. 1851(d)(1)(J).
---------------------------------------------------------------------------

    This relief is expected to promote and protect the safety and
soundness of such funds and their foreign banking entity sponsors by
putting them on a level playing field with their foreign competitors
that are not subject to the implementing regulations. If the activities
of these foreign funds were subject to the restrictions applicable to
banking entities, their asset management activities could be
significantly disrupted, and their foreign banking entity sponsors may
be at a competitive disadvantage to other foreign bank and non-bank
market participants conducting asset management business outside of the
United States. Exempting the activities of these foreign funds allows
their foreign banking entity sponsors to continue to conduct their
asset management business outside the United States as long as the
foreign banking entity's acquisition of an ownership interest in or
sponsorship of the fund meets the requirements in Sec.  __.13(b) of the
implementing regulations. Thus, the exemption is expected to have the
effect of promoting the safety and soundness of these foreign funds and
their sponsors, while at the same time limiting the extraterritorial
impact of the implementing regulations, consistent with the purposes of
sections 13(d)(1)(H) and (I) of the BHC Act.
    The exemption is also expected to promote and protect U.S.
financial stability. While qualifying foreign excluded funds have a
very limited nexus to the U.S. financial system, the exemption would
promote U.S. financial stability by providing additional capital and
liquidity to U.S. capital markets without a concomitant increase in
risk borne by U.S. entities. Because the exemption requires that the
foreign banking entity's acquisition of an ownership interest in or
sponsorship of the fund meets the requirements in Sec.  __.13(b) of the
final rule, the exemption will help ensure that the risks of
investments made by these foreign funds will be booked at foreign
entities in foreign jurisdictions, thus promoting and protecting U.S.
financial stability. Additionally, subjecting such funds to the
requirements of the implementing regulations could precipitate
disruptions in foreign capital markets, which could generate spillover
effects in the U.S. financial system.
    In response to comments regarding the anti-evasion provision, the
final rule specifies that the qualifying foreign excluded fund must not
be operated in a manner that enables the banking entity that sponsors
or controls the qualifying foreign excluded fund, or any other
affiliated banking entity (other than a qualifying foreign excluded
fund), to evade the requirements of section 13 of the BHC Act or the
final rule. This change is meant to clarify the scope of the anti-
evasion provision and provide certainty for banking entities that
sponsor or control the qualifying foreign excluded fund.
    Consistent with feedback from several commenters, the agencies also
have modified compliance requirements with respect to qualifying
foreign excluded funds. While, under the final rule, the activities of
a qualifying foreign excluded fund are exempted from the proprietary
trading restrictions of Sec.  __.3(a) and the covered fund restrictions
of Sec.  __.10(a) of the final rule, the qualifying foreign excluded
fund is still a banking entity. Absent any additional changes, the
qualifying foreign excluded fund could become subject to the compliance
requirements of Sec.  __.20. 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) of the
final rule, the agencies believe that requiring a compliance program
for the fund itself is overly burdensome and unnecessary. The
requirements in Sec.  __.20 are intended to ensure and monitor
compliance with the proprietary trading and covered fund provisions,
and there would be no benefit to applying these requirements to an
entity that is exempt from those provisions. Therefore, under the final
rule, qualifying foreign excluded funds are not required to have
compliance programs or comply with the reporting and additional
documentation requirements under Sec.  __.20. However, any banking
entity that owns or sponsors a qualifying foreign excluded fund will
still be required to have in place appropriate compliance programs for
itself and its other subsidiaries and provide reports and additional
documentation as required by Sec.  __.20.
    The final rule does not amend the definition of ``banking entity''
as requested by several commenters. Because ``banking entity'' is
specifically defined in section 13 of the BHC Act, the agencies find it
appropriate to address concerns related to foreign excluded funds
through their exemptive rulemaking authority.
    The agencies are not making any change regarding the applicability
of Sec.  __.14 of the implementing regulations, which imposes
limitations on relationships with covered funds, with respect to
qualifying foreign excluded funds. The agencies believe it is
appropriate to retain the application of Sec.  __.14 to qualifying
foreign excluded funds to limit risks that may be borne by banking
entities located in the United States through transactions with such
funds.\40\ Further, given the limited set of circumstances in which
Sec.  __.14 would apply (i.e., a transaction between a foreign excluded
fund and a covered fund that is sponsored or advised by the same
banking entity), the agencies do not believe that it is overly
burdensome for a banking entity that sponsors or controls a qualifying
foreign excluded fund to ensure that it is not in violation of Sec.
__.14.
---------------------------------------------------------------------------

    \40\ A U.S. banking entity's exposure to a fund that would be a
qualifying foreign excluded fund with respect to a foreign banking
entity may still be a covered fund with respect to a U.S. banking
entity under Sec.  __.10(b)(1)(iii) of the implementing regulations.
A U.S. banking entity's investment in and relationship with such a
fund could therefore be subject to the entirety of the applicable
prohibitions and restrictions of Subpart C of the implementing
regulations.
---------------------------------------------------------------------------

B. Modifications To Existing Covered Fund Exclusions

    In the preamble to the 2013 rule, the agencies acknowledged that
the covered fund definition was expansive.\41\ To effectively tailor
the covered fund provisions to the types of entities that section 13 of
the BHC Act was intended to cover, the 2013 rule excluded various types
of entities from the covered fund definition.\42\ In response to
comments received on the 2020 proposal, and based on experience
implementing the rule, the agencies are modifying certain of the
existing exclusions, as described below, to make them more
appropriately structured to effectuate the intent of the statute and
its implementing regulations.
---------------------------------------------------------------------------

    \41\ See 79 FR 5677.
    \42\ See id.
---------------------------------------------------------------------------

1. Foreign Public Funds

2013 Rule

    To provide consistent treatment for U.S. registered investment
companies and their foreign equivalents, the implementing regulations
exclude foreign public funds from the definition of covered fund.\43\ A
foreign public fund

is generally defined under the 2013 rule as any issuer that is
organized or established outside of the United States and the ownership
interests of which are (1) authorized to be offered and sold to retail
investors in the issuer's home jurisdiction and (2) sold predominantly
through one or more public offerings outside of the United States.\44\
The agencies stated in the preamble to the 2013 rule that they
generally expect that an offering is made predominantly outside of the
United States if 85 percent or more of the fund's interests are sold to
investors that are not residents of the United States.\45\ The 2013
rule defines ``public offering'' for purposes of this exclusion to mean
a ``distribution,'' as defined in Sec.  __.4(a)(3) of subpart B, of
securities in any jurisdiction outside the United States to investors,
including retail investors, provided that the distribution complies
with all applicable requirements in the jurisdiction in which such
distribution is being made; the distribution does not restrict
availability to only investors with a minimum level of net worth or net
investment assets; and the issuer has filed or submitted, with the
appropriate regulatory authority in such jurisdiction, offering
disclosure documents that are publicly available.\46\
---------------------------------------------------------------------------

    \43\ In adopting the foreign public fund exclusion, the
agencies' view was that it was appropriate to exclude these funds
from the ``covered fund'' definition because they are sufficiently
similar to U.S. registered investment companies. 79 FR 5678.
    \44\ 2013 rule Sec.  __.10(c)(1); see also 79 FR 5678.
    \45\ 79 FR 5678.
    \46\ 2013 rule Sec.  __.10(c)(1)(iii).
---------------------------------------------------------------------------

    The 2013 rule places an additional condition on a U.S. banking
entity's ability to rely on the foreign public fund exclusion with
respect to any foreign fund it sponsors.\47\ The foreign public fund
exclusion is only available to a U.S. banking entity with respect to a
foreign fund sponsored by the U.S. banking entity if, in addition to
the requirements discussed above, the fund's ownership interests are
sold predominantly to persons other than the sponsoring banking entity,
the issuer (or affiliates of the sponsoring banking entity or issuer),
and employees and directors of such entities.\48\ The agencies stated
in the preamble to the 2013 rule that, consistent with the agencies'
view concerning whether a foreign public fund has been sold
predominantly outside of the United States, the agencies generally
expect that a foreign public fund would satisfy this additional
condition if 85 percent or more of the fund's interests are sold to
persons other than the sponsoring U.S. banking entity and the specified
persons connected to that banking entity.\49\
---------------------------------------------------------------------------

    \47\ Although the discussion of this condition generally refers
to U.S. banking entities for ease of reading, the condition also
applies to foreign subsidiaries of a U.S. banking entity. See 2013
rule Sec.  __.10(c)(1)(ii) (applying this limitation ``[w]ith
respect to a banking entity that is, or is controlled directly or
indirectly by a banking entity that is, located in or organized
under the laws of the United States or of any State and any issuer
for which such banking entity acts as sponsor'').
    \48\ See 2013 rule Sec.  __.10(c)(1)(ii).
    \49\ 79 FR 5678.
---------------------------------------------------------------------------

2020 Proposal

    In the 2020 proposal, the agencies acknowledged that some of the
conditions of the 2013 rule's foreign public fund exclusion may not be
necessary to ensure consistent treatment of foreign public funds and
U.S. registered investment companies. Moreover, some conditions may
make it difficult for a non-U.S. fund to qualify for the exclusion or
for a banking entity to validate whether a non-U.S. fund qualifies for
the exclusion, resulting in certain non-U.S. funds that are similar to
U.S. registered investment companies being treated as covered funds.
    To address these concerns, the 2020 proposal would have made
certain modifications to the foreign public fund exclusion. First, the
agencies proposed to replace the requirement that the fund be
authorized to be offered and sold to retail investors in the issuer's
home jurisdiction (the home jurisdiction requirement) and the
requirement that the fund interests be sold predominantly through one
or more public offerings outside of the United States, with a
requirement that the fund is authorized to offer and sell ownership
interests, and such interests are offered and sold, through one or more
public offerings outside of the United States. This change would have
permitted foreign funds to qualify for the exclusion if they are
organized in one jurisdiction but only authorized to be sold to retail
investors in another jurisdiction, as this is a fairly common way for
foreign retail funds to be organized. Also, no longer requiring a fund
to be sold predominantly through one or more public offerings was
intended to reduce the difficulty that banking entities have described
in determining and monitoring the distribution history and patterns of
a third-party sponsored fund or a sponsored fund whose interests are
sold through third-party distributors.
    The agencies also proposed modifying the definition of ``public
offering'' from the implementing regulations to add a new requirement
that the distribution be subject to substantive disclosure and retail
investor protection laws or regulations, to help ensure that foreign
funds qualifying for this exclusion are sufficiently similar to U.S.
registered investment companies. Additionally, the 2020 proposal would
have only applied the condition that the distribution comply with all
applicable requirements in the jurisdiction where it is made to
instances in which the banking entity acts as the investment manager,
investment adviser, commodity trading advisor, commodity pool operator,
or sponsor. This proposed change was intended to address the potential
difficulty that a banking entity investing in a third-party sponsored
fund may have in determining whether the distribution of such fund
complied with all the requirements in the jurisdiction where it was
made.
    To simplify the requirements of the exclusion and address concerns
described by banking entities with the difficulty in tracking the sale
of ownership interests to employees and their immediate family members,
the 2020 proposal would have eliminated the limitation on selling
ownership interests of the issuer to employees (other than senior
executive officers) of the sponsoring banking entity or the issuer (or
affiliates of the banking entity or issuer). This change was intended
to help align the treatment of foreign public funds with that of U.S.
registered investment companies, as the exclusion for U.S. registered
investment companies has no such limitation. The 2020 proposal would
have continued to limit the sale of ownership interests to directors or
senior executive officers of the sponsoring banking entity or the
issuer (or their affiliates), as the agencies believed that such a
requirement would be simpler for a banking entity to track.
    Finally, the 2020 proposal requested comment on the appropriateness
of the expectation stated in the preamble to the 2013 rule that, for a
U.S. banking entity-sponsored foreign fund to satisfy the condition
that it be ``predominantly'' sold to persons other than the sponsoring
U.S. banking entity and certain persons connected to that banking
entity, at least 85 percent of the ownership interests in the fund
should be sold to such other persons.

Discussion of Comments and the Final Rule

    The agencies are adopting all of the proposed changes and are
making certain adjustments in response to comments received, as
discussed below.
    Commenters on the 2020 proposal generally supported the proposed
changes to the foreign public funds

exclusion.\50\ Specifically, commenters supported the elimination of
the home jurisdiction requirement and the requirement that the fund be
sold predominantly through one or more public offerings.\51\ Commenters
supported the proposed change to the ``public offering'' definition to
include a requirement that a distribution be subject to substantive
disclosure and retail investor protection laws or regulations,\52\ but
did not recommend further specifying what substantive disclosure and
investor protection requirements should apply because they generally
viewed it as unnecessary and overly prescriptive.\53\ Commenters also
supported eliminating the restriction on share ownership by employees
(other than senior executives and directors) of the U.S. banking entity
that sponsors the foreign public fund.\54\ In response to a specific
question in the 2020 proposal, one commenter indicated that the
proposed changes to the foreign public funds exclusion would not
increase the risk of evasion of the requirements of section 13 and the
implementing regulations, and thus no additional anti-evasion measures
were necessary.\55\ Another commenter stated that the proposed changes
were less than ideal but were acceptable after balancing compliance
costs and benefits.\56\
---------------------------------------------------------------------------

    \50\ IIB; SIFMA; BPI; ABA; EBF; EFAMA; FSF; Investment Company
Institute (ICI); BVI; CBA; Committee on Capital Markets Regulation
(CCMR); Data Boiler; Goldman Sachs; Investment Adviser Association
(IAA); JBA; SAF; and U.S. Chamber of Commerce Center for Capital
Markets Competitiveness (CCMC).
    \51\ IIB; SIFMA; BPI; ABA; EBF; EFAMA; FSF; ICI; BVI; and CBA.
    \52\ IIB; EFAMA; FSF; ICI; and BVI.
    \53\ IIB; ICI; and CBA. One commenter supported this assertion
by stating that 95 percent of the world's securities markets,
including all major emerging markets, have substantive disclosure
and retail investor protection rules that are guided by the
International Organization of Securities Commissions' common
principles for retail funds and the detailed policy work that
informs those principles. ICI.
    \54\ FSF.
    \55\ SIFMA.
    \56\ Data Boiler.
---------------------------------------------------------------------------

    Commenters also recommended additional changes to further align the
treatment of foreign public funds with that of U.S. registered
investment companies or to prevent evasion of the rule.\57\
Specifically, some commenters recommended eliminating the requirement
that a fund actually be sold through a public offering and, instead,
only require that a fund be authorized to be sold through a public
offering.\58\ These commenters generally viewed this requirement as
burdensome and difficult to administer and noted that U.S. registered
investment companies are not required to be sold in public
distributions. The agencies do not consider the fact that there is no
requirement for U.S. registered investment companies to be actually
sold through public offerings as a sufficient rationale for removing
this requirement from the foreign public fund exclusion. Requiring
foreign public funds to be sold through one or more public offerings is
intended to ensure that such funds are in fact public funds and thus
sufficiently similar to U.S. registered investment companies. While
there may be certain limited scenarios where a U.S. registered
investment company is not sold to retail investors, the agencies
believe that the vast majority of U.S. registered investment companies
are sold to retail investors. Furthermore, U.S. registered investment
companies are subject to robust registration, reporting, and other
requirements that are familiar to the agencies, whereas foreign public
funds are subject to a differing array of requirements depending on the
jurisdiction where they are authorized to be sold. These other
jurisdictions may have less developed requirements for retail funds,
which may increase the likelihood of a fund seeking authorization for
public distribution in certain foreign jurisdictions solely as a means
of avoiding the covered fund prohibition. The agencies believe that
eliminating this requirement would increase the risk of evasion by
permitting foreign funds that may be authorized for sale to retail
investors in a foreign jurisdiction--but are only sold through private
offerings where no substantive disclosure or retail investor
protections exist--to qualify for the exclusion. Such funds would not
be comparable to U.S. registered investment companies and would not be
the type of fund that foreign public fund exclusion was intended to
address. Accordingly, the agencies are not adopting this suggested
modification.
---------------------------------------------------------------------------

    \57\ One commenter recommended that the agencies create an
exclusion from the ``proprietary trading'' definition for the
activities of regulated funds, including foreign public funds, under
certain circumstances. ICI. The agencies note that such a change is
not within the scope of this rulemaking.
    \58\ IIB; SIFMA; and EBF.
---------------------------------------------------------------------------

    One trade association commenter suggested eliminating a provision
in the ``public offering'' requirement that prohibits a distribution
from being limited to investors with a minimum net worth or net
investment assets because some of its members distribute funds,
including mutual funds, in offerings that do not meet this requirement
but that are nonetheless subject to substantive disclosure and retail
investor protection requirements. Similar to the reasons for retaining
the requirement that a foreign public fund actually be sold through one
or more public offerings, the agencies believe that retaining this
requirement is necessary to ensure that funds qualifying for this
exclusion are sufficiently similar to U.S. registered investment
companies. In fact, one of the identifying characteristics of a covered
fund is that its offerings are limited to investors with minimum net
worth or net investment assets.\59\ The agencies therefore believe that
foreign funds that limit their offerings to investors with a minimum
net worth or net investment assets are generally not sufficiently
similar to U.S. registered investment companies, and thus the agencies
are not adopting this suggested change to the ``public offering''
definition.
---------------------------------------------------------------------------

    \59\ Under the Investment Company Act, certain funds whose
offerings are limited to investors with minimum net worth or net
investment assets are exempt from registration as investment
companies. See 15 U.S.C. 80a-3(c)(7). These funds are generally
treated as covered funds under section 13 of the BHC Act and the
implementing regulations. See 12 U.S.C. 1851(h)(2); implementing
regulations Sec.  __.10(b)(1)(i).
---------------------------------------------------------------------------

    One commenter opposed the proposed elimination of the requirement
in the ``public offering'' definition that a distribution comply with
all applicable requirements in the jurisdiction in which such
distribution is being made for a banking entity that does not serve as
the fund's investment manager, investment adviser, commodity trading
advisor, commodity pool operator, or sponsor.\60\ The final rule adopts
this modification as proposed, because the agencies believe the other
eligibility criteria for a fund to qualify under the foreign public
fund exclusion are sufficient to appropriately identify these funds. In
addition, the agencies recognize that it may be difficult or impossible
for a banking entity that invests in a third-party fund to know whether
the fund's distribution complied with all applicable requirements in
the jurisdiction where it was distributed.
---------------------------------------------------------------------------

    \60\ Data Boiler.
---------------------------------------------------------------------------

    One commenter recommended that the agencies require 85 percent of a
foreign public fund's ownership interests be sold to and owned by
``bona fide'' retail investors in the fund's home jurisdiction.\61\
However, for the same reasons that the agencies are eliminating the
home jurisdiction requirement and the requirement that a fund be sold
predominantly through public offerings,

the agencies are not adopting this requirement.
---------------------------------------------------------------------------

    \61\ Oleh Zadorestskyy. This commenter also suggested that the
agencies require proof that the investors were non-U.S. persons.
---------------------------------------------------------------------------

    Some commenters suggested that the agencies identify common foreign
fund types that are presumed to qualify for the exclusion for foreign
public funds for the purpose of improving efficiency and simplifying
compliance with the rule.\62\ Other commenters recommended that issuers
listed on an internationally-recognized exchange and available in
retail-level denominations should automatically qualify for the
exclusion for similar reasons.\63\ Although the agencies expect many
such funds will qualify for the exclusion, the agencies decline to
adopt either of these suggested changes, as both would require the
agencies' review and on-going monitoring of foreign laws and
regulations to ensure that the types of funds that would qualify under
these provisions are sufficiently similar to U.S. registered investment
companies and that their exclusion as foreign public funds would
continue to be appropriate.
---------------------------------------------------------------------------

    \62\ IIB and EBF.
    \63\ IIB; SIFMA; BPI; ABA; FSF; and CBA.
---------------------------------------------------------------------------

    Some commenters recommended that the agencies entirely eliminate
the restrictions on share ownership by parties affiliated with a U.S.
banking entity sponsor of a foreign public fund.\64\ Other commenters
suggested that, if the restrictions on share ownership by banking
entities affiliated with the sponsor were retained, the restrictions on
share ownership by senior executives and directors should be
removed.\65\ The commenters generally viewed these requirements as
unnecessary and burdensome to track and monitor. As discussed in the
preamble to the 2013 rule, these requirements are intended to prevent
evasion of section 13 of the BHC Act.\66\ Additionally, the agencies
note that U.S. banking entity sponsors of foreign public funds would
need to track the ownership of such funds by their affiliates and
management officials even if the requirements were eliminated in order
to determine whether they control such funds for BHC Act purposes.\67\
Thus, for a U.S. banking entity relying on this exclusion with respect
to a fund that it sponsors, the agencies are retaining the requirement
that the fund be sold predominantly to persons other than the U.S.
banking entity sponsor, the fund, affiliates of such sponsoring banking
entity or fund, and the directors and senior executive officers of such
entities (collectively, ``U.S. banking entity sponsor and associated
parties'').
---------------------------------------------------------------------------

    \64\ SIFMA and FSF.
    \65\ SIFMA; BPI; ICI; and CCMC.
    \66\ 79 FR 5678-79.
    \67\ See 12 CFR 225.2(e); 12 CFR 225.31(d)(2)(ii). If a foreign
public fund is controlled by a banking entity for BHC Act purposes,
such fund could also be being treated as a banking entity under
section 13. See implementing regulations Sec.  __.2(c); FAQ 14.
---------------------------------------------------------------------------

    Relatedly, some commenters recommended that the agencies modify
their expectation of the level of ownership of a foreign public fund
that would satisfy the requirement that a fund be ``predominantly''
sold to persons other than its U.S. banking entity sponsor and
associated parties,\68\ which, in the preamble to the 2013 rule, the
agencies stated was 85 percent or more (which would permit the U.S.
banking entity sponsor and associated parties to own the remaining 15
percent). These commenters asserted that the relevant ownership
threshold for U.S. registered investment companies is 25 percent, and
that, for foreign public funds, the threshold should be the same. The
agencies agree that the permitted ownership level of a foreign public
fund by a U.S. banking entity sponsor and associated parties should be
aligned with the functionally equivalent threshold for banking entity
investments in U.S. registered investment companies, which is 24.9
percent.\69\ Accordingly, the agencies have amended this provision in
the final rule to require that more than 75 percent of the fund's
interests be sold to persons other than the U.S. banking entity sponsor
and associated parties.\70\
---------------------------------------------------------------------------

    \68\ BPI; FSF; ICI; and CCMC.
    \69\ Although the implementing regulations do not explicitly
prohibit a banking entity from acquiring 25 percent or more of a
U.S. registered investment company, a U.S. registered investment
company would become a banking entity if it is affiliated with
another banking entity (other than as described in 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.'').
    \70\ For a U.S. banking entity that sponsors a foreign public
fund, crossing the 24.9 percent ownership threshold (other than
during a permitted seeding period) would cause the fund to be a
covered fund (if no other exclusion applied), in which case the
banking entity would be in violation of the 3 percent per-fund
investment limit. See implementing regulations Sec.
__.12(a)(2)(ii)(A). The agencies believe that such a strict
prohibition against a U.S. banking entity acquiring 25 percent or
more of a foreign public fund that it sponsors is appropriate
because of the elevated risk of evasion by the sponsoring banking
entity, which may be able to control the investments made by the
fund.
---------------------------------------------------------------------------

    One commenter recommended that, with respect to foreign public
funds sponsored by U.S. affiliates of foreign banking entities, the
agencies exclude the sponsoring U.S. banking entity's non-U.S.
affiliates and their directors and employees from the restrictions on
share ownership, provided that such non-U.S. affiliates are not
controlled by a U.S. banking entity.\71\ This commenter asserted that
there is no U.S. financial stability or safety and soundness benefit to
applying this restriction to such non-U.S. affiliates and their
directors and employees, as the risks of any such investments are borne
solely outside the United States. However, with the change described
above, which permits a U.S. banking entity sponsor and associated
parties to hold less than 25 percent of a foreign public fund, the
agencies do not believe that this change is necessary. Even if the
requirement were modified as the commenter suggested, the banking
entity and its affiliates would still be limited to owning less than 25
percent of the fund without the fund becoming a banking entity.
---------------------------------------------------------------------------

    \71\ IIB.
---------------------------------------------------------------------------

    One commenter requested that the agencies modify Sec.  __.12(b)(1)
of the implementing regulations, which governs attribution of ownership
interests in covered funds to banking entities, to clarify that the
banking entity ``or an affiliate'' can provide the advisory,
administrative, or other services required in Sec.  __.12(b)(1)(ii)(B)
for the non-attribution rule to apply. The commenter requested this
clarification because Sec.  __.12(b)(1)(ii)(B) is cross-referenced by
FAQ 14, which, as discussed above, states that a foreign public fund
will not be treated as a banking entity if it complies with the test in
Sec.  __.12(b)(1)(ii) (i.e., the banking entity holds less than 25
percent of the voting shares in the foreign public fund and provides
advisory, administrative, or other services to the fund). The agencies
confirm that the requested interpretation is correct and, accordingly,
have amended Sec.  __.12(b)(1)(ii) of the implementing regulations to
clarify that the ownership limit applies to the banking entity and its
affiliates, in the aggregate, and the requirement that the banking
entity provide advisory or other services can be satisfied by the
banking entity or its affiliates.
    One commenter noted that FAQ 16, which relates to the seeding
period for foreign public funds, uses 3 years as an example of the
duration of such a seeding period, and requested that the agencies
confirm that a foreign public fund's seeding period can be longer than

3 years.\72\ Another commenter requested that the agencies codify the
3-year seeding period in the implementing regulations.\73\ The agencies
believe that, depending on the facts and circumstances of a particular
foreign public fund, the appropriate duration of its seeding period may
vary and, under certain facts and circumstances, may exceed three
years. The agencies believe that this flexibility is appropriate and
thus decline to further specify such a limit. Another commenter
requested that the agencies codify the foreign public fund seeding
FAQ,\74\ FAQ 14, and FAQ 16, both described above, in the implementing
regulations.\75\ The agencies decline to codify these FAQs at this time
but note that the final rule does not modify or revoke any previously
issued staff FAQs, unless otherwise specified.
---------------------------------------------------------------------------

    \72\ IAA.
    \73\ CCMC.
    \74\ The foreign public fund seeding FAQ states that staffs of
the agencies would not advise that a seeding vehicle that is
operated pursuant to a written plan to become a foreign public fund
and that meets certain conditions be treated as a covered fund
during such seeding period.
    \75\ IIB.
---------------------------------------------------------------------------

    In the final rule, the agencies are adopting the amendments to the
foreign public funds exclusion as proposed, with the additional
modifications described above. The agencies believe the revised
requirements will make the foreign public fund exclusion more effective
by expanding its availability, providing clarity, and simplifying
compliance with its requirements, while continuing to ensure that the
funds that qualify are sufficiently similar to U.S. registered
investment companies.
2. Loan Securitizations
    Section 13 of the BHC Act provides that ``[n]othing in this section
shall be construed to limit or restrict the ability of a banking entity
. . . to sell or securitize loans in a manner otherwise permitted by
law.'' \76\ To effectuate this statutory mandate, the 2013 rule
excluded from the definition of covered fund loan securitizations that
issue asset-backed securities and hold only loans, certain rights and
assets that arise from the structure of the loan securitization or from
the loans supporting a loan securitization, and a small set of other
financial instruments (permissible assets).\77\
---------------------------------------------------------------------------

    \76\ 12 U.S.C. 1851(g)(2).
    \77\ 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. Implementing
regulations Sec.  __.2(t).
---------------------------------------------------------------------------

    Since the adoption of the 2013 rule, several banking entities and
other participants in the loan securitization industry have commented
that the limited set of permissible assets has inappropriately
restricted their ability to use the loan securitization exclusion. In
the 2018 proposal, the agencies asked several questions regarding the
efficacy and scope of the exclusion and the Loan Securitization
Servicing FAQ.\78\ Comments focused on permitting small amounts of non-
loan assets and clarifying the treatment of leases and related assets.
---------------------------------------------------------------------------

    \78\ 83 FR 33480-81.
---------------------------------------------------------------------------

    In response to these concerns, the 2020 proposal would have
codified the Loan Securitization Servicing FAQ and permitted loan
securitizations to hold a small amount of non-loan assets. The agencies
requested comment on all aspects of the proposed changes to the loan
securitization exclusion, and comments were generally supportive of the
proposed revisions.\79\ Several commenters also suggested revisions to
the 2020 proposal.\80\ Comments are discussed in detail below.\81\
---------------------------------------------------------------------------

    \79\ E.g., SIFMA; BPI; Managed Funds Association (MFA); PNC
Financial Services Group, Inc. (PNC); Goldman Sachs; Loan
Syndications and Trading Association (LSTA); and Structured Finance
Association (SFA).
    \80\ E.g., SIFMA; CCMC; BPI; and IIB.
    \81\ One commenter suggested that some jurisdictions' risk
retention rules may vary from the regulations implementing section
15G of the Exchange Act (15 U.S.C. 78o-11), which requires a banking
entity to retain and maintain a certain minimum interest in certain
asset-backed securities. See IIB. This commenter recommended
allowing banking entities to hold certain investments in compliance
with certain foreign laws (e.g., European risk retention rules). The
agencies understand that rules for risk retention vary across
jurisdictions. However, the agencies believe that the requested
action is outside the scope of the current rulemaking. In addition,
another commenter requested that the agencies clarify the definition
of asset-backed securities as used in the loan securitization
exclusions. See Arnold & Porter Kaye Scholer LLP (Arnold & Porter).
The agencies discuss the definition of asset-backed securities in
Section IV.C.1.iii (Credit Funds), infra.
---------------------------------------------------------------------------

Servicing Assets
    The implementing regulations permit loan securitizations to hold
rights or other assets (servicing assets) that arise from the structure
of the loan securitization or from the loans supporting a loan
securitization.\82\ Rights or other servicing assets are assets
designed to facilitate the servicing of the underlying loans or the
distribution of proceeds from those loans to holders of the asset-
backed securities.\83\ In response to confusion regarding the scope of
the provisions permitting servicing assets and a separate provision
limiting the types of permitted securities, the staffs of the agencies
released the Loan Securitization Servicing FAQ. The FAQ clarified that
a servicing asset may or may not be a security, but if the servicing
asset is a security, it must be a permitted security under the rule.
---------------------------------------------------------------------------

    \82\ Sec. Sec.  __.2(t); __.10(c)(8)(i)(D); __.10(c)(8)(v).
    \83\ See, e.g., FASB Statement No. 156: Accounting for Servicing
of Financial Assets, ] 61 (FAS 156).
---------------------------------------------------------------------------

    The 2020 proposal would have codified the Loan Securitization
Servicing FAQ in the implementing regulations to clarify the scope of
the servicing asset provision.\84\ Commenters generally supported the
codification of the Loan Securitization Servicing FAQ, indicating that
such a codification would promote transparency and ensure continued use
of the loan securitization exclusion.\85\ For the above reasons, the
final rule adopts the codification of the Loan Securitization Servicing
FAQ as proposed.
---------------------------------------------------------------------------

    \84\ The 2020 proposal also clarified that special units of
beneficial interest and collateral certificates meeting the
requirements of paragraph (c)(8)(v) of the exclusion that are
securities need not meet the requirements of paragraph (c)(8)(iii)
of the exclusion. See 2020 proposal Sec.  __.10(c)(8)(i)(B). The
agencies are adopting this revision, as proposed.
    \85\ E.g., SIFMA; PNC; and SFA. One commenter indicated that the
current Loan Securitization Servicing FAQ was sufficient and that
codifying the FAQ was not necessary; however, the commenter did not
elaborate on or justify this position. Data Boiler.
---------------------------------------------------------------------------

Cash Equivalents
    The loan securitization exclusion permits issuers relying on the
exclusion to hold certain types of contractual rights or assets related
to the loans underlying the securitization, including cash equivalents.
In response to questions about the scope of the cash equivalents
provision, the Loan Securitization Servicing FAQ stated that ``cash
equivalents'' means high quality, highly liquid investments whose
maturity corresponds to the securitization's expected or potential need
for funds and whose currency corresponds to either the underlying loans
or the asset-backed securities.\86\ To promote transparency and
clarity, the 2020 proposal would have codified this additional language
in the Loan Securitization Servicing FAQ regarding the meaning of
``cash equivalents.'' \87\ The agencies did not propose requiring
``cash equivalents'' to be ``short term,'' because the agencies
recognized that a loan securitization may need greater flexibility to
match the maturity of high quality, highly liquid investments to its
expected or potential need for funds. Commenters generally supported
the codification of the definition of ``cash equivalents'' in the loan
securitization

exclusion.\88\ The final rule adopts the codification of ``cash
equivalents'' as proposed.
---------------------------------------------------------------------------

    \86\ See supra, n.14.
    \87\ 2020 proposed rule Sec.  __.10(c)(8)(iii)(A).
    \88\ E.g., LSTA; PNC; and SIFMA. One commenter expressed
opposition to this codification but did not elaborate or justify
this position. See Data Boiler.
---------------------------------------------------------------------------

Limited Holdings of Certain Debt Securities
    In the preamble to the 2013 rule, the agencies declined to permit
loan securitizations to hold a certain amount of non-loan assets.\89\
The agencies supported a narrow scope of permissible assets in loan
securitizations, suggesting that such an approach would be consistent
with the purpose of section 13 of the BHC Act.\90\
---------------------------------------------------------------------------

    \89\ 79 FR 5687-88.
    \90\ 79 FR 5687.
---------------------------------------------------------------------------

    Several commenters on the 2018 proposal disagreed with the
agencies' views and supported expanding the range of permissible assets
in an excluded loan securitization. After considering the comments
received on the 2018 proposal, the 2020 proposal would have allowed a
loan securitization vehicle to hold up to five percent of the fund's
total assets in non-loan assets. The agencies indicated that
authorizing loan securitizations to hold small amounts of non-loan
assets could, consistent with section 13 of the BHC Act, permit loan
securitizations to respond to investor demand and reduce compliance
costs associated with the securitization process without significantly
increasing risk to banking entities and the financial system.\91\ The
agencies requested comment on, among other things, the maximum amount
of permitted non-loan assets, the methodology for calculating the cap
on non-loan assets, and whether the agencies should limit the type of
assets that could be held under the non-loan asset provision.
Specifically, the agencies requested comment on whether the non-loan
asset provision should be limited to debt securities or should exclude
certain financial instruments such as derivatives and collateralized
debt obligations.
---------------------------------------------------------------------------

    \91\ 85 FR 12128-29.
---------------------------------------------------------------------------

    Commenters were generally supportive of allowing loan
securitizations to hold a limited amount of non-loan assets.\92\ These
commenters indicated that the requirements for the current loan
securitization exclusion are too restrictive and excessively limit use
of the exclusion and prevent issuers from responding to investor
demand, and suggested that a limited bucket of non-loan assets would
not fundamentally alter the characteristics and risks of
securitizations or otherwise increase risks in banking entities or the
financial system.\93\
---------------------------------------------------------------------------

    \92\ E.g., SIFMA; CCMC; ABA; Credit Suisse; MFA; Goldman Sachs;
LSTA; BPI; and SFA.
    \93\ E.g., LSTA and Goldman Sachs.
---------------------------------------------------------------------------

    Several commenters recommended against limiting the type of assets
that could be held per the non-loan asset provision.\94\ For example,
one commenter stated that allowing excluded loan securitizations to
invest in any class of asset would allow those vehicles to achieve
investment goals during periods of constrained loan supply, while
another commenter indicated that such a restriction would be
unnecessary given that the low limit on non-loan assets would constrain
risks.\95\ In contrast, one commenter suggested limiting the type of
permissible assets to securities with risk characteristics similar to
loans.\96\
---------------------------------------------------------------------------

    \94\ E.g., MFA; LSTA; and SFA. One commenter also requested that
the agencies make clear that the non-loan assets would not be
subject to the other provisions of the loan securitization
exclusion. LSTA.
    \95\ SFA and LSTA.
    \96\ JBA.
---------------------------------------------------------------------------

    Numerous commenters suggested raising the cap on non-loan assets
from five percent of assets to ten percent of assets,\97\ while one
commenter indicated that a five percent cap would be sufficient.\98\
Commenters that supported an elevated limit on non-loan assets
generally argued that a ten percent limit would further reduce
compliance burdens while not materially increasing risk.\99\
---------------------------------------------------------------------------

    \97\ SIFMA; CCMC; ABA; Credit Suisse; MFA; Goldman Sachs; LSTA;
and SFA.
    \98\ PNC. Another commenter who generally supported the proposed
modifications to the loan securitization exclusion did not urge the
agencies to raise the cap on non-loan assets. See BPI.
    \99\ E.g., LSTA; SIFMA; and Goldman Sachs.
---------------------------------------------------------------------------

    Several commenters also suggested a method for calculating the cap
on non-loan assets: The par value of assets on the day they are
acquired.\100\ These commenters suggested that relying on par value is
accepted practice in the loan securitization industry and would obviate
concerns related to tracking amortization or prepayment of loans in a
securitization portfolio.\101\ One of these commenters further
specified that the limit should be calculated (1) according to the par
value of the acquired assets on the date of investment over the
securitization's total collateral pool and (2) only at the time of
investment.\102\ Another commenter indicated that the cap should be
calculated as the lower of the purchase price and par value of the non-
qualifying assets over the issuer's aggregate capital commitments plus
its subscription based credit facility.\103\ A third commenter
suggested having a separate valuation mechanism for equity securities,
which the commenter suggested should be market value upon
acquisition.\104\
---------------------------------------------------------------------------

    \100\ SIFMA; BPI; ABA; and LSTA.
    \101\ SIFMA and BPI.
    \102\ BPI.
    \103\ Goldman Sachs.
    \104\ SFA.
---------------------------------------------------------------------------

    Finally, two commenters opposed allowing excluded loan
securitizations to hold non-loan assets and suggested that such a
change would be contrary to the purpose of section 13 of the BHC Act or
would result in loan securitizations with differing risk
characteristics, potentially increasing monitoring costs on
investors.\105\ In addition, a commenter claimed that the 2020 proposal
to allow excluded loan securitizations to hold non-loan assets would be
contrary to section 13 of the BHC Act.\106\ Specifically, this
commenter suggested that the rule of construction in 12 U.S.C.
1851(g)(2) only permits the securitization or sale of loans and that
legislative history supports this reading of the statute.
---------------------------------------------------------------------------

    \105\ JBA and Data Boiler.
    \106\ Occupy.
---------------------------------------------------------------------------

    The agencies previously concluded and continue to believe they have
legal authority to adopt the proposed allowance for a limited amount of
non-loan assets.\107\ Section 13(g)(2) of the BHC Act states,
``[n]othing in this section shall be construed to limit or restrict the
ability of a banking entity or nonbank financial company supervised by
the Board to sell or securitize loans in a manner otherwise permitted
by law.'' \108\ This rule of construction is permissive--it allows the
agencies to design the regulations implementing section 13 in a way
that accommodates and does not unduly ``limit or restrict'' the ability
of banking entities to sell or securitize loans. Contrary to the
commenter's argument, this provision does not mandate that any loan
securitization exclusion only relate to loans. As discussed in this
section and the preamble to the 2020 proposal,\109\ the agencies
believe that allowing excluded loan securitizations to hold limited
amounts of non-loan assets would, in fact, promote the ability of

banking entities to sell or securitize loans.
---------------------------------------------------------------------------

    \107\ See 79 FR 5688-92 (stating, for example, that ``[t]he
[a]gencies also do not believe that they lack the statutory
authority to permit a loan securitization relying on the loan
securitization exclusion to use derivative[s,] as suggested by
[Occupy]'' and that, more broadly, the agencies have the authority
to allow excluded loan securitizations to hold non-loan assets).
    \108\ 12 U.S.C. 1851(g)(2).
    \109\ 85 FR 12128-29.
---------------------------------------------------------------------------

    After considering the foregoing comments, the agencies are revising
the loan securitization exclusion to permit a loan securitization to
hold a limited amount of debt securities. Loan securitizations provide
an important mechanism for banking entities to fund lending programs.
Allowing loan securitizations to hold a small amount of debt securities
in response to customer and market demand may increase a banking
entity's capacity to provide financing and lending. To minimize the
potential for banking entities to use this exclusion to engage in
impermissible activities or take on excessive risk, the final rule
permits a loan securitization to hold debt securities (excluding asset-
backed securities and convertible securities), as opposed to any non-
loan assets, as the 2020 proposal would have allowed.\110\
---------------------------------------------------------------------------

    \110\ Final rule Sec.  __.10(c)(8)(i)(E).
---------------------------------------------------------------------------

    Although several commenters supported allowing a loan
securitization to hold any non-loan asset to provide flexibility and
allow the issuer's investment manager to respond to changing market
demands, the agencies believe that limiting the assets to debt
securities is more consistent with the activities of an issuer focused
on securitizing loans, rather than engaging in other activities. The
agencies have determined, consistent with the views of another
commenter, that non-loan assets with materially different risk
characteristics from loans could change the character and complexity of
an issuer and raise the type of concerns that section 13 of the BHC Act
was intended to address. Moreover, as described further below, limiting
the assets to those with risk characteristics that are similar to loans
will allow for a simpler and more transparent calculation of the five
percent limit, which will facilitate banking entities' compliance with
the exclusion. For the same reasons, the final rule does not permit a
loan securitization to hold asset-backed securities or convertible
securities as part of its five percent allowance for debt securities.
This helps to ensure that a loan securitization will not be exposed to
complex financial instruments and will retain the general
characteristic of a loan securitization issuer.
    Similarly, to reduce potential risk-taking and to ensure that the
fund is composed almost entirely of loans with minimal non-loan assets,
the final rule retains the 2020 proposal's five percent limit on non-
loan assets. Commenters differed on whether raising the limit on non-
loan assets was appropriate or necessary to ensure flexibility, and it
is not clear what benefit would accrue to issuers who could hold debt
securities of, for example, seven or ten percent versus five percent.
The amount of non-loan assets held by a fund should not be so
significant that it fundamentally changes the character of the fund
from one that is engaged in securitizing loans to one that is engaged
in investing in other types of assets.
    The agencies are also clarifying the methodology for calculating
the five percent limit on non-convertible debt securities.\111\ The
2020 proposal only provided that ``the aggregate value of any such
other assets must not exceed five percent of the aggregate value of the
issuing entity's assets'' and requested comment about how the agencies
should calculate this limit.\112\ As suggested by several commenters,
the final rule specifies that the limit on non-convertible debt
securities must be calculated at the most recent time of acquisition of
such assets. Specifically, the aggregate value of debt securities held
under Sec.  __.10(c)(8)(i)(E) of the final rule may not exceed five
percent of the aggregate value of loans held under Sec.
__.10(c)(8)(i)(A), cash and cash equivalents held under Sec.
__.10(c)(8)(iii)(A), and debt securities held under Sec.
__.10(c)(8)(i)(E), where the value of the loans, cash and cash
equivalents, and debt securities is calculated at par value at the time
any such debt security is purchased.\113\
---------------------------------------------------------------------------

    \111\ Final rule Sec.  __.10(c)(8)(i)(E)(1)-(2).
    \112\ 2020 proposal Sec.  __.10(c)(8)(i)(E); 85 FR 12129.
    \113\ Final rule Sec.  __.10(c)(8)(i)(E)(1)-(2).
---------------------------------------------------------------------------

    The agencies have chosen the most recent time of acquisition of
non-convertible debt securities as the moment of calculation to
simplify the manner in which the 5 percent cap applies. This would
permit an issuer that, at some point in its life, held debt securities
in excess of five percent of its assets to qualify for the exclusion if
it came into compliance with the five percent limit prior to a banking
entity relying on the exclusion with respect to such issuer. The
agencies believe that a continuous monitoring obligation could impose
significant burdens on excluded issuers and could cause an issuer to be
disqualified from the loan securitization exclusion based on market
events not under its control. It is also unnecessary to require this
calculation at other intervals because limiting permissible assets to
those that have similar characteristics as loans addresses the
potential for evasion of the five percent limit that could arise if the
issuer held more volatile assets.\114\
---------------------------------------------------------------------------

    \114\ The agencies also have authority to address acts that
function as an evasion of the requirements of the exclusion. See
implementing regulations Sec.  __.21.
---------------------------------------------------------------------------

    In the final rule, this measurement is based only on the value of
the loans and debt securities held under Sec. Sec.  __.10(c)(8)(i)(A)
and (E) and the cash and cash equivalents held under Sec.
__.10(c)(8)(iii)(A) rather than the aggregate value of all of the
issuing entity's assets. The purpose of the five percent limit is to
ensure the investment pool of a loan securitization is composed of
loans. Therefore, the calculation takes into account the assets that
should make up the issuing entity's investment pool and excludes the
value of other rights or incidental assets, as well as derivatives held
for risk management. This further simplifies the calculation
methodology by excluding assets that may be more complex to value and
that are ancillary to the loan securitization's investment activities.
This straightforward calculation methodology will ensure that the loan
securitization exclusion remains easy to use and will facilitate
banking entities' compliance with the exclusion.
    The agencies recognize that a loan securitization's transaction
agreements may require that some categories of loans, cash equivalents,
or debt securities be valued at fair market value for certain purposes.
To accommodate such situations, the exclusion provides that the value
of any loan, cash equivalent, or permissible debt security may be based
on its fair market value if (1) the issuing entity is required to use
the fair market value of such loan or debt security for purposes of
calculating compliance with concentration limitations or other similar
calculations under its transaction agreements and (2) the issuing
entity's valuation methodology values similarly situated assets, for
example non-performing loans, consistently. This provision is intended
to provide issuers with the flexibility to leverage existing
calculation methodologies while preventing issuers from using
inconsistent methodologies in a manner to evade the requirements of the
exclusion.
Leases
    A commenter on the 2018 proposal suggested that the loan
securitization exclusion be expanded to cover leases and related
assets, including operating or capital leases.\115\ In response, in the
2020 proposal the agencies stated that they were ``not proposing to
separately

list leases within the loan securitization exclusion because leases are
included in the definition of loan and thus are permitted assets for
loan securitizations under the current exclusion.'' \116\ That same
commenter made a comment on the 2020 proposal urging the agencies to
reconsider explicitly including operating leases and leased properties
in the loan securitization exclusion.\117\ This commenter asserted that
unless the agencies specifically revise the definition of ``rights or
other assets'' to explicitly include leased property, then
securitization vehicles with operating leases that rely on the residual
property value after expiration of the lease to support their asset-
backed securities would not be able to qualify under the loan
securitization exemption, despite the 2013 rule's provisions for
special units of beneficial interest and collateral certificates.
---------------------------------------------------------------------------

    \115\ See 85 FR 12128.
    \116\ Id.
    \117\ SFA.
---------------------------------------------------------------------------

    Consistent with the 2020 proposal, the agencies are not separately
listing leases within the loan securitization exclusion because leases
are included in the definition of loan and thus are permitted assets
for loan securitizations under the current exclusion. The agencies are
also not modifying the definition of ``rights or other assets'' to
explicitly include leased property, as any residual value of such
leased property upon expiration of an operating lease should meet the
requirements to constitute an asset that is related or incidental to
purchasing or otherwise acquiring and holding loans.
3. Public Welfare and Small Business Funds
i. Public Welfare Funds
    Section 13(d)(1)(E) of the BHC Act permits, among other things, a
banking entity to make and retain investments that are designed
primarily to promote the public welfare of the type permitted under 12
U.S.C. 24(Eleventh).\118\ Consistent with the statute, the implementing
regulations exclude from the definition of ``covered fund'' issuers
that make investments that are designed primarily to promote the public
welfare, of the type permitted under paragraph 11 of section 5136 of
the Revised Statutes of the United States (12 U.S.C. 24), including the
welfare of low- and moderate-income communities or families (such as
providing housing, services, or jobs) (the public welfare investment
exclusion).\119\
---------------------------------------------------------------------------

    \118\ See 12 U.S.C. 1851(d)(1)(E).
    \119\ Implementing regulations Sec.  __.10(c)(11)(ii)(A).
---------------------------------------------------------------------------

    The 2020 proposal noted that the OCC's regulations implementing 12
U.S.C. 24(Eleventh) provide that investments that receive consideration
as qualified investments under the regulations implementing the
Community Reinvestment Act (CRA) are public welfare investments for
national banks.\120\ The 2020 proposal requested comment on whether any
change should be made to clarify that all permissible public welfare
investments, under any agency's regulation, are excluded from the
covered fund restrictions.\121\ The 2020 proposal specifically asked
whether investments that would receive consideration as qualified
investments under the CRA should be excluded from the definition of
covered fund, either by incorporating these investments into the public
welfare investment exclusion or by establishing a new exclusion for
CRA-qualifying investments.\122\
---------------------------------------------------------------------------

    \120\ See 85 FR 12130; 12 CFR 24.3.
    \121\ See 85 FR 12130 (noting that such a change could provide
additional certainty regarding community development investments
made through fund structures).
    \122\ See id.
---------------------------------------------------------------------------

    In addition, the 2020 proposal requested comment on whether Rural
Business Investment Companies (RBICs) are typically excluded from the
definition of ``covered fund'' because of the public welfare investment
exclusion or another exclusion and on whether the agencies should
expressly exclude RBICs from the definition of covered fund.\123\ RBICs
are licensed under a program designed to promote economic development
and job creation in rural communities by investing in companies
involved in the production, processing, and supply of food and
agriculture-related products.\124\
---------------------------------------------------------------------------

    \123\ See id.
    \124\ See id.
---------------------------------------------------------------------------

    The Tax Cuts and Jobs Act established the ``opportunity zone''
program to provide tax incentives for long-term investing in designated
economically distressed communities.\125\ The program allows taxpayers
to defer and reduce taxes on capital gains by reinvesting gains in
``qualified opportunity funds'' (QOF) that are required to have at
least 90 percent of their assets in designated low-income zones.\126\
The 2020 proposal requested comment on whether many or all QOFs would
meet the terms of the public welfare investment exclusion and on
whether the agencies should expressly exclude QOFs from the definition
of covered fund.\127\
---------------------------------------------------------------------------

    \125\ See id.
    \126\ See id.
    \127\ See id.
---------------------------------------------------------------------------

    Commenters generally supported clarifying that funds that make
investments that qualify for consideration under the CRA qualify for
the public welfare investment exclusion.\128\ Commenters noted that
this clarification would be consistent with the OCC's regulations
concerning public welfare investments and the CRA, provide greater
certainty, and avoid unnecessarily chilling public welfare investment
activities.\129\ One commenter stated that some banking entities have
been reluctant to invest in certain community development funds due to
uncertainty as to whether these funds were covered funds.\130\ This
commenter stated that explicitly excluding funds that qualify for
consideration under the CRA from the definition of covered fund would
eliminate this uncertainty and would help support the type of community
development efforts that the public welfare investment exclusion was
designed to promote.\131\ In addition, some commenters recommended
excluding funds that qualify for the public welfare investment
exclusion from the definition of ``banking entity.'' \132\
---------------------------------------------------------------------------

    \128\ See SIFMA; FSF; BPI; ABA; PNC; Community Development
Venture Capital Alliance (CDVCA); IIB; and Data Boiler (stating that
incorporating the CRA public welfare exemption may ease some
challenges faced by communities during the current COVID pandemic,
but all PWI should not be excluded).
    \129\ See SIFMA; FSF; and CDVCA.
    \130\ See CDVCA.
    \131\ See id.
    \132\ See SIFMA; BPI; ABA; and IIB.
---------------------------------------------------------------------------

    Commenters also generally favored explicitly excluding RBICs and
QOFs from the definition of ``covered fund,'' either by adopting new
exclusions, or by clarifying the scope of the public welfare investment
exclusion.\133\ Commenters stated that explicitly excluding these funds
from the definition of ``covered fund'' would be consistent with the
statutory provision permitting public welfare investments. Commenters
stated that RBICs and QOFs must make investments that are clearly
designed primarily to promote the public welfare because they are
required to invest primarily in ways that promote job creation in rural
communities (which may have significant low- and moderate-income
populations or be economically disadvantaged and in need of
revitalization or stabilization) and in economically distressed
communities, respectively.\134\ Commenters stated that

certain RBICs and QOFs qualify for the public welfare investment
exclusion, but providing an express exclusion for these funds would
reduce uncertainty and associated compliance burdens and would
encourage banking entities to provide capital to projects that promote
economic development in rural and low-income communities.\135\ One
commenter stated that RBICs and QOFs engage in investments that are
substantively similar or identical to those of public welfare
investment funds that are already excluded from the definition of
covered fund and of the type that Congress recognized that section 13
of the BHC Act was not designed to prohibit.\136\ Another commenter
stated that explicitly excluding RBICs would result in the provision of
valuable expertise and services to RBICs and provide funding and
assistance to small businesses and low- and moderate-income
communities.\137\ One commenter expressed skepticism about providing a
new exclusion for RBICs and QOFs but suggested that certain of these
funds may currently qualify for the public welfare investment
exclusion.\138\ Another commenter stated that it is not necessary to
expressly exclude QOFs from the definition of covered fund, noting that
these funds should be of the type primarily intended to promote the
public welfare of low- and moderate-income areas and should therefore
qualify for the current public welfare investment exclusion.\139\
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    \133\ See SIFMA; FSF; ABA (addressing QOFs); and Small Business
Investor Alliance (SBIA) (addressing RBICs).
    \134\ See SIFMA and FSF.
    \135\ See SIFMA and FSF.
    \136\ See SIFMA.
    \137\ See SBIA.
    \138\ See Data Boiler.
    \139\ See PNC.
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    After carefully considering the comments received, the agencies are
revising the public welfare investment exclusion to explicitly
incorporate funds, the business of which is to make investments that
qualify for consideration under the Federal banking agencies'
regulations implementing the CRA.\140\ Explicitly excluding these types
of investments from the definition of covered fund clarifies and gives
full effect to the statutory exemption for public welfare
investments.\141\ In addition, this clarification will reduce
uncertainty and will facilitate public welfare investments by banking
entities.
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    \140\ Final rule Sec.  __.10(c)(11)(ii)(A).
    \141\ See 12 U.S.C. 1851(d)(1)(E). A banking entity must have
independent authority to make a public welfare investment. For
example, a banking entity that is a state member bank may make a
public welfare investment to the extent permissible under 12 U.S.C.
338a and 12 CFR 208.22.
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    The agencies are also adopting explicit exclusions from the
definition of covered fund for RBICs and QOFs in Sec.  __.10(c)(11) of
the final rule. These types of funds were created by Congress to
promote development in rural and low-income communities, and, due to
their similarity to SBICs and public welfare investments, the agencies
believe that section 13 of the BHC Act was not intended to restrict the
types of funds that engage in those activities. RBICs are companies
licensed under the Rural Business Investment Program, a program
designed to promote economic development and the creation of wealth and
job opportunities among individuals living in rural areas and to help
meet the equity capital investment needs primarily of smaller
enterprises located in such areas.\142\ Likewise, QOFs were developed
as part of a program to promote long-term investing in designated
economically distressed communities and are required to have at least
90 percent of their assets in designated low-income zones.\143\
Congress created RBICs and QOFs to encourage investment in rural areas,
small enterprises, and low-income areas. Providing an explicit
exclusion for these funds in the implementing regulations gives effect
to section 13 of the BHC Act's provision permitting public welfare
investments and avoids chilling the activities of funds that were not
the target of section 13 of the BHC Act.\144\ Although many of these
funds may already qualify for the public welfare investment exclusion,
the agencies are explicitly excluding these funds from the definition
of covered fund to reduce uncertainty and compliance burden. Thus,
under the final rule, a covered fund does not include an issuer that
has elected to be regulated or is regulated as a RBIC, as described in
15 U.S.C. 80b-3(b)(8)(A) or (B), or that has terminated its
participation as a RBIC in accordance with 7 CFR 4290.1900 and does not
make any new investments (other than investments in cash equivalents,
which, for the purposes of this paragraph, means high quality, highly
liquid investments whose maturity corresponds to the issuer's expected
or potential need for funds and whose currency corresponds to the
issuer's assets) after such termination.\145\ Likewise, under the final
rule, a covered fund does not include an issuer that is a QOF, as
defined in 26 U.S.C. 1400Z-2(d).\146\
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    \142\ See, e.g., Rural Business Investment Company (RBIC)
Program, 85 FR 16519, 16520 (Mar. 24, 2020).
    \143\ See 26 U.S.C. 1400Z-2(d).
    \144\ See 12 U.S.C. 1851(d)(1)(E); 156 Cong. Rec. S5896 (daily
ed. July 15, 2010) (Statement of Sen. Merkley) (noting that Section
13(d)(1)(E) permits investments ``of the type'' permitted under 12
U.S.C. 24 (Eleventh), including ``a range of low-income community
development and other projects,'' but ``is flexible enough to permit
the [agencies] to include other similar low-risk investments with a
public welfare purpose'').
    \145\ Final rule Sec.  __.10(c)(11)(iii). As with SBICs,
discussed below, the final rule contemplates that an issuer that
ceases to be a RBIC during wind-down may continue to qualify for the
exclusion from the definition of ``covered fund'' for RBICs if the
issuer satisfies certain conditions designed to prevent abuse.
    \146\ Final rule Sec.  __.10(c)(11)(iv). As with other types of
issuers excluded from the covered fund definition, a banking entity
must have independent authority to invest in a QOF.
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    The final rule does not exclude funds that qualify for the public
welfare investment exclusion from the definition of ``banking entity''
as requested by some commenters.\147\ The term ``banking entity'' is
specifically defined in section 13 of the BHC Act.\148\ In addition,
the agencies do not believe that applying the definition of banking
entity places an undue burden on banking entities' public welfare
investments. The agencies believe that banking entities are able to
design their permissible public welfare investments so as not to cause
the investment fund to become a banking entity. For public welfare
investment funds that are banking entities, the agencies believe that
the burden-reducing amendments adopted in this final rule and the 2019
amendments should mitigate concerns about compliance burdens.
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    \147\ See SIFMA and BPI.
    \148\ 12 U.S.C. 1851(h)(1).
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ii. Small Business Investment Companies
    Consistent with section 13 of the BHC Act,\149\ the implementing
regulations exclude from the definition of ``covered fund'' SBICs and
issuers that have received notice from the Small Business
Administration to proceed to qualify for a license as an SBIC, which
notice or license has not been revoked.\150\ The agencies proposed
revising the exclusion for SBICs to clarify how the exclusion would
apply to SBICs that surrender their licenses during wind-down
phases.\151\ Specifically, the agencies proposed revising the exclusion
for SBICs to apply explicitly to an issuer that has voluntarily
surrendered its license to operate as an SBIC in accordance with 13 CFR
107.1900 and does not make new investments (other than investments in
cash equivalents) after such voluntary

surrender.\152\ The agencies explained that applying the exclusion to
an issuer that has surrendered its SBIC license is appropriate because
of the statutory exemption for investments in SBICs and because banking
entities may otherwise become discouraged from investing in SBICs due
to concerns that an SBIC may become a covered fund during its wind-down
phase.\153\ The agencies further noted that the proposed revisions
included a number of requirements designed to ensure that the exclusion
would not be abused.\154\ In particular, the exclusion would apply only
to an issuer that voluntarily surrenders its license in accordance with
13 CFR 107.1900 and that does not make any new investments (other than
investments in cash equivalents).\155\
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    \149\ See 12 U.S.C. 1851(d)(1)(E) (permitting investments in
SBICs).
    \150\ See implementing regulations Sec.  __.10(c)(11)(i).
    \151\ See 85 FR 12131.
    \152\ See id.
    \153\ See id.; 12 U.S.C 1851(d)(1)(E).
    \154\ See 85 FR 12131.
    \155\ See id.
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    Most commenters that directly addressed the 2020 proposal's
revisions concerning SBICs supported the proposed revisions, stating
that the proposed revisions would provide greater certainty to banking
entities wishing to invest in SBICs and would increase investment in
small businesses.\156\ One commenter stated that revising the exclusion
for SBICs would prevent a banking entity from being forced to sell an
interest in an SBIC that became a covered fund for reasons outside of
the banking entity's control.\157\ Commenters further noted that the
proposed revisions included sufficient safeguards against evasion and
did not present safety or soundness concerns.\158\ One commenter
recommended against revising the exclusion from the definition of
covered fund for SBICs. This commenter expressed concern about frequent
buying and selling of SBICs and noted that section 13 of the BHC Act
and its implementing regulations do not prohibit a banking entity from
lending to small businesses.\159\ The commenter further expressed
concern that an SBIC that surrenders its license may be doing so
because it has failed or no longer wishes to comply with the Small
Business Administration's regulations.\160\
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    \156\ See SIFMA; BPI; ABA; PNC; and SBIA.
    \157\ See SBIA.
    \158\ See SIFMA; BPI; and SBIA.
    \159\ See SIFMA; BPI; and SBIA.
    \160\ See Data Boiler.
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    After carefully considering the comments received, the agencies are
adopting the revisions to the exclusion from the definition of covered
fund for SBICs, as proposed.\161\ The revisions will provide greater
certainty to banking entities, give full effect to the provision of
section 13 of the BHC Act that permits investments in SBICs, and
support capital formation for small businesses. In response to one
commenter's concerns regarding the exclusion for SBICs,\162\ the
agencies note that a banking entity's investment in an SBIC must comply
with all applicable laws and regulations, including the prohibition
against proprietary trading under section 13 of the BHC Act and its
implementing regulations. Furthermore, as noted above, the revised
exclusion for SBICs includes safeguards designed to prevent abuse or
evasion. In particular, the exclusion would only apply to an issuer
that has voluntarily surrendered its license to operate as an SBIC in
accordance with 13 CFR 107.1900 and that does not make new investments
(other than investments in cash equivalents) after such voluntary
surrender.
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    \161\ See final rule Sec.  __10(c)(11)(i).
    \162\ See Data Boiler.
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C. Additional Covered Fund Exclusions

    In addition to modifying certain existing exclusions, the agencies
are creating four new exclusions from the definition of ``covered
fund'' to better tailor the provision to the types of entities that
section 13 was intended to cover. These exclusions are for credit
funds, venture capital funds, family wealth management vehicles, and
customer facilitation vehicles.
General Comments
    Many commenters were broadly supportive of the proposed new
exclusions from the definition of ``covered fund.'' \163\ Some
commenters recommended adopting additional exclusions for an array of
fund types and situations, including for tender bond vehicles,\164\
ownership interests erroneously acquired or retained,\165\ certain real
estate funds,\166\ and funds in their seeding period.\167\ The agencies
are declining to adopt these suggested exclusions because the requested
actions are outside the scope of the current rulemaking. In addition,
one commenter urged the agencies to redefine the definition of
``covered fund,'' to rely on a characteristics-based approach.\168\ The
agencies decline to revise the definition of ``covered fund'' for the
reasons articulated in the preamble to the 2013 rule.\169\
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    \163\ E.g., SIFMA; JBA; Credit Suisse; and SAF.
    \164\ SIFMA.
    \165\ SIFMA and BPI.
    \166\ IAA.
    \167\ ABA.
    \168\ JBA.
    \169\ See 79 FR 5671.
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1. Credit Funds
i. Background and 2020 Proposal
    In the preamble to the 2013 rule, the agencies declined to
establish an exclusion from the definition of covered fund for funds
that make loans, invest in debt, or otherwise extend the type of credit
that banking entities may provide directly under applicable banking law
(credit funds).\170\ The agencies cited concerns about whether credit
funds could be distinguished from private equity funds and hedge funds
and the possible evasion of the requirements of section 13 of the BHC
Act through the availability of such an exclusion. In addition, the
agencies suggested that some credit funds would be able to operate
using other exclusions from the definition of covered fund in the 2013
rule, such as the exclusion for joint ventures or the exclusion for
loan securitizations.\171\
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    \170\ See 79 FR 5705.
    \171\ Id.
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    However, commenters on the 2018 proposal noted that many credit
funds have not been able to utilize the joint venture and loan
securitization exclusions. In response, the agencies included in the
2020 proposal a specific exclusion for credit funds. Under the 2020
proposal, a credit fund would have been an issuer whose assets consist
solely of:
     Loans;
     Debt instruments;
     Related rights and other assets that are related or
incidental to acquiring, holding, servicing, or selling loans, or debt
instruments; and
     Certain interest rate or foreign exchange
derivatives.\172\
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    \172\ 2020 proposal Sec.  __.10(c)(15)(i).
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    The proposed exclusion would have been subject to certain
additional requirements to reduce evasion concerns and help ensure that
banking entities invest in, sponsor, or advise credit funds in a safe
and sound manner. For example, the proposed exclusion would have
imposed (1) certain activity requirements on the credit fund, including
a prohibition on proprietary trading; \173\ (2) disclosure and safety
and soundness requirements on banking entities that sponsor or serve as
an advisor for a credit fund; \174\ (3) safety and soundness
requirements on all banking entities that invest in or have certain
relationships with a credit

fund; \175\ and (4) restrictions on the banking entity's investment in,