requirements to fund-of-funds structures and parallel or master-feeder
structures would be unworkable.\2338\ Commenters contended that the
proposed attribution rules could result in a banking entity calculating
the per-fund limitation in a way that exceeds the banking entity's
actual loss exposure if the attribution rule for controlled investments
is interpreted to require that 100 percent of all investments made by
controlled entities be attributed to the banking entity.\2339\
---------------------------------------------------------------------------

    \2338\ See BoA; SIFMA et al. (Covered Funds) (Feb. 2012); SSgA
(Feb. 2012). These commenters argued that banking entities
traditionally utilize a fund-of-funds structure to offer customers
the opportunity to invest indirectly in a portfolio of other funds
(including some funds sponsored and managed by one or more third
parties) and that these structures provide customers with certain
risk-mitigating benefits and allow customers to gain exposure to a
diverse portfolio without having to satisfy the minimum investment
requirements of each fund directly. They also argued that parallel
and feeder entities are established for a variety of client-driven
reasons, including to accommodate tax needs of clients and that
these entities should be viewed as a single investment program in
which the master fund holds and manages investments in portfolio
assets and the feeder fund typically makes no investments other than
in the master fund.
    \2339\ See SIFMA et al. (Covered Funds) (Feb. 2012); BoA; Arnold
& Porter; SSgA (Feb. 2012).
---------------------------------------------------------------------------

    In addition, several commenters argued that the pro rata
attribution of investments held through non-controlled structures is
not consistent with the Board's rules and practices for purposes of the
activity and investment limits in other sections of the BHC Act.
Commenters also maintained that this pro rata attribution for non-
controlled entities would be impracticable because a banking entity has
only a limited ability to monitor, direct, or restrain investments of a
covered fund that it does not control.\2340\
---------------------------------------------------------------------------

    \2340\ See SIFMA et al. (Covered Funds) (Feb. 2012).
---------------------------------------------------------------------------

    Conversely, one commenter supported the pro rata attribution
requirement in the proposal. This commenter argued that this
requirement reduced opportunities for evasion through subsidiaries,
affiliates or related entities.\2341\
---------------------------------------------------------------------------

    \2341\ See Occupy.
---------------------------------------------------------------------------

    The final rule has been modified in light of the comments. Under
the final rule, a banking entity must account for an investment in a
covered fund for purposes of the per-fund and aggregate funds
limitations only if the investment is made by the banking entity or
another entity controlled by the banking entity. Accordingly, the final
rule does not generally require that a banking entity include the pro
rata share of any ownership interest held by any entity that is not
controlled by the banking entity, and thus reduces the potential
compliance costs of the final rule. The Agencies believe that this
concept of attribution is more consistent with how the Board has
historically applied the concept of ``control'' under the BHC Act for
purposes of determining whether a company subject to that Act is
engaged in an activity or whether to attribute an investment to that
company. Furthermore, because a banking entity does not control a non-
affiliate and typically has less access to information about the
holdings of a non-affiliate, this change is unlikely to present
opportunity for circumvention of the per-fund and aggregate funds
limitations. The Agencies will monitor these limitations for practices
that appear to be attempts to circumvent them.\2342\
---------------------------------------------------------------------------

    \2342\ The Agencies note that other provisions of the BHC Act
and Savings and Loan Holding Company Act would prohibit a banking
entity that is a bank holding company or savings and loan holding
company from acquiring 5 percent or more of a covered fund that is
itself a bank holding company or a savings and loan holding company,
respectively, without regulatory approval. See 12 U.S.C. 1842(a); 12
U.S.C. 1467a(e).
---------------------------------------------------------------------------

    Whether a banking entity controls another entity under the BHC Act
may vary depending on the type of entity in question. As noted above in
Part IV.B.1.b.3., the Board's regulations and orders have long
recognized that the concept of control is different for funds than for
operating companies.\2343\ In contrast to the proposal, the final rule
incorporates these different concepts of control in part by providing
that, for purposes of section 13 of the BHC Act and the final rule, a
registered investment company, SEC-regulated business development
company, and a foreign public fund as described in Sec.  ----.10(c)(1)
of the final rule 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.\2344\
---------------------------------------------------------------------------

    \2343\ See, e.g., First Union Letter.
    \2344\ Id. See final rule Sec.  ----.12(b)(1)(ii).
---------------------------------------------------------------------------

    In response to commenter concerns regarding the workability of the
proposed rule, the final rule has been modified to address how
ownership interests would be attributed to a banking entity when those
interests are held in a fund-of-funds or multi-tiered fund structures.
For instance, banking entities may use a variety of structures to
satisfy operational needs or meet the investment needs of customers of
their trust, fiduciary, investment advisory or commodity trading
advisory services.
    First, except as explained for purposes of calculating a banking
entity's permitted investment in multi-tier fund structures, the final
rule does not generally attribute to a banking entity ownership
interests held by a covered fund so long as the banking entity's
investment in the covered fund meets the per-fund limitation in the
final rule.\2345\ Absent unusual circumstances or structures, a banking
entity would not control a covered fund in which the banking entity has
an ownership interest that conforms to the per-fund and aggregate funds
limitations contained in the final rule. Thus, the interests held by
that covered fund would not be attributed to the banking entity for the
reasons discussed above.
---------------------------------------------------------------------------

    \2345\ See final rule Sec.  ----.12(b)(1)(iii).
---------------------------------------------------------------------------

    The final rule also explains how the investment limitations apply
to investments of a banking entity in multi-tier fund structures. The
Agencies believe that master-feeder fund structures typically
constitute a single investment program in which the master fund holds
and manages investments and the feeder funds typically make no
investments other than in the master fund and exist as a convenience
for customers of the trust, fiduciary, investment advisory, or
commodity trading advisory services of the banking entity. Similarly,
trust, fiduciary, or advisory customers of a banking entity may desire
to obtain diversified exposure to a variety of funds or investments
through investing in a fund-of-funds structure that the banking entity
organizes and offers.
    In order to meet the demands of these customers, the final rule
provides that if the principal investment strategy of a covered fund
(the ``feeder fund'') is to invest substantially all of its assets in
another single covered fund (the ``master fund''), then for purposes of
the

per-fund limitation the banking entity's permitted investment shall be
measured only at the master fund. However, in order to appropriately
capture the banking entity's amount of investment in the master fund, a
banking entity must include in this calculation any investment held by
the banking entity in the master fund, as well as the banking entity's
pro-rata share of any ownership interest of the master fund that is
held through the feeder fund.\2346\
---------------------------------------------------------------------------

    \2346\ See final rule Sec.  ----.12(b)(34).
---------------------------------------------------------------------------

    Similarly, regarding fund-of-funds structures, the final rule
provides that if a banking entity organizes and offers a covered fund
pursuant to Sec.  ----.11 for the purpose of investing in other covered
funds (a ``fund of funds'') and that fund of funds itself invests in
another covered fund that the banking entity organizes and offers, then
the banking entity's permitted investment in that other covered fund
shall include any investment held by the banking entity in that other
fund, as well as the banking entity's pro-rata share of any ownership
interest of the other fund that is held through the fund of funds. The
banking entity's investment in the fund of funds must also meet the
investment limitations contained in Sec.  ----.12. In these manners,
the final rule permit a banking entity to meet the demands of customers
of their trust, fiduciary, or advisory services while also limiting the
ability of a banking entity to be exposed to more than the amount of
risk of a covered fund contemplated by section 13.
    As described above in the discussion of organizing and offering a
covered fund, other provisions of section 13 contemplate investments by
employees and directors of the banking entity that provide qualifying
services to a covered fund.\2347\ The Agencies recognized in the
proposal that employee and director investments in a covered fund may
provide an opportunity for a banking entity to evade the limitations
regarding the amount or value of ownership interests a banking entity
may acquire in a covered fund.\2348\ In order to address this concern,
the proposal attributed an ownership interest in a covered fund
acquired or retained by a director or employee to the person's
employing banking entity if the banking entity either extends credit
for the purposes of allowing the director or employee to acquire the
ownership interest, guaranteed the director or employee's purchase, or
guarantees the director or employee against loss on the investment.
---------------------------------------------------------------------------

    \2347\ See 12 U.S.C. 1851(d)(1)(G)(vii); final rule Sec.  --
--.11(g).
    \2348\ See Joint Proposal, 76 FR 68,902.
---------------------------------------------------------------------------

    One commenter supported the way the proposal addressed evasion
concerns by attributing an ownership interest in a covered fund
acquired or retained by a director or employee to a banking
entity.\2349\ A different commenter urged the Agencies to attribute any
employee investments in a covered fund to the banking entity itself,
regardless of the source of funds.\2350\ Another commenter argued that
the statute prohibits a banking entity from guaranteeing an investment
by an employee or director.\2351\
---------------------------------------------------------------------------

    \2349\ See Ass'n. of Institutional Investors (Feb. 2012).
    \2350\ See Occupy.
    \2351\ See Arnold & Porter.
---------------------------------------------------------------------------

    After considering the comments and the language of the statute, the
Agencies have determined to retain the requirement that all director or
employee investments in a covered fund be attributed to the banking
entity for purposes of the per-fund limitation and the aggregate funds
limitation whenever the banking entity provides the employee or
director funding for the purpose of acquiring the ownership interest.
Specifically, under the final rule, an investment by a director or
employee of a banking entity who acquires an ownership interest in his
or her personal capacity in a covered fund sponsored by the banking
entity will be attributed to the banking entity if the banking entity,
directly or indirectly, extends financing for the purpose of enabling
the director or employee to acquire the ownership interest in the fund
and the financing is used to acquire such ownership interest in the
covered fund.\2352\ It is also important to note that the statute
prohibits a banking entity from guaranteeing the obligations or
performance of a covered fund in which it acts as investment adviser,
investment manager or sponsor, or organizes and offers.\2353\
---------------------------------------------------------------------------

    \2352\ See final rule Sec.  ----.12(b)(1)(iv).
    \2353\ See 12 U.S.C. 1851(f)(1).
---------------------------------------------------------------------------

    As discussed above in the definition of ownership interest, the
final rule also attributes to the banking entity any amounts
contributed by an employee or director when made in order to receive a
restricted profit interest, whether or not funded or guaranteed by the
banking entity. This approach ensures that all funding provided by the
banking entity--whether directly or through its employees or
directors--and all exposures of the banking entity--whether directly or
through a guarantee provided to or on behalf of an employee or
director--is counted against the limits on exposure contained in the
statute and final rule. At the same time, this approach recognizes that
employees and directors may use their own resources, not protected by
the banking entity, to invest in a covered fund. Employees of
investment advisers in particular often invest their own resources in
covered funds they advise, both by choice and as a method to align
their personal financial interests with those of other investors in the
covered fund. So long as these investments are truly with personal
resources, and are not funded by the banking entity, these personal
investments would not expose the banking entity to loss and would not
be attributed by the final rule to the banking entity. This approach is
also consistent with the terms of the statute, which expressly
contemplates investments by directors or employees of a banking entity
in their individual capacity.\2354\
---------------------------------------------------------------------------

    \2354\ See 12 U.S.C. 1851(d)(1)(G)(vii).
---------------------------------------------------------------------------

    The Agencies intend to monitor investments by directors and
employees of a banking entity to ensure that employee ownership
interests are not used to circumvent the per-fund and aggregate funds
limitations in section 13. Among the factors the Agencies will
consider, in addition to financing and guarantee arrangements, are
whether the benefits of the acquisition and retention, such as
dividends, inure to the benefit of the director or employee and not the
banking entity; the voting or control of the ownership interests is
subject to the direction of, or otherwise controlled by, the banking
entity; and the employee or director, rather than the banking entity,
determines whether the employee or director should make the investment.
    The proposed rule contained a provision intended to curb potential
evasion of the per-fund limitation and aggregate limitation through
parallel investments by banking entities that were not otherwise
subject to section 13 of the BHC Act. Specifically, the proposed rule
provided that, to the extent that a banking entity is contractually
obligated to invest in, or is found to be acting in concert through
knowing participation in a joint activity or parallel action toward a
common goal of investing in, one or more investments with a covered
fund that is organized and offered by the banking entity (whether or
not pursuant to an express agreement), such investment must be included
in the calculation of a banking entity's per-fund limitation.
    Several commenters objected to this requirement and argued that it
was not consistent with the statute. These commenters argued that
section 13 of

the BHC Act restricts a banking entity's investments in covered funds,
and not direct investments by a banking entity in individual companies
under other authorities, such as the merchant banking investment
authority in section 4(k)(4)(H) of the BHC Act.\2355\ Some commenters
argued that prohibiting or limiting direct investments could cause a
conflict between a banking entity's fiduciary duty to its clients to
manage their covered fund investments and the banking entity's duty to
its shareholders to pursue legitimate merchant banking
investments.\2356\ Some commenters urged the Agencies not to attribute
any parallel co-investment alongside a covered fund to a banking entity
unless there is a pattern of evasion, and some requested that there be
prior notice and an opportunity for a hearing to determine whether such
a pattern has occurred.\2357\ Another commenter recommended the
Agencies provide a safe harbor for situations where a bank trustee is
acting on behalf of customers.\2358\
---------------------------------------------------------------------------

    \2355\ See 12 U.S.C. 1843(k)(4)(H); 12 CFR 225.170 et seq. See
ABA (Keating); BoA; BOK; SIFMA et al. (Covered Funds) (Feb. 2012);
SVB.
    \2356\ See ABA (Keating).
    \2357\ See BOK; SVB; ABA (Keating); BoA; SIFMA et al. (Covered
Funds) (Feb. 2012).
    \2358\ See BOK.
---------------------------------------------------------------------------

    In contrast, other commenters contended that the risks of direct
investments, such as those made under merchant banking authority, are
similar to those of many investments in covered funds. These commenters
urged the Agencies to restrict direct investments in the underlying
holdings or assets of a covered fund in the same manner as direct
investments in covered funds.\2359\
---------------------------------------------------------------------------

    \2359\ See Public Citizen; Sens. Merkley & Levin (Feb. 2012).
---------------------------------------------------------------------------

    After carefully considering the comments and the language of the
statute, the Agencies have determined not to adopt the proposed
prohibition on parallel investments in the final rule. As illustrated
by commenters, banking entities rely on a number of investment
authorities and structures to meet the needs of their clients and make
investments under a variety of authorities that are not coordinated
with investments made by covered funds owned or advised by the banking
entity. The Agencies believe that many investments made by banking
entities are made for the purpose of serving the legitimate needs of
customers and shareholders, and not for the purpose of circumventing
the per-fund and aggregate funds limitations in section 13.
    Nevertheless, the Agencies continue to believe that the potential
for evasion of these limitations may be present where a banking entity
coordinates its direct investment decisions with the investments of
covered funds that it owns or sponsors. For instance, the Agencies
understand that it is relatively common for the sponsor of a covered
fund in connection with a privately negotiated investment to offer
investors co-investment opportunities when the general partner or
investment manager for the covered fund determines that the covered
fund does not have sufficient capital available to make the entire
investment in the target portfolio company or determines that it would
not be suitable for the covered fund to take the entire available
investment. In such circumstances, a banking entity that sponsors the
covered fund should not itself make any additional side by side co-
investment with the covered fund in a privately negotiated investment
unless the value of such co-investment is less than 3% of the value of
the total amount co-invested by other investors in such investment.
Further, if the co-investment is made through a co-investment vehicle
that is itself a covered fund (a ``co-investment fund''), the sum of
the banking entity's ownership interests in the co-investment fund and
the related covered fund should not exceed 3% of the sum of the
ownership interests held by all investors in the co-investment fund and
related covered fund. Finally, the Agencies note that if a banking
entity makes investments side by side in substantially the same
positions as the covered fund, then the value of such investments shall
be included for purposes of determining the value of the banking
entity's investment in the covered fund.
g. Calculation of Tier 1 Capital
    The proposal explained that tier 1 capital is a banking law concept
that, in the United States, is calculated and reported by certain
depository institutions and bank holding companies in order to
determine their compliance with regulatory capital standards.
Accordingly, the proposed rule clarified that for purposes of the
aggregate funds limitation in Sec.  ----.12, a banking entity that is a
bank, a bank holding company, a company that controls an insured
depository institution that reports tier 1 capital, or uninsured trust
company that reports tier 1 capital (each a ``reporting banking
entity'') needed to use the reporting banking entity's tier 1 capital
as of the last day of the most recent calendar quarter that has ended,
as reported to the relevant Federal banking agency.
    The proposal also recognizes that not all entities subject to
section 13 of the BHC Act calculate and report tier 1 capital. In order
to provide a measure of equality related to the aggregate funds
limitation contained in section 13(d)(4)(B)(ii)(II) of the BHC Act and
Sec.  ----.12(c) of the proposed rule, the proposed rule clarified how
the aggregate funds limitation should be calculated for entities that
are not required to calculate and report tier 1 capital in order to
determine compliance with regulatory capital standards. Under the
proposed rule, with respect to any banking entity that is not
affiliated with a reporting banking entity and not itself required to
report capital in accordance with the risk-based capital rules of a
Federal banking agency, the banking entity's tier 1 capital for
purposes of the aggregate funds limitation was the total amount of
shareholders' equity of the top-tier entity within such organization as
of the last day of the most recent calendar quarter that has ended, as
determined under applicable accounting standards.\2360\ For a banking
entity that was not itself required to report tier 1 capital but was a
subsidiary of a reporting banking entity that is a depository
institution (e.g., a subsidiary of a national bank), the aggregate
funds limitation was the amount of tier 1 capital reported by such
depository institution.\2361\ For a banking entity that was not itself
required to report tier 1 capital but was a subsidiary of a reporting
banking entity that is not a depository institution (e.g., a nonbank
subsidiary of a bank holding company), the aggregate funds limitation
was the amount of tier 1 capital reported by the top-tier affiliate of
such banking entity that holds and reports tier 1 capital under the
proposal.\2362\
---------------------------------------------------------------------------

    \2360\ See proposed rule Sec.  ----.12(c)(2)(ii)(B)(2).
    \2361\ See proposed rule Sec.  ----.12(c)(2)(ii)(A).
    \2362\ See proposed rule Sec.  ----.12(c)(1)(B(2)(ii)(B)(1).
---------------------------------------------------------------------------

    Commenters did not generally object to the proposed approach for
determining the applicable tier 1 capital for banking entities. One
commenter advocated calculating the aggregate funds limitation based on
the tier 1 capital of the banking entity making the covered fund
investment instead of the tier 1 capital of the consolidated banking
entity.\2363\ In addition, the commenter urged the Agencies to require
banking entities to divest any portions of the investment that exceeds
3 percent of that entity's tier 1 capital.
---------------------------------------------------------------------------

    \2363\ See Occupy.
---------------------------------------------------------------------------

    The final rule provides that any banking entity that is required to

calculate and report tier 1 capital (a ``reporting banking entity'')
must calculate the aggregate funds limitation using the tier 1 capital
amount reported by the entity as of the last day of the most recent
calendar quarter as reported to the relevant Federal banking agency. A
non-depository institution subsidiary of a reporting banking entity may
rely on the consolidated tier 1 capital of the reporting banking entity
for purposes of calculating compliance with the aggregate funds
limitation. In the case of a depository institution that is itself a
reporting banking entity and that is also a subsidiary or affiliate of
a reporting banking entity, the aggregate of all investments in covered
funds held by the depository institution (including the investments by
its subsidiaries) may not exceed three percent of either the tier 1
capital of the depository institution or of the top-tier reporting
banking entity that controls such depository institution. The final
rule also provides that any banking entity that is not itself required
to report tier 1 capital but is a subsidiary of a reporting banking
entity that is a depository institution (e.g., a subsidiary of a
national bank) may compute compliance with the aggregate funds
limitations using the amount of tier 1 capital reported by such
depository institution.
    Several commenters argued that foreign banking organizations should
be permitted to use the consolidated tier 1 capital at the top-tier
foreign banking organization level, as calculated under applicable home
country capital standards, to calculate compliance with the aggregate
funds limitation.\2364\ One commenter noted that the tier 1 capital of
a banking entity may fluctuate based on specific conditions relevant
only to the banking entity, and urged the Agencies to consider an
alternative measure of capital, although this commenter did not suggest
any alternative.\2365\
---------------------------------------------------------------------------

    \2364\ See Credit Suisse (Williams); IIB/EBF.
    \2365\ See Japanese Bankers Ass'n.
---------------------------------------------------------------------------

    After considering the comments received and that purpose and
language of section 13 of the BHC Act, the Agencies have determined
that for foreign banking organizations, the aggregate funds limitation
would be based on the consolidated tier 1 capital of the foreign
banking organization, as calculated under applicable home country
standards. However, a U.S. bank holding company or U.S. savings and
loan holding company that is controlled by a foreign banking entity
must separately meet the per-fund and aggregate funds limitations for
each and all (respectively) covered fund investments made by the U.S.
holding company, based on the tier 1 capital of the U.S. bank holding
company or U.S. savings and loan holding company. The Federal banking
agencies may revisit this approach in light of the manner in which the
Board implements the enhanced prudential standards and early
remediation requirements for foreign banking organizations and foreign
nonbank financial companies, including the proposed U.S. intermediate
holding company requirements under that rule.\2366\
---------------------------------------------------------------------------

    \2366\ See Enhanced Prudential Standards and Early Remediation
Requirements for Foreign Banking Organizations and Foreign Nonbank
Financial Companies, 77 FR 76,628, 76,637 (Dec. 28, 2012).
---------------------------------------------------------------------------

h. Extension of Time to Divest Ownership Interest in a Single Fund
    The proposed rule provided that the Board may, upon application by
a banking entity, extend the period of time that a banking entity may
have to conform an investment to the 3 percent per-fund limitation. As
in the statute, the proposed rule permitted the Board to grant up to an
additional two years if the Board finds that an extension would be
consistent with safety and soundness and not detrimental to the public
interest. The proposal required a banking entity to submit an
application for extension to the Board, and set forth the factors that
the Board would consider in reviewing an application for extension,
including a requirement that the Board consult with the primary federal
supervisory agency for the banking entity prior to acting on an
application.
    Some commenters argued that the final rule should be modified to
extend automatically the one-year statutory period for complying with
the per-fund limitation by an additional two years without application
or approval on a case-by-case basis and to apply the extended
conformance period to the aggregate funds limitations.\2367\ Some of
these commenters suggested that Congress explicitly recognized the need
for a banking entity to have a sufficient seeding period following
establishment of a fund, and that funds often require more than one
year to attract enough unaffiliated investors to enable the sponsoring
banking entity to reduce its ownership interests in the fund to the
level required by section 13(d)(4).
---------------------------------------------------------------------------

    \2367\ See, e.g., SIFMA et al. (Covered Funds) (Feb. 2012); SSgA
(Feb. 2012); TCW; Credit Suisse (Williams).
---------------------------------------------------------------------------

    Other commenters argued that the amount of a banking entity's own
capital involved in seeding a fund is typically ``small'' and suggested
that, in order to prevent banking entities from engaging in prohibited
proprietary trading through a fund, the Board should condition the
ability of a banking entity to qualify for an extension of the one-year
statutory period on several requirements, including a requirement that
the banking entity not have provided more than $10 million in seed
capital as part of establishing the covered fund.\2368\
---------------------------------------------------------------------------

    \2368\ See, e.g., Occupy; Sens. Merkley & Levin (Feb. 2012).
---------------------------------------------------------------------------

    The Agencies have carefully considered comments received on the
proposal and have determined instead to adopt the process and standards
governing requests for extensions of time to divest an ownership
interest in a single covered fund largely as proposed. The Agencies
believe that this approach is consistent with the process and standards
set out under the statute.
    As under the proposal, the final rule requires any banking entity
that seeks an extension of the conformance period provided for the per-
funds limitation to submit a written request to the Board. Any such
request must be submitted to the Board at least 90 days prior to the
expiration of the applicable time period and provide the reasons why
the banking entity believes the extension should be granted. In
addition, the request must explain the banking entity's plan for
reducing the permitted investment in a covered fund through redemption,
sale, dilution or other methods to the limits imposed by the final
rule. To allow the Board to assess the factors provided in the statute,
the final rule provides that any extension request by a banking entity
must address: (i) Whether the investment would result, directly or
indirectly, in a material exposure by the banking entity to high-risk
assets or high-risk trading strategies; (ii) the contractual terms
governing the banking entity's interest in the covered fund; (iii) the
total exposure of the covered banking entity to the investment and the
risks that disposing of, or maintaining, the investment in the covered
fund may pose to the banking entity and the financial stability of the
United States; (iv) the cost to the banking entity of divesting or
disposing of the investment within the applicable period; (v) whether
the investment or the divestiture or conformance of the investment
would involve or result in a material conflict of interest between the
banking entity and unaffiliated parties, including clients, customers
or counterparties to which it owes a duty; (vi) the banking entity's
prior efforts to reduce through redemption, sale, dilution, or other
methods its ownership

interests in the covered fund, including activities related to the
marketing of interests in such covered fund; (vii) market conditions;
and (viii) any other factor that the Board believes appropriate. In
contrast to the proposal, the final rule does not require information
on whether the extension would pose a threat to safety and soundness of
the covered banking entity or to financial stability of the United
States. The categories of information in final rule have been modified
in order to eliminate redundancies.
    The final rule continues to permit the Board to impose conditions
on granting any extension granted if the Board determines conditions
are necessary or appropriate to protect the safety and soundness of
banking entities or the financial stability of the United States,
address material conflicts of interest or otherwise unsound practices,
or to otherwise further the purposes of section 13 of the BHC Act and
the final rule. In cases where the banking entity is primarily
supervised by another Agency, the Board will consult with such Agency
both in connection with its review of the application and, if
applicable, prior to imposing conditions in connection with the
approval of any request by the banking entity for an extension of the
conformance period. While some commenters requested that the Board
modify the final rule to permit a banking entity to have covered fund
investments in excess of the aggregate funds limitation,\2369\ the
final rule does not contain such a provision. As noted in the release
for the proposed rule, the statutory grant of authority to provide
extensions of time to comply with the investment limits refers
specifically and only to the period for conforming a seeding investment
to the per-fund limitation.\2370\
---------------------------------------------------------------------------

    \2369\ See ABA (Keating).
    \2370\ See 12 U.S.C. 1851(d)(4)(C).
---------------------------------------------------------------------------

    As noted in the proposed rule, the Agencies recognize the potential
for evasion of the restrictions contained in section 13 of the BHC Act
through misuse of requests for extension of the seeding period for
covered funds. Therefore, the Board and the Agencies will monitor
requests for extensions of the seeding period for activity in covered
funds that is inconsistent with the requirements of section 13 of the
BHC Act.
4. Section ----.13: Other Permitted Covered Fund Activities
a. Permitted Risk-Mitigating Hedging Activities
    Section 13(d)(1)(C) of the BHC Act provides an exemption for
certain risk-mitigating hedging activities.\2371\ In the context of
covered fund activities, the proposed rule implemented this authority
narrowly and permitted a banking entity to acquire or retain an
ownership interest in a covered fund as a risk-mitigating hedge only in
two situations: (i) When acting as intermediary on behalf of a customer
that is not itself a banking entity to facilitate exposure by the
customer to the profits and losses of the covered fund; and (ii) with
respect to a compensation arrangement with an employee of the banking
entity that directly provides investment advisory or other services to
that fund.\2372\ The proposed rule imposed specific requirements on a
banking entity seeking to rely on this exemption.\2373\
---------------------------------------------------------------------------

    \2371\ See 12 U.S.C. 1851(d)(1)(C).
    \2372\ See proposed rule Sec.  ----.13(b)(1)(i)(A) and (B).
    \2373\ These requirements were substantially similar to the
requirements for the risk-mitigating hedging exemption for trading
activities contained in proposed Sec.  ----.5. In addition, proposed
Sec.  ----.13(b) also required that: (i) The hedge represent a
substantially similar offsetting exposure to the same covered fund
and in the same amount of ownership interest in that covered fund
arising out of the transaction to accommodate a specific customer
request or directly connected to the banking entity's compensation
arrangement with an employee; and (ii) the banking entity document,
at the time the transaction is executed, the hedging rationale for
all hedging transactions involving an ownership interest in a
covered fund.
---------------------------------------------------------------------------

    The Agencies received a range of comments on the proposed risk-
mitigating hedging exemption for ownership interests in covered funds.
Some commenters objected to the limited applicability of the statutory
risk-mitigating hedging exemption in the covered funds context and
urged the Agencies to allow ownership interests in covered funds to be
used in any appropriate risk-mitigating hedging.\2374\ In contrast,
other commenters urged the Agencies to delete one or both of the risk-
mitigating hedging exemptions as the commenters argued they were
inconsistent with the statute or otherwise inappropriate.\2375\
Commenters also argued that a separate risk-mitigating hedging
exemption for covered funds is unnecessary because the statute provides
a single risk-mitigating hedging exemption.\2376\
---------------------------------------------------------------------------

    \2374\ See BoA; Credit Suisse (Williams); Deutsche Bank (Fund-
Linked Products); ISDA (Feb. 2012); SIFMA et al. (Covered Funds)
(Feb. 2012).
    \2375\ See AFR et al. (Feb. 2012); Occupy; Public Citizen; Sens.
Merkley & Levin (Feb. 2012).
    \2376\ See BoA.
---------------------------------------------------------------------------

    Some commenters argued that the proposed rule would impede banking
entities from offering covered-fund linked products to customers,
including hedging these products, and would, in particular, impair the
ability of banking entities to hedge the risks of fund-linked
derivatives with fund-linked swaps or shares of covered funds
referenced in fund-linked products.\2377\ These commenters argued this
limitation would increase risks at banking entities and was
inconsistent with the purpose of the risk-mitigating hedging exemption.
Commenters also proposed modifying the proposal to permit risk-
mitigating hedging activities that facilitate a customer's exposure to
profits and/or losses of the covered fund, to permit portfolio or
dynamic hedging strategies involving covered fund interests, and to
eliminate the proposed condition that a customer would not itself be a
banking entity.\2378\ Some commenters also urged the Agencies to
grandfather existing risk-mitigating hedging activities with respect to
any covered-fund linked products that comply with the hedging
requirements for proprietary trading under Sec.  ----.5 of the proposed
rule.\2379\
---------------------------------------------------------------------------

    \2377\ See ISDA (Feb. 2012); BoA; Credit Suisse (Williams);
Deutsche Bank (Fund-Linked Products); ISDA (Feb. 2012); SIFMA et al.
(Covered Funds) (Feb. 2012).
    \2378\ See, e.g., BoA; SIFMA et al. (Covered Funds) (Feb. 2012);
Deutsche Bank (Fund-Linked Products).
    \2379\ See SIFMA et al. (Covered Funds) (Feb. 2012); BoA.
---------------------------------------------------------------------------

    In contrast, other commenters objected to the exemption for hedging
covered fund-linked products sold to customers. These commenters
asserted that this activity would authorize investment in covered funds
in a manner that would not be subject to the three percent per-fund
limitation; \2380\ or would be inconsistent with the statutory
requirement that a banking entity actively seek additional investors
for a fund.\2381\
---------------------------------------------------------------------------

    \2380\ See Sens. Merkley & Levin (Feb. 2012).
    \2381\ See AFR et al. (Feb. 2012).
---------------------------------------------------------------------------

    Some commenters urged the Agencies to expand the hedging exemption
to allow banking entities to invest in covered funds in order to hedge
obligations relating to deferred compensation plans for employees who
do not directly provide services to the covered fund for which the
hedge relates.\2382\ Another commenter argued that banking entities
should be permitted to hedge compensation investment accounts for
executive officers who are not involved in the management of the
investment accounts.\2383\ In contrast, other commenters objected to
the hedging exemption for compensation arrangements, arguing that it
may increase risk to banking entities,\2384\ is

unnecessary,\2385\ or may provide banking entities with an opportunity
to evade the limitations on the amount of ownership interests they may
have as an investment in a covered fund.\2386\
---------------------------------------------------------------------------

    \2382\ See Arnold & Porter.
    \2383\ See BOK.
    \2384\ See Occupy.
    \2385\ See AFR et al. (Feb. 2012); Public Citizen.
    \2386\ See Occupy.
---------------------------------------------------------------------------

    After review of the comments, the Agencies believe at this time
that permitting only limited risk-mitigating hedging activities
involving ownership interests in covered funds is consistent with the
safe and sound conduct of banking entities, and that increased use of
ownership interests in covered funds could result in exposure to higher
risks.\2387\
---------------------------------------------------------------------------

    \2387\ See 12 U.S.C. 1851(d)(2).
---------------------------------------------------------------------------

    In particular, the Agencies have determined that transactions by a
banking entity to act as principal in providing exposure to the profits
and losses of a covered fund for a customer, even if hedged by the
entity with ownership interests of the covered fund, is a high risk
strategy that could threaten the safety and soundness of the banking
entity. These transactions expose the banking entity to the risk that
the customer will fail to perform, thereby effectively exposing the
banking entity to the risks of the covered fund. Furthermore, a
customer's failure to perform may be concurrent with a decline in value
of the covered fund, which could expose the banking entity to
additional losses. Accordingly, the Agencies believe that these
transactions pose a significant potential to expose banking entities to
the same or similar economic risks that section 13 of the BHC Act
sought to eliminate, and have not adopted the proposed exemption for
using ownership interests in covered funds to hedge these types of
transactions in the final rule.
    As argued by some commenters, modifying the proposal to eliminate
the exemption for permitting banking entities to acquire covered fund
interests in connection with customer facilitation may impact banking
entities ability to hedge the risks of fund-linked derivatives through
the use of fund-linked swaps or shares of covered funds referenced by
fund-linked products.\2388\ Some commenters on the proposal argued that
innovation of financial products may potentially be reduced if the
final rule does not permit this type of activity related to fund-linked
products.\2389\ The Agencies recognize that U.S. banking entities may
no longer be able to participate in offering certain customer
facilitation products relating to covered funds, but believe it is
consistent with the purposes of section 13 to restrict these
activities.
---------------------------------------------------------------------------

    \2388\ See ISDA (Feb. 2012); BoA; Credit Suisse (Williams);
Deutsche Bank (Fund-Linked Products); SIFMA et al. (Covered Funds)
(Feb. 2012).
    \2389\ See SIFMA et al. (Covered Funds) (Feb. 2012); Credit
Suisse (Williams).
---------------------------------------------------------------------------

    The final rule maintains the proposed exemption for hedging
employee compensation arrangements with several changes. To ensure that
exempt hedging activities are designed to reduce one or more specific
risks, as required by section 13(d)(1)(C) of the BHC Act, the proposed
rule required that permitted hedging activity be designed to reduce the
specific risks to the banking entity in connection with and related to
its obligations or liabilities. The final rule permits a banking entity
to acquire or retain an ownership interest in a covered fund provided
that the ownership interest is designed to demonstrably reduce or
otherwise significantly mitigate the specific, identifiable risks to
the banking entity in connection with a compensation arrangement with
an employee who directly provides investment advisory or other services
to the covered fund. Under the final rule, a banking entity may not use
as a hedge ownership interests of a covered fund for which the employee
does not provide services. The requirement under the final rule that
the hedging activity be designed to demonstrably reduce or otherwise
significantly mitigate the specific, identifiable risks to the banking
entity is consistent with the requirement in Sec.  ----.5 of the final
rule, as discussed above in Part IV.A.4. The final rule permits a
banking entity to hedge its exposures to price and other risks based on
fund performance that arise from restricted profit interest and other
performance based compensation arrangements with its investment
managers.
    Section 13(a)(2) of the final rule describes the criteria a banking
entity must meet in order to rely on the risk-mitigating hedging
exemption for covered funds. These requirements, which are based on the
requirements for the risk-mitigating hedging exemption for trading
activities under Sec.  ----.5 of the final rule and which are discussed
in detail above in Part IV.A.4, have been modified from the proposal to
reflect the more limited scope of this section.\2390\ In particular,
the final rule permits a banking entity to engage in risk-mitigating
hedging activities involving ownership interests in a covered fund only
if the banking entity has established and implements, maintains and
enforces an internal compliance program that is reasonably designed to
ensure the covered banking entity's compliance with the requirements of
the hedging exemption, including reasonably designed written policies
and procedures and internal controls and ongoing monitoring and
authorization procedures, and has acquired or retained the ownership
interest in accordance with these written policies, procedures and
internal controls. Furthermore, the acquisition or retention of an
ownership interest must demonstrably reduce or otherwise significantly
mitigate, at the inception of the hedge, one or more specific,
identifiable risks arising in connection with the compensation
arrangement with an employee that directly provides investment advisory
or other services to the covered fund. The acquisition or retention
also may not, at the inception of the hedge, result in any significant
new or additional risk that is not itself hedged contemporaneously in
accordance with the hedging exemption, and the hedge must be subject to
continuing review, monitoring and management by the banking entity.
---------------------------------------------------------------------------

    \2390\ See final rule Sec.  ----.13(a)(2).
---------------------------------------------------------------------------

    The final rule also permits a banking entity to engage in risk-
mitigating hedging activities in connection with a compensation
arrangement, subject to the conditions noted above, only if the
compensation arrangement relates solely to the covered fund in which
the banking entity or any affiliate thereof has acquired an ownership
interest and the losses on such ownership interest are offset by
corresponding decreases in the amounts payable in connection with the
related employee compensation arrangement.\2391\
---------------------------------------------------------------------------

    \2391\ See final rule Sec.  ----.13(a)(2)(iii).
---------------------------------------------------------------------------

b. Permitted Covered Fund Activities and Investments Outside of the
United States
    Section 13(d)(1)(I) of the BHC Act \2392\ permits foreign banking
entities to acquire or retain an ownership interest in, or act as
sponsor to, covered funds, so long as those activities and investments
occur solely outside the United States and certain other conditions are
met (the ``foreign fund

exemption'').\2393\ As described in the proposal, the purpose of this
statutory exemption appears to be to limit the extraterritorial
application of the statutory restrictions on covered fund activities
and investments, while preserving national treatment and competitive
equality among U.S. and foreign banking entities within the United
States.\2394\ The statute does not explicitly define what is meant by
``solely outside of the United States.''
---------------------------------------------------------------------------

    \2392\ Section 13(d)(1)(I) of the BHC Act permits a banking
entity to acquire or retain an ownership interest in, or have
certain relationships with, a covered fund notwithstanding the
restrictions on investments in, and relationships with, a covered
fund, if: (i) Such activity or investment is conducted by a banking
entity pursuant to paragraph (9) or (13) of section 4(c) of the BHC
Act; (ii) the activity occurs solely outside of the United States;
(iii) no ownership interest in such fund is offered for sale or sold
to a resident of the United States; and (iv) the banking entity is
not directly or indirectly controlled by a banking entity that is
organized under the laws of the United States or of one or more
States. See 12 U.S.C. 1851(d)(1)(I).
    \2393\ This section's discussion of the concept ``solely outside
of the United States'' is provided solely for purposes of the final
rule's implementation of section 13(d)(1)(I) of the BHC Act, and
does not affect a banking entity's obligation to comply with
additional or different requirements under applicable securities,
banking, or other laws.
    \2394\ See 156 Cong. Rec. S5897 (daily ed. July 15, 2010)
(statement of Sen. Merkley). (``Subparagraphs (H) and (I) recognize
rules of international regulatory comity by permitting foreign
banks, regulated and backed by foreign taxpayers, in the course of
operating outside of the United States to engage in activities
permitted under relevant foreign law. However, these subparagraphs
are not intended to permit a U.S. banking entity to avoid the
restrictions on proprietary trading simply by setting up an offshore
subsidiary or reincorporating offshore, and regulators should
enforce them accordingly. In addition, the subparagraphs Seek to
maintain a level playing field by prohibiting a foreign bank from
improperly offering its hedge fund and private equity fund services
to U.S. persons when such offering could not be made in the United
States.'').
---------------------------------------------------------------------------

    The proposed rule allowed foreign banking entities that met certain
qualifications to engage in covered fund activities, including owning,
organizing and offering, and sponsoring funds outside the United
States. The proposed rule defined both the type of foreign banking
entity that is eligible for the exemption and when an activity or
investment would occur ``solely outside of the United States.'' The
proposed rule allowed a qualifying foreign banking entity to acquire or
retain an ownership interest in, or act as sponsor to, a covered fund
under the exemption only if no subsidiary, affiliate or employee of the
banking entity that's incorporated or physically located in the United
States engaged in offering or selling the covered fund. The proposed
rule also implemented the statutory requirement that prohibited an
ownership interest in the covered fund from being offered for sale or
sold to a resident of the United States.
    Commenters generally expressed support for an exemption to allow
foreign banking entities to conduct foreign covered fund activities and
make investments outside the United States.\2395\ A number of
commenters also expressed concerns that the proposed foreign fund
exemption was too narrow and would not be effective in permitting
foreign banking entities to engage in covered fund activities and
investments outside of the United States. For instance, many commenters
argued that several of the proposal's restrictions on the exemption
were not required by statute and were inconsistent with congressional
intent to limit the extraterritorial impact of section 13 of the BHC
Act.\2396\ These commenters argued that the foreign funds exemption
should focus on whether a prohibited activity, such as sponsoring or
investing in a covered fund, involves principal risk taken or held by
the foreign banking entity that poses risk to U.S. banking entities or
the financial stability of the United States.\2397\ Commenters also
argued that a broader exemption would better recognize the regulation
and supervision of the home country supervisor of the foreign banking
entity and of its covered fund activities.\2398\
---------------------------------------------------------------------------

    \2395\ See, e.g., IIB/EBF; SIFMA et al. (Covered Funds) (Feb.
2012); See also Occupy.
    \2396\ See Ass'n. of German Banks; BVI; Allen & Overy (on behalf
of Canadian Banks); EFAMA; F&C HSBC; IIB/EBF; ICSA; PEGCC;
Soci[eacute]t[eacute] G[eacute]n[eacute]rale; Union Asset; Ass'n. of
Banks in Malaysia; EBF; Credit Suisse (Williams); Cadwalader (on
behalf of Thai Banks).
    \2397\ See IIB/EBF; EBF; Allen & Overy (on behalf of Canadian
Banks); Credit Suisse (Williams); Katten (on behalf of Int'l
Clients).
    \2398\ See Credit Suisse (Williams); PEGCC; See also
Commissioner Barnier.
---------------------------------------------------------------------------

    Some commenters contended that the proposal represented an improper
extraterritorial application of U.S. law that could be found to violate
international treaty obligations of the United States, such as those
under the North American Free Trade Agreement, and might result in
retaliation by foreign countries in their treatment of U.S. banking
entities abroad.\2399\ Commenters also alleged that the proposal would
impose significant compliance costs on the foreign operations of
foreign banking entities conducting activity pursuant to this
exemption.\2400\ These commenters argued that foreign banking entities
relying on the foreign fund exemption should not be subject to the
compliance program requirements contained in Appendix C with respect to
their non-U.S. operations.\2401\
---------------------------------------------------------------------------

    \2399\ See e.g., Norinchukin; Cadwalader (on behalf of Thai
Banks); Barclays; EBF; Ass'n. of German Banks; Soci[eacute]t[eacute]
G[eacute]n[eacute]rale; Chamber (Feb. 2012).
    \2400\ See BaFin/Deutsche Bundesbank; Norinchukin; IIF; Allen &
Overy (on behalf of Canadian Banks); ICFR; BoA. As discussed below
in Part IV.C.1, other parts of the final rule address commenters'
concerns regarding the compliance burden on foreign banking
entities.
    \2401\ See AFG; Ass'n. of German Banks; BVI; Comm. on Capital
Markets Regulation; IIB/EBF; Japanese Bankers Ass'n.; Norinchukin;
Union Asset. As discussed in greater detail below in Part IV.C.1,
activities and investments of a foreign bank that are conducted
under the foreign funds exemption are generally not subject to the
specific requirements of Sec.  ----.20 and Appendices A and B. The
U.S. operations of foreign banking entities are expected to have
policies and procedures in place to ensure that they conduct
activities under this part in full compliance with this part.
---------------------------------------------------------------------------

    Several commenters argued that the restrictions of section 13(f),
which limits transactions between a banking entity and certain covered
funds, would not apply to activities and investments made in reliance
on the foreign fund exemption.\2402\ Some commenters argued that the
Agencies should grandfather all existing foreign covered funds and
argued that failure to provide relief for existing relationships could
cause substantial disruption to foreign covered funds and significantly
harm investors in existing funds without producing a clear offsetting
benefit.\2403\
---------------------------------------------------------------------------

    \2402\ See Australian Bankers Ass'n.; AFMA; Allen & Overy (on
behalf of Foreign Bank Group); British Bankers' Ass'n.; F&C French
Banking Fed'n.; IIB/EBF; Japanese Bankers Ass'n; Katten (on behalf
of Int'l Clients); Union Asset. See also infra Part IV.B.5.
    \2403\ See BVI; Credit Suisse (Williams); EFAMA; IIB/EBF; PEGCC;
Union Asset. See supra Part II for a discussion regarding the
conformance period.
---------------------------------------------------------------------------

    In response to comments received on the proposal, the final rule
contains a number of modifications to more effectively implement the
foreign fund exemption in light of the language and purpose of the
statute. Importantly, as explained in the section defining covered
funds, the Agencies also believe that the more circumscribed definition
of covered fund, including the exclusion for foreign public funds,
should alleviate many of the concerns raised and potential burdens
identified by commenters with respect to the funds activities of
foreign banking entities.\2404\
---------------------------------------------------------------------------

    \2404\ For instance, many commenters raised concerns regarding
the treatment of foreign public funds such as UCITS. As discussed in
greater detail above in Part IV.B.1, the definition of covered fund
under the final rule has been modified from the proposal and
tailored to include only the types of foreign funds that the
Agencies believe are intended to be the focus of the statute (e.g.,
certain foreign funds that are established by U.S. banking
entities). Foreign public funds are also excluded from the
definition of covered fund under the final rule. The modifications
in the final rule in part address commenters' request that foreign
funds be grandfathered. To the extent that an entity qualifies for
one or more of the exclusions from the definition of covered fund,
that entity would not be a covered fund under the final rule.
Moreover, any entity that would be a covered fund would still be
able to rely on the conformance period in order to come into
compliance with the requirements of section 13 and the final rule.
---------------------------------------------------------------------------

1. Foreign Banking Entities Eligible for the Exemption
    The statutory language of section 13(d)(1)(I) provides that, in
order to be eligible for the foreign funds exemption, the banking
entity must not be directly or indirectly controlled by a banking

entity that is organized under the laws of the United States or of one
or more States. Consistent with this statutory language, the proposed
rule limited the scope of the exemption to banking entities that are
organized under foreign law and, as applicable, controlled only by
entities organized under foreign law.
    The Agencies did not receive substantive comment on this aspect of
the proposal related to the foreign fund exemption, though some
commenters offered suggestions to clarify various parts of the wording
of the scope of the definition of banking entities that may qualify for
the exemption. The final rule makes only minor, technical changes to
more fully carry out the purposes of the statute.
    Consistent with the statutory language and purpose of section
13(d)(1)(I) of the BHC Act, the final rule provides that the exemption
is available only if the banking entity is not organized under \2405\
or directly or indirectly controlled by a banking entity that is
organized under the laws of the United States or of one or more States.
As noted above, section 13(d)(1)(I) of the BHC Act specifically
provides that its exemption is available only to a banking entity that
is not ``directly or indirectly'' controlled by a banking entity that
is organized under the laws of the United States or of one or more
States.\2406\ Because of this express statutory requirement, a foreign
subsidiary controlled, directly or indirectly, by a banking entity
organized under the laws of the United States or one of its States, and
a foreign branch office of a banking entity organized under the laws of
the United States or one of the States, may not take advantage of this
exemption.
---------------------------------------------------------------------------

    \2405\ The final rule clarifies the eligibility requirements for
banking entities Seeking to rely on the foreign fund exemption.
Section 13(d)(1)(I) of the BHC Act and Sec.  ----.13(c)(1)(i) of the
proposal require that a banking entity Seeking to rely on the
foreign fund exemption not be directly or indirectly controlled by a
banking entity that is organized under the laws of the United States
or of one or more states. For clarification purposes, in addition to
the eligibility requirement in Section 13(d)(1)(I) of the BHC Act
and the proposal, the final rule also expressly requires that the
banking entity not itself be organized under the laws of the United
States.
    \2406\ See 12 U.S.C. 1851(d)(1)(I).
---------------------------------------------------------------------------

    Like the proposal, the final rule incorporates the statutory
requirement that the banking entity conduct its sponsorship or
investment activities pursuant to sections 4(c)(9) or 4(c)(13) of the
BHC Act. The final rule retains the tests in the proposed rule for
determining when a banking entity would meet that requirement. The
final rule also provides qualifying criteria for both a banking entity
that is a qualifying foreign banking organization under the Board's
Regulation K and a banking entity that is not a foreign banking
organization for purposes of Regulation K.\2407\
---------------------------------------------------------------------------

    \2407\ Section ----.13(b)(2) only addresses when a transaction
will be considered to have been conducted pursuant to section
4(c)(9) of the BHC Act. Although the statute also references section
4(c)(13) of the BHC Act, the Board has to date applied the general
authority contained in that section solely to the foreign activities
of U.S. banking organizations which, by the express terms of section
13(d)(1)(I) of the BHC Act, are unable to rely on the foreign funds
exemption.
---------------------------------------------------------------------------

    Section 4(c)(9) of the BHC Act applies to any company organized
under the laws of a foreign country the greater part of whose business
is conducted outside the United States, if the Board by regulation or
order determines that the exemption would not be substantially at
variance with the purposes of the BHC Act and would be in the public
interest.\2408\ The Board has implemented section 4(c)(9) as part of
subpart B of the Board's Regulation K,\2409\ which specifies a number
of conditions and requirements that a foreign banking organization must
meet in order to act pursuant to that authority.\2410\ The qualifying
conditions and requirements include, for example, that the foreign
banking organization demonstrate that more than half of its worldwide
business is banking and that more than half of its banking business is
outside the United States.\2411\ Under the final rule a banking entity
that is a qualifying foreign banking organization for purposes of the
Board's Regulation K, other than a foreign bank as defined in section
1(b)(7) of the International Banking Act of 1978 that is organized
under the laws of any commonwealth, territory, or possession of the
United States, will qualify for the foreign fund exemption.\2412\
---------------------------------------------------------------------------

    \2408\ See 12 U.S.C. 1843(c)(9).
    \2409\ See 12 CFR 211.20 et seq.
    \2410\ Some commenters argued that the Board's Regulation K
contains a number of limitations that may not be appropriate to
include as part of the requirements of the foreign fund exemption.
For example, subpart B of the Board's Regulation K includes various
approval requirements and interstate office location restrictions.
See Allen & Overy (on behalf of Foreign Bank Group); HSBC Life. The
final rule does not retain the proposal's requirement that the
activity be conducted in compliance with all of subpart B of the
Board's Regulation K (12 CFR 211.20 through 211.30). However, the
foreign fund exemption in section 13(d)(1)(I) of the BHC Act and the
final rule operates as an exemption and is not a separate grant of
authority to engage in an otherwise impermissible activity. To the
extent a banking entity is a foreign banking organization, it
remains subject to the Board's Regulation K and must, as a separate
matter, comply with any and all applicable rules and requirements of
that regulation.
    \2411\ See 12 CFR 211.23(a), (c), and (e). The proposed rule
only referenced the qualifying test under section 211.23(a) of the
Board's Regulation K; however, because there are two other methods
by which a foreign banking organization may meet the requirements to
be considered a qualified foreign banking organization, the final
rule incorporates a reference to those provisions as well.
    \2412\ This modification to the definition of foreign banking
organization from the proposed definition is necessary because,
under the International Banking Act and the Board's Regulation K,
depository institutions that are located in, or organized under the
laws of a commonwealth, territory, or possession of the United
States, are foreign banking organizations. However, for purposes of
the Federal securities laws and certain banking statutes, such as
section 2(c)(1) of the BHC Act and section 3 of the FDI Act, these
same entities are defined to be and treated as domestic entities.
For instance, these entities act as domestic broker-dealers under
U.S. securities laws and their deposits are insured by the FDIC.
Because one of the purposes of section 13 is to protect insured
depository institutions and the U.S. financial system from the
perceived risks of proprietary trading and covered fund activities,
the Agencies believe that these entities should be considered to be
located within the United States for purposes of section 13. The
final rule includes within the definition of State any State, the
District of Columbia, the Commonwealth of Puerto Rico, Guam,
American Samoa, the United States Virgin Islands, and the
Commonwealth of the Northern Mariana Islands.
---------------------------------------------------------------------------

    Section 13 of the BHC Act also applies to foreign companies that
control a U.S. insured depository institution but that are not subject
to the BHC Act generally or to the Board's Regulation K--for example,
because the foreign company controls a savings association or an FDIC-
insured industrial loan company. Accordingly, the final rule also
provides that a foreign banking entity that is not a foreign banking
organization would be considered to be conducting activities ``pursuant
to section 4(c)(9)'' for purposes of the foreign fund exemption \2413\
if the entity, on a fully-consolidated basis \2414\, meets at least two
of three requirements that evaluate the extent to which the foreign
banking entity's business is conducted outside the United States, as
measured by assets, revenues, and income.\2415\ This test largely
mirrors the qualifying foreign banking organization test that is made
applicable under section 4(c)(9) of the BHC Act and Sec.  211.23(a),
(c), or (e) of the Board's Regulation K, except that the test does not
require the foreign

entity to demonstrate that more than half of its banking business is
outside the United States.\2416\ This difference reflects the fact that
foreign entities subject to section 13 of the BHC Act, but not the BHC
Act generally, are likely to be, in many cases, predominantly
commercial firms. A requirement that such firms also demonstrate that
more than half of their banking business is outside the United States
would likely make the exemption unavailable to such firms and subject
their global activities to the restrictions on covered fund activities
and investments, a result that the Agencies do not believe was
intended.
---------------------------------------------------------------------------

    \2413\ This clarification would be applicable solely in the
context of section 13(d)(1) of the BHC Act. The application of
section 4(c)(9) to foreign companies in other contexts is likely to
involve different legal and policy issues and may therefore merit
different approaches.
    \2414\ For clarification purposes, the final rule has been
modified from the proposal to provide that the requirements for this
provision must be met on a fully-consolidated basis.
    \2415\ See final rule Sec.  ----.13(b)(2)(ii)(B). For purposes
of determining whether, on a fully consolidated basis, it meets the
requirements under Sec.  ----.13(b)(2)(ii)(B), a foreign banking
entity that is not a foreign banking organization should base its
calculation on the consolidated global assets, revenues, and income
of the top-tier affiliate within the foreign banking entity's
structure.
    \2416\ See 12 U.S.C. 1843(c)(9); 12 CFR 211.23(a), (c), and (e);
final rule Sec.  ----.13(b)(2)(ii)(B).
---------------------------------------------------------------------------

2. Activities or Investments Solely Outside of the United States
    As noted above, the proposed rule adopted a transaction-based
approach to implementing the foreign fund exemption and focused on the
extent to which the foreign fund transactions occur within, or are
carried out by personnel, subsidiaries or affiliates within, the United
States. In particular, Sec.  ----.13(c)(3) of the proposed rule
provided that a transaction or activity be considered to have occurred
solely outside of the United States only if: (i) the transaction or
activity is conducted by a banking entity that is not organized under
the laws of the United States or of one or more States; (ii) no
subsidiary, affiliate, or employee of the banking entity that is
involved in the offer or sale of an ownership interest in the covered
fund is incorporated or physically located in the United States; and
(iii) no ownership interest in such covered fund is offered for sale or
sold to a resident of the United States.
    Commenters suggested that, like the foreign trading exemption, the
foreign fund exemption should focus on the location of activities that
a banking entity engages in as principal.\2417\ These commenters argued
that the location of sales activities of a fund should not determine
whether a banking entity has sponsored or acquired an ownership
interest in a covered fund solely outside of the United States.
Commenters also argued that foreign banking entities typically locate
marketing and sales personnel for foreign funds in the United States in
order to serve customers, including those that are not residents of the
United States, and that the proposal would needlessly force all covered
fund sales activities to shift outside of the United States. These
commenters alleged that the restrictions under the proposal would cause
foreign banking entities to relocate their personnel from the United
States to overseas, diminishing U.S. jobs with no concomitant
benefit.\2418\
---------------------------------------------------------------------------

    \2417\ See Credit Suisse (Williams); IIB/EBF; Katten (on behalf
of Int'l Clients).
    \2418\ See Allen & Overy (on behalf of Foreign Bank Group);
Ass'n. of German Banks; Credit Suisse (Williams); IIB/EBF;
Soci[eacute]t[eacute] G[eacute]n[eacute]rale; Union Asset.
---------------------------------------------------------------------------

    Many commenters requested removal of the proposal's prohibition on
a U.S. subsidiary, affiliate, or employee of the foreign banking entity
offering or selling fund interests in order to qualify for the foreign
fund exemption.\2419\ Commenters argued that this limitation was not
included in the statute and that the limited involvement of persons
located in the U.S. in the distribution of ownership interests in a
foreign covered fund should not, by itself, disqualify the banking
entity from relying on the foreign fund exemption so long as the fund
is offered only outside the United States.\2420\ These commenters
argued that organizing and offering a fund is not a prohibited activity
so long as it is not accompanied by ownership or sponsorship of the
covered fund. One commenter urged that the final rule permit U.S.
personnel of a foreign banking entity to engage in non-selling
activities related to a covered fund, including acting as investment
advisor, establishing fund vehicles, conducting back-office functions
such as day-to-day management and deal sourcing tax structuring,
obtaining licenses, interfacing with regulators, and other related
activities that do not involve U.S. sales activity.\2421\
---------------------------------------------------------------------------

    \2419\ See Allen & Overy (on behalf of Foreign Bank Group);
Ass'n. of German Banks; Credit Suisse (Williams); IIB/EBF; Katten
(on behalf of Int'l Clients); TCW; Union Asset.
    \2420\ See IIB/EBF; Soci[eacute]t[eacute]
G[eacute]n[eacute]rale; TCW; Union Asset; Credit Suisse (Williams);
See also Katten (on behalf of Int'l Clients) (recommending that,
similar to the SEC's Regulation S, the final rule provide that
involvement of persons located in the United States in the
distribution of a non-U.S. covered fund's securities to potential
purchasers outside of the United States not affect the analysis of
whether a non-U.S. banking entity's investment or sponsorship occurs
outside the United States).
    \2421\ See Allen & Overy (on behalf of Foreign Bank Group).
---------------------------------------------------------------------------

    Instead of the proposal's transaction-based approach to
implementing the foreign fund exemption, many commenters suggested the
final rule adopt a risk-based approach.\2422\ These commenters argued
that a risk-based approach would prohibit or significantly limit the
amount of financial risk from such activities that could be transferred
to the United States by the foreign activity of foreign banking
entities in line with the purpose of the statute.\2423\ Commenters also
contended that foreign activities of most foreign banking entities are
already subject to activities limitations, capital requirements, and
other prudential requirements of their home-country
supervisor(s).\2424\
---------------------------------------------------------------------------

    \2422\ See BaFin/Deutsche Bundesbank; ICSA; IIB/EBF; EBF; Allen
& Overy (on behalf of Canadian Banks); Credit Suisse (Williams);
George Osborne.
    \2423\ See IIB/EBF.
    \2424\ See IIB/EBF.
---------------------------------------------------------------------------

    In response to commenters' concerns and in order to more
effectively implement both the statutory prohibition as well as the
foreign fund exemption, the final rule has been modified to better
reflect the purpose of the statute by ensuring that the principal risks
of covered fund investments and sponsorship by foreign banking entities
permitted under the foreign funds exemption occur and remain solely
outside of the United States. One of the principal purposes of section
13 is to limit the risks that covered fund investments and activities
pose to the safety and soundness of U.S. banking entities and the U.S.
financial system. Another purpose of the foreign fund exemption was to
limit the extraterritorial application of section 13 as it applies to
foreign banking entities subject to section 13.
    To accomplish these purposes in light of the structure and purpose
of the statute and in response to commenters, the final rule adopts a
risk-based approach rather than a transaction approach to the foreign
fund exemption. In order to ensure these risks remain solely outside of
the United States, the final rule also includes several conditions on
the availability of the foreign fund exemption. Specifically, the final
rule provides that an activity or investment occurs solely outside the
United States for purposes of the foreign fund exemption only if:
     The banking entity acting as sponsor, or engaging as
principal in the acquisition or retention of an ownership interest in
the covered fund, is not itself, and it not controlled directly or
indirectly by, a banking entity that is located in the United States or
established under the laws of the United States or of any State;
     The banking entity (including relevant personnel) that
makes the decision to acquire or retain the ownership interest or act
as sponsor to the covered fund is not located in the United States or
organized under the laws of the United States or of any State;
     The investment or sponsorship, including any transaction
arising from risk-mitigating hedging related to an ownership interest,
is not accounted for as principal directly or indirectly on a
consolidated basis by any branch or

affiliate that is located in the United States or organized under the
laws of the United States or of any State; and
     No financing for the banking entity's ownership or
sponsorship is provided, directly or indirectly, by any branch or
affiliate that is located in the United States or organized under the
laws of the United States or of any State.\2425\
---------------------------------------------------------------------------

    \2425\ See final rule Sec.  ----.13(b)(4).
---------------------------------------------------------------------------

    These requirements are designed to ensure that any foreign banking
entity engaging in activity under the foreign fund exemption does so in
a manner that ensures the risk and sponsorship of the activity or
investment occurs and resides solely outside of the United States.
    The final rule has been modified from the proposal to specifically
recognize that, for purposes of the foreign fund exemption, a U.S.
branch, agency, or subsidiary of a foreign bank, is located in the
United States; however, a foreign bank that operates or controls that
branch, agency, or subsidiary is not considered to be located in the
United States solely by virtue of operation of the U.S. branch, agency,
or subsidiary.\2426\ A subsidiary (wherever located) of a U.S. branch,
agency, or subsidiary of a foreign bank is also considered itself to be
located in the United States. This provision helps give effect to the
statutory language limiting the foreign fund exemption to activities of
foreign banking entities that occur ``solely outside of the United
States'' by clarifying that the U.S. operations of foreign banking
entities may not sponsor or acquire or retain an ownership interest in
a covered fund as principal based on this exemption.
---------------------------------------------------------------------------

    \2426\ See final rule Sec.  ----.13(b)(5).
---------------------------------------------------------------------------

    Because so-called ``back office'' activities do not involve
sponsoring or acquiring or retaining an ownership interest in a covered
fund, the final rule does not impose restrictions on U.S. personnel of
a foreign banking entity engaging in these activities in connection
with one or more covered funds. This allows providing administrative
services or similar functions to the covered fund as an incident to the
activity conducted under the foreign fund exemption (such as clearing
and settlement, maintaining and preserving records of the fund,
furnishing statistical and research data, or providing clerical support
for the fund).
    The foreign fund exemption in the final rule also permits the U.S.
personnel and operations of a foreign banking entity to act as
investment adviser to a covered fund in certain circumstances. For
instance, the U.S. personnel of a foreign banking entity may provide
investment advice and recommend investment selections to the manager or
general partner of a covered fund so long as that investment advisory
activity in the United States does not result in the U.S. personnel
participating in the control of the covered fund or offering or selling
an ownership interest to a resident of the United States. As explained
above, the final rule also explicitly provides that acquiring or
retaining an ownership interest does not include acquiring or retaining
an ownership interest in a covered fund by a banking entity acting
solely as agent, broker, or custodian, subject to certain conditions,
or acting on behalf of customers as a trustee, or in a similar
fiduciary capacity for a customer that is not a covered fund, so long
as the activity is conducted for the account of the customer and the
banking entity and its affiliates do not have or retain beneficial
ownership of the ownership interest.\2427\ The final rule would thus
allow a foreign bank to engage in any of these capacities in the U.S.
without the need to rely on the foreign fund exemption.
---------------------------------------------------------------------------

    \2427\ See final rule Sec.  ----.10(a)(2).
---------------------------------------------------------------------------

3. Offered for Sale or Sold to a Resident of the United States
    The proposed rule provided that no ownership interest in the
covered fund be offered for sale or sold to a resident of the United
States, a requirement of the statute.\2428\ Numerous commenters focused
on the definition of ``resident of the United States'' in the proposed
rule and the manner in which the restriction on offers and sales to
such persons would interrelate with Regulation S under the Securities
Act of 1933. Commenters asserted that, since market participants have
long conducted offerings of foreign funds in reliance on Regulation S
\2429\ in order to comply with U.S. securities law obligations, these
same securities law principles should be applied to determine whether a
person is a resident of the United States for purposes of section 13
and the final rule to determine whether an offer or sale is made to
residents of the United States.\2430\
---------------------------------------------------------------------------

    \2428\ See proposed rule Sec.  ----.13(c)(1)(iii).
    \2429\ See 17 CFR 230.901-905.
    \2430\ See IIB/EBF; EFAMA; ICI Global.
---------------------------------------------------------------------------

    Certain commenters argued that because of the way the restriction
in the statute and proposed rule was written, it was unclear whether
the restriction on offering for sale to a resident of the United States
applied to the foreign banking entity or to any third party that
establishes a fund.\2431\ Commenters argued the prohibition against
offers or sales of ownership interests to residents of the United
States should apply only to offers and sales of covered funds organized
and offered by the foreign banking entity but not to covered funds
established by unaffiliated third parties.\2432\ These commenters
reasoned that a foreign banking entity should be permitted to make a
passive investment in a covered fund sponsored and controlled by an
unaffiliated third party that has U.S. investors as long as the foreign
banking entity does not itself offer or sell ownership interest in the
covered fund to residents of the United States.\2433\ Commenters
contended that this interpretation would be consistent with section
13's purpose to prevent foreign banks from using the foreign fund
exemption to market and sell covered funds to U.S. investors, while
simultaneously limiting the extraterritorial impact of section
13.\2434\ Commenters argued that the proposal's foreign fund exemption
would negatively impact U.S. asset managers unaffiliated with any
banking entity because they would either be forced to exclude foreign
banking entities from investing in their funds or would need to ensure
that no residents of the United States hold ownership interests in
funds offered to these entities.\2435\ Commenters also contended that
foreign banking entities, including sovereign wealth funds that own or
control foreign banking organizations, invest tens of billions of
dollars in U.S. covered funds and that if these types of investments
were not permitted under the foreign fund exemption an important source
of foreign investment in the U.S. could be eliminated.\2436\
---------------------------------------------------------------------------

    \2431\ See Cadwalader (on behalf of Thai Banks); Grosvenor;
SIFMA et al. (Covered Funds) (Feb. 2012).
    \2432\ See Ass'n. of German Banks; BAROC; Cadwalader (on behalf
of Thai Banks); Comm. on Capital Markets Regulation; Credit Suisse
(Williams); IIB/EBF; Japanese Bankers Ass'n.; Katten (on behalf of
Int'l Clients); PEGCC.
    \2433\ See Grosvenor; IIB/EBF; Japanese Bankers Ass'n.; Katten
(on behalf of Int'l Clients); Sens. Merkley & Levin (Feb.2012);
Norinchukin; SIFMA et al. (Covered Funds) (Feb. 2012).
    \2434\ See BAROC; Credit Suisse (Williams); Grosvenor; IIB/EBF.
    \2435\ See Comm. on Capital Markets Regulation; Credit Suisse
(Williams); PEGCC.
    \2436\ See SIFMA et al. (Covered Funds) (Feb. 2012); See also
Grosvenor; PEGCC.
---------------------------------------------------------------------------

    Commenters argued that an investment by a foreign banking entity in
a third-party unaffiliated fund does not pose any risk to a U.S.
banking entity or to the U.S. financial system. Moreover, commenters
argued that a foreign banking entity that has invested in a fund
sponsored and advised by a

third party has no control over whether--and may have no knowledge--
that the third party has determined to offer or sell the fund to U.S.
residents.\2437\
---------------------------------------------------------------------------

    \2437\ See AFG; BAROC; Cadwalader (on behalf of Thai Banks);
Japanese Bankers Ass'n.
---------------------------------------------------------------------------

    As noted above, one of the purposes of section 13 is to limit the
risk to banking entities and the financial system of the United States.
Another purpose of the statute appears to be to permit foreign banking
entities to engage in foreign activities without being subject to the
restrictions of section 13 while also ensuring that these foreign
entities do not receive a competitive advantage over U.S. banking
entities with respect to offering and selling their covered fund
services in the United States.\2438\ As such, the final rule does not
prohibit a foreign banking entity from making an investment in or
sponsoring a foreign fund. However, a foreign banking entity would not
be permitted under the foreign fund exemption to invest in, or engage
in the sponsorship of, a U.S. or foreign covered fund that offers
ownership interests to residents in the United States unless it does so
pursuant to and subject to the limitations of the permitted activity
exemption for organizing and offering a covered fund, for example,
which has the same effect for U.S. banking entities. The final rule
ensures that the risk of the sponsoring and investing in non-U.S.
covered funds by foreign banking entities remains outside of the United
States and that the foreign fund exemption does not advantage foreign
banking entities relative to U.S. banking entities with respect to
providing their covered fund services in the United States by
prohibiting the offer or sale of ownership interests in related covered
funds to residents of the United States.
---------------------------------------------------------------------------

    \2438\ See 156 Cong. Rec. S5897 (daily ed. July 15, 2010)
(statement of Sen. Merkley).
---------------------------------------------------------------------------

    Commenters also argued that foreign investors in a foreign covered
fund should not be treated as residents of the United States for
purposes of the final rule if, after purchasing their interest in the
covered fund, they relocate to the U.S.,\2439\ or travel to the U.S. on
a temporary basis.\2440\ Commenters also argued that non-U.S. investors
in a fund offered by a foreign banking entity should not be prohibited
from transferring their interests to residents of the United States in
the secondary market.\2441\ One commenter alleged that, notwithstanding
the reasonable efforts of foreign banking entities to prevent residents
of the United States from investing in their foreign covered funds,
investors may find ways to circumvent and invest in covered funds
without knowledge or assistance from the foreign banking entity.\2442\
---------------------------------------------------------------------------

    \2439\ See IIB/EBF; Katten (on behalf of Int'l Clients); Union
Asset.
    \2440\ See IFIC; See also Allen & Overy (on behalf of Canadian
Banks).
    \2441\ See Ass'n. of German Banks; Credit Suisse (Williams);
IIB/EBF; Katten (on behalf of Int'l Clients).
    \2442\ See Credit Suisse (Williams).
---------------------------------------------------------------------------

    Certain commenters argued that there was a substantial risk that
foreign funds offered by foreign banking entities would not be able to
rely on the exemption due to the presence of a limited number of
investors who are residents of the United States.\2443\ A few
commenters suggested that the final rule should require that, for both
related and unrelated covered funds, a banking entity need only have a
reasonable belief that an ownership interest in a covered fund is not
offered or sold to residents of the United States in order to qualify
for the foreign fund exemption. Commenters argued that only active
targeting or marketing towards a resident of the United States by the
foreign banking entity should be prohibited by the final rule, and that
the incidental presence of a limited number of investors that are
residents of the United States in a foreign covered fund offered by a
foreign banking entity should not prohibit the foreign banking entity
from relying on the foreign fund exemption.\2444\ One commenter argued
that, for certain complex fund structures (e.g., a structure with a
master fund and multiple feeder funds that investors invest in or a
parallel fund structure both managed by the same fund manager),
eligibility for the foreign fund exemption should not be precluded for
a fund with no ownership interests offered for sale or sold to U.S.
residents even if a related covered fund is offered to residents of the
United States.\2445\
---------------------------------------------------------------------------

    \2443\ See BVI; EFAMA; Union Asset.
    \2444\ See AFG; Union Asset; See also BVI; Allen & Overy (on
behalf of Canadian Banks); Katten (on behalf of Int'l Clients).
    \2445\ See Japanese Bankers Ass'n.
---------------------------------------------------------------------------

    After considering comments received on the proposal, the final rule
retains the statutory requirement that no ownership interest in the
covered fund be offered for sale to a resident of the United
States.\2446\ The final rule provides that an ownership interest in a
covered fund is offered for sale or sold to a resident of the United
States for purposes of the foreign fund exemption only if it is sold or
has been sold pursuant to an offering that targets residents of the
United States.\2447\
---------------------------------------------------------------------------

    \2446\ See final rule Sec.  ----.13(b)(1)(iii).
    \2447\ See final rule Sec.  ----.13(b)(3).
---------------------------------------------------------------------------

    Absent circumstances otherwise indicating a nexus with residents of
the United States, the sponsor of a foreign fund would not be viewed as
targeting U.S. residents for purposes of the foreign fund exemption if
it conducts an offering directed to residents of one or more countries
other than the United States; includes in the offering materials a
prominent disclaimer that the securities are not being offered in the
United States or to residents of the United States; and includes other
reasonable procedures to restrict access to offering and subscription
materials to persons that are not residents of the United States.\2448\
If ownership interests that are issued in a foreign offering are listed
on a foreign exchange, secondary market transactions could be
undertaken by the banking entity outside the United States in
accordance with Regulation S under the foreign fund exemption.\2449\
Foreign banking entities should use precautions not to send offering
materials into the United States or conduct discussions with persons
located in the United States (other than to or with a person known to
be a dealer or other professional fiduciary acting on behalf of a
discretionary account or similar account for a person who is not a
resident of the United States).\2450\ In order to comply with the rule
as adopted, sponsors of covered funds established outside of the United
States must examine the facts and circumstances of their particular
offerings and confirm that the offering does not target residents of
the United States.
---------------------------------------------------------------------------

    \2448\ See Statement of the Commission Regarding Use of Internet
Web sites to Offer Securities, Solicit Securities Transactions or
Advertise Investment Services Offshore, Securities Act Release No.
7516 (Mar. 23, 1998). Reliance on these principles only applies with
respect to whether an ownership interest in a covered fund is
offered for sale or sold to a resident of the United States for
purposes of section 13 of the BHC Act. In addition, reliance would
not be appropriate if a foreign fund engages in a private placement
of ownership interests in the United States in reliance on Section
4(a)(2) of the Securities Act of 1933 or Regulation D (17 CFR
230.501-506).
    \2449\ An offer or sale is made in an ``offshore transaction''
under Regulation S if, among other conditions, the transaction is
executed in, on or through the facilities of a ``designated offshore
securities market'' as described in Regulation S, which includes a
number of foreign stock exchanges and markets and any others the SEC
designates. See Securities Act rule 902(h).
    \2450\ See Securities Act rule 902(k)(2).
---------------------------------------------------------------------------

    With respect to the treatment of multi-tiered fund structures under
the foreign fund exemption, the Agencies expect that activities related
to certain complex fund structures should be integrated in

order to determine whether an ownership interest in a covered fund is
offered for sale to a resident of the United States. For example, a
banking entity may not be able to rely on the foreign fund exemption to
sponsor or invest in an initial covered fund (that is offered for sale
only overseas and not to residents of the United States) that is itself
organized or operated for the purpose of investing in another covered
fund (that is sold pursuant to an offering that targets U.S. residents)
and that is either organized and offered or is advised by that banking
entity.
4. Definition of ``Resident of the United States''
    As discussed in greater detail above in Part IV.B.1, section
13(d)(1)(I) of the BHC Act provides that a foreign banking entity may
acquire or retain an ownership interest in or act as sponsor to a
covered fund, but only if that activity is conducted according to the
requirements of the statute, including that no ownership interest in
the covered fund is offered for sale or sold to a ``resident of the
United States.'' As noted above in Part IV.B.1.f describing the
definition of ``resident of the United States,'' the statute does not
define this term.
    After carefully considering comments received, the Agencies have
defined the term ``resident of the United States'' in the final rule to
mean a ``U.S. person'' as defined in the SEC's Regulation S.\2451\ The
Agencies note, however, that it would not be permissible under the
foreign fund exemption for a foreign banking entity to facilitate or
participate in the formation of a non-U.S. investment vehicle for a
person or entity that is itself a U.S. person for the specific purpose
of investing in a foreign fund. The Agencies believe that this type of
activity would constitute an evasion of the requirements of section 13
of the BHC Act.
---------------------------------------------------------------------------

    \2451\ See final rule Sec.  ----.10(d)(8).
---------------------------------------------------------------------------

c. Permitted Covered Fund Interests and Activities by a Regulated
Insurance Company
    As discussed above, section 13(d)(1)(F) of the BHC Act permits a
banking entity that is a regulated insurance company acting for its
general account, or an affiliate of an insurance company acting for the
insurance company's general account, to purchase or sell a financial
instrument subject to certain conditions.\2452\ Section 13(d)(1)(D) of
the Act permits a banking entity to purchase or sell a financial
instrument on behalf of customers.\2453\ The proposal implemented these
exemptions with respect to the proprietary trading activities of
insurance companies by permitting a banking entity that is an insurance
company to purchase or sell a financial instrument for the general
account of the insurance company or for a separate account, in each
case subject to certain restrictions.\2454\ The proposal did not apply
these exemptions to covered fund activities or investments.
---------------------------------------------------------------------------

    \2452\ See 12 U.S.C. 1851(d)(1)(F).
    \2453\ See 12 U.S.C. 1851(d)(1)(D).
    \2454\ See proposed rule Sec. Sec.  ----.6(b)(2)(iii); --
--.6(c).
---------------------------------------------------------------------------

    A number of commenters argued that section 13 was designed to
accommodate the business of insurance by exempting both the proprietary
trading and covered fund activities of insurance companies.\2455\ These
commenters argued that providing an exemption for covered fund
activities and investments through both the general account and
separate accounts of an insurance company was integral to the business
of insurance and that, absent an exemption from the covered fund
provisions, insurance companies would lack an effective means to
diversify their holdings and obtain adequate rates of return in order
to maintain affordable premiums for customers.\2456\
---------------------------------------------------------------------------

    \2455\ See, e.g., Sutherland (on behalf of Comm. of Annuity
Insurers); ACLI (Jan. 2012); Country Fin. et al.; Nationwide; NAMIC;
Fin. Services Roundtable (Feb. 3, 2012) (citing FSOC study at 71);
HSBC Life; Chamber (Feb. 2012); Country Fin. et al.; Mutual of
Omaha; See also Rep. McCarthy et al.; Sen. Nelson; Sen. Hagan; Sens.
Brown & Harkin.
    \2456\ See, e.g., Fin. Services Roundtable (Feb. 3, 2012); TIAA-
CREF (Feb. 13, 2012); Sutherland (on behalf of Comm. of Annuity
Insurers); USAA (citing FSOC study at 71); HSBC Life; ACLI; NAMIC;
Nationwide.
---------------------------------------------------------------------------

    Some commenters argued that section 13 of the BHC Act specifically
provides exemptions from both the covered fund prohibition of section
13(a)(1), and the prohibition on proprietary trading.\2457\ Commenters
contended that the exemptions in section 13(d)(1)(F) (referencing
activity in general accounts of insurance companies) and 13(d)(1)(D)
(referencing activities on behalf of customers) cross-reference the
instruments described in section 13(h)(4) and not activity described in
section 13(h)(4). On this basis, commenters argued the statute exempts
both proprietary trading in these instruments described in section
13(h)(4) and investments in those instruments (including when those
instruments are ownership interests in covered funds).\2458\
---------------------------------------------------------------------------

    \2457\ See Sutherland (on behalf of Comm. of Annuity Insurers);
Nationwide; See also Rep. McCarthy et al.; Sens. Brown & Harkin.
    \2458\ See, e.g., Fin. Services Roundtable (Feb. 3, 2012); USAA;
HSBC Life; Country Fin. et al.; Sutherland (on behalf of Comm. of
Annuity Insurers); Nationwide (discussing the exemption for the
general account of an insurance company); ACLI; Nationwide
(discussing the exemption for separate accounts).
---------------------------------------------------------------------------

    Alternatively, commenters argued that the Agencies should use their
authority in section 13(d)(1)(J) of the BHC Act to provide an exemption
for the covered fund activities and investments of insurance
companies.\2459\ These commenters argued that exempting covered funds
activities and investments of insurance companies would promote and
protect the safety and soundness of the banking entity and financial
stability of the United States and provide certain benefits to the U.S.
financial system by allowing insurance companies to access important
asset classes (for better investment diversity and returns), provide
more diverse product offerings to customers, better manage their
investment risks through diversification and more closely matching the
maturity of their assets and liabilities, contribute liquidity to
capital markets, and support economic growth through the provision of
capital to entrepreneurs and businesses.\2460\ Commenters also argued
that an exemption for insurance companies from the covered fund
prohibitions was necessary to permit insurance companies that are
banking entities to effectively compete with insurance companies not
affiliated with an insured depository institution.\2461\ Commenters
alleged that insurance companies are already subject to extensive
regulation under state insurance laws that specifically include
provisions designed to diversify risk among investment categories,
limit exposure to particular types of asset classes including covered
fund investments, and protect the safety and soundness of the insurance
company.\2462\
---------------------------------------------------------------------------

    \2459\ See, e.g., Sutherland (on behalf of Comm. of Annuity
Insurers).
    \2460\ See Fin. Services Roundtable (Feb. 3, 2012); TIAA-CREF
(Feb. 13, 2012); USAA; HSBC Life; ACLI (Jan. 2012); NAMIC;
Nationwide.
    \2461\ See, e.g., Nationwide.
    \2462\ See, e.g., ACLI (Jan. 2012); Fin. Services Roundtable
(Feb. 3, 2012); USAA; Chamber (Feb. 2012); Country Fin. et al.;
Mutual of Omaha; NAMIC; Nationwide; Rep. McCarthy et al. See also
156 Cong. Reg. S. 5896 (daily ed. July 15, 2010) (statement of Sen.
Merkley) (arguing that activities of insurance companies ``are
heavily regulated by State insurance regulators, and in most cases
do not pose the same level of risk as other proprietary trading'').
---------------------------------------------------------------------------

    After careful review of the comments in light of the statutory
provisions, the final rule has been modified to permit

an insurance company or its affiliate \2463\ to acquire or retain an
ownership interest in, or act as sponsor to, a covered fund for either
the general account of the insurance company or one or more separate
accounts established by the insurance company.\2464\
---------------------------------------------------------------------------

    \2463\ Some commenters urged the Agencies to provide that an
affiliate or subsidiary of an insurance company could purchase
covered funds for the insurance company's general account or a
separate account. See e.g., Fin. Services Roundtable (Feb. 3, 2012);
TIAA-CREF (Feb. 13, 2012). The Agencies note that the final rule
provides (as does the statute) an exemption that permits an
insurance company or its affiliate to acquire and retain an
ownership interest in a covered fund solely for the insurance's
company general account (or one or more of its separate account);
such an affiliate or subsidiary also may be a wholly-owned
subsidiary, as defined in the final rule.
    \2464\ The final rule defines the terms ``general account'' and
``separate account'' largely as proposed, and includes the new
defined term ``insurance company,'' defined as a company that is
organized as an insurance company, primarily and predominantly
engaged in writing insurance or reinsuring risks underwritten by
insurance companies, subject to supervision as such by a state
insurance regulator or a foreign insurance regulator, and not
operated for the purpose of evading the provisions of section 13 of
the BHC Act. Cf. section 2(a)(17) of the Investment Company Act
(defining the term insurance company).
---------------------------------------------------------------------------

    These activities are only permitted under the final rule so long
as: (1) the insurance company or its affiliate acquires and retains the
ownership interest solely for the general account of the insurance
company or for one or more separate accounts established by the
insurance company; (2) the acquisition and retention of the ownership
interest is conducted in compliance with, and subject to, the insurance
company investment laws, regulations, and written guidance of the State
or jurisdiction in which the insurance company is domiciled; and (3)
the appropriate Federal banking agencies, after consultation with the
Financial Stability Oversight Council and the relevant insurance
commissioners of the States and relevant foreign jurisdictions, as
appropriate, have not jointly determined, after notice and comment,
that a particular law, regulation, or written guidance described in
Sec.  ----.13(c)(2) of the final rule is insufficient to protect the
safety and soundness of the banking entity, or the financial stability
of the United States.\2465\
---------------------------------------------------------------------------

    \2465\ See final rule Sec.  ----.13(c).
---------------------------------------------------------------------------

    The Agencies believe that exempting insurance activities and
investments from the covered fund restrictions is supported by the
language of sections 13(d)(1)(D) and (F) of the BHC Act,\2466\ and more
fully carries out Congressional intent and the statutory purpose of
appropriately accommodating the business of insurance within an
insurance company.\2467\ Section 13(d)(1)(F) of the statute
specifically exempts general accounts of insurance companies, and, as
explained above in Part IV.A.7, separate accounts are managed and
maintained on behalf of customers, an activity exempt under section
13(d)(1)(D) of the statute. By their terms, these are statutory
exemptions from the prohibitions in section 13(a), which includes both
the prohibition on proprietary trading and the prohibition on covered
fund investments and sponsorship. Moreover, the statutory language of
sections 13(d)(1)(D) and 13(d)(1)(F), both cross-reference the
instruments described in section 13(h)(4) and not activity described in
section 13(h)(4). These instruments are ``any security, any derivative,
any contract of sale of a commodity for future delivery, any option on
any such security, derivative or contract or any other security or
financial instrument that [the Agencies determine by rule.]'' This
reference covers an ownership interest in a covered fund. The Agencies
believe these exemptions as modified more fully carry out Congressional
intent and the statutory purpose of appropriately accommodating the
business of insurance within an insurance company.\2468\ Insurance
companies are already subject to a robust regulatory regime including
limitations on their investment activities.
---------------------------------------------------------------------------

    \2466\ See 12 U.S.C. 1851(d)(1)(D), (F).
    \2467\ See 12 U.S.C. 1851(b)(1)(F). See also 156 Cong. Reg. S.
5896 (daily ed. July 15, 2010) (statement of Sen. Merkley) (arguing
that ``section 13 of the BHC Act] was never meant to affect the
ordinary business of insurance'').
    \2468\ See 12 U.S.C. 1851(b)(1)(F). See also 156 Cong. Reg. S.
5896 (daily ed. July 15, 2010) (statement of Sen. Merkley) (arguing
that ``section 13 of the BHC Act] was never meant to affect the
ordinary business of insurance'').
---------------------------------------------------------------------------

5. Section ----.14: Limitations on Relationships With a Covered Fund
    Section 13(f) of the BHC Act generally prohibits a banking entity
that, directly or indirectly, serves as investment manager, investment
adviser, or sponsor to a covered fund (or that organizes and offers a
covered fund pursuant to section 13(d)(1)(G) of the BHC Act) from
entering into a transaction with a covered fund that would be a covered
transaction as defined in section 23A of the Federal Reserve Act (``FR
Act'').\2469\ The statute also provides an exemption for prime
brokerage transactions between a banking entity and a covered fund in
which a covered fund managed, sponsored, or advised by that banking
entity has taken an ownership interest. Section 13(f) subjects any
transaction permitted under section 13(f) of the BHC Act (including a
permitted prime brokerage transaction) between the banking entity and
covered fund to section 23B of the FR Act.\2470\ In general, section
23B of the FR Act requires that the transaction be on market terms or
on terms at least as favorable to the banking entity as a comparable
transaction by the banking entity with an unaffiliated third party.
Section ----.16 of the proposed rule implemented these
provisions.\2471\
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    \2469\ 12 U.S.C. 371c. The Agencies note that this does not
alter the applicability of section 23A of the FR Act and the Board's
Regulation W to covered transactions between insured depository
institutions and their affiliates.
    \2470\ 12 U.S.C. 371c-1.
    \2471\ See proposed rule Sec.  ----.16.
---------------------------------------------------------------------------

a. Scope of Application
    Section 13(f) of the BHC Act and the related provisions of the
proposal were among the most commented upon aspects of the covered
funds section. The majority of commenters argued that the broad
definition of ``covered fund'' under the proposal made the proposed
implementation of section 13(f) unworkable and disruptive to existing
market practices because it would prohibit corporate funding
transactions with ordinary corporate entities that do not engage in
hedge fund or private equity activities.\2472\ Commenters also argued
that activities that the proposal appeared to permit as a permitted
activity exemption (e.g., investments in public welfare funds) would be
prohibited by the restrictions in 13(f) \2473\ and that the Agencies
should construe section 13(d)(1)(J) of the BHC Act as allowing them to
permit banking entities to enter into covered transactions with a
covered fund, if those activities would promote and protect the safety
and soundness of banking entities and the financial stability of the
United States.\2474\ However, many of the comments discussed above and
some of the economic burdens noted by these commenters have been
addressed by revisions discussed above in Part IV.B.1 to the definition
of covered fund.\2475\ A number of these and related comments are also
addressed by portions of the

final rule that provide that the prohibitions of section 13 do not
apply to interests acquired, for example, as agent, broker, custodian,
in satisfaction of a debt previously contracted, through a pension
fund, or as trustee or fiduciary (all within the limits defined in the
final rule).
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    \2472\ See, e.g., Allen & Overy (on behalf of Foreign Bank
Group); BoA; Barclays; Credit Suisse (Williams); Deutsche Bank
(Fund-Linked Products); GE (Feb. 2012); Goldman Sachs (Covered
Funds); ICI Global; ISDA (Feb. 2012); RMA; SIFMA et al. (Covered
Funds) (Feb. 2012).
    \2473\ See SunTrust; AHIC; SBIA.
    \2474\ See SIFMA et al. (Covered Funds) (Feb. 2012).
    \2475\ See final rule Sec.  ----.10(b). See supra Part IV.B.1.
---------------------------------------------------------------------------

    Several commenters argued that applying the restrictions in section
13(f) to foreign activities of foreign banking entities would be
inconsistent with the presumption against extraterritorial application
of U.S. law and principles of international comity, including deference
to home-country regulation.\2476\ For example, one commenter expressed
concern that rules being developed around custody obligations in the
European Union may require a prime broker or custodian to indirectly
guarantee assets of a fund, which would directly conflict with the
prohibition on guarantees in section 13(f) of the BHC Act.\2477\ As
explained above, the final rule has been modified to more narrowly
focus the scope of the definition of covered fund as it applies to
foreign funds.\2478\ These changes substantially address the issues
raised by commenters regarding the applicability of section 13(f) of
the BHC Act to foreign funds.
---------------------------------------------------------------------------

    \2476\ See IIB/EBF; Katten (on behalf of Int'l Clients); EBF;
EFAMA; French Banking Fed'n.; Japanese Bankers Ass'n.
    \2477\ See AIMA.
    \2478\ See final rule Sec.  ----.10(b)(1)(ii) & (c)(1). See
supra Part IV.B.1.
---------------------------------------------------------------------------

    Commenters also raised a number of other issues. For instance, some
commenters argued that applying section 13(f) to securitization
entities would in some instances run counter to the rule of
construction contained in section 13(g)(2) regarding the sale and
securitization of loans.\2479\ These commenters recommended that the
final rule, at a minimum, grandfather pre-existing relationships
between banking entities and existing securitization vehicles to reduce
the potential effects of the final rule on agreements and positions
entered into before the enactment of the statute.\2480\
---------------------------------------------------------------------------

    \2479\ Section ----.11(b) of the final rule provides that for
purposes of securitizations, organizing and offering includes acting
as the securitizer. As discussed in greater detail above in Part
IV.B.2.b, a banking entity that continues to hold interests in a
securitization in reliance on this exemption must comply with
certain requirements, including the requirements of Sec.  ----.14.
Accordingly, Sec.  ----.14 of the final rule has also been modified
from the proposal to prohibit a banking entity that continues to
hold an ownership interest in accordance with Sec.  ----11(b), and
its affiliates, from entering into a covered transaction with a
covered fund, subject to certain exceptions.
    \2480\ See AFME et al.: ASF (Feb. 2012); Ashurst; BoA; Barclays;
Cadwalader (Municipal Securities); Credit Suisse (Williams);
Commercial Real Estate Fin. Council; Deutsche Bank (Fund-Linked
Products); Fidelity; GE (Feb. 2012); Goldman Sachs (Covered Funds);
ICI (Feb. 2012); IIB/EBF; ISDA (Feb. 2012); JPMC; PNC et al.; PNC;
RBC; SIFMA et al. (Covered Funds) (Feb. 2012); SIFMA
(Securitization) (Feb. 2012); Chamber (Feb. 2012). These comments
are addressed above in Part II regarding availability of the
conformance period provisions of section 13 of the BHC Act.
---------------------------------------------------------------------------

    One commenter argued that a banking entity that delegates its
responsibility for acting as sponsor, investment manager, or investment
adviser to an unaffiliated entity should no longer be subject to the
restrictions of section 13(f).\2481\ By its terms, section 13(f) of the
BHC Act applies to a banking entity that, directly or indirectly,
serves as investment manager, investment adviser, or sponsor to a
covered fund (or that relies on section 13(d)(1)(G) of the BHC Act in
connection with organizing and offering a covered fund). The Agencies
believe that a banking entity that delegates its responsibility to act
as sponsor, investment manager, or investment adviser to an
unaffiliated party would still be subject to the limitations of section
13(f) if the banking entity retains the ability to select, remove,
direct, or otherwise exert control over the sponsor, investment
manager, or investment adviser designee. In addition, the unaffiliated
party designated as sponsor, investment manager, or investment adviser
would be subject to the restrictions of section 13(f) if the third
party is a banking entity.
---------------------------------------------------------------------------

    \2481\ See Katten (on behalf of Int'l Clients).
---------------------------------------------------------------------------

b. Transactions That Would Be a ``Covered Transaction''
    Section 13(f) of the BHC Act prohibits covered transactions as
defined in section 23A of the FR Act between a banking entity that
serves as investment manager, investment advisor or sponsor to a
covered fund or that relies on the exemption in section 13(d)(1)(G) and
a covered fund.\2482\ A number of commenters contended that the
definition of ``covered transaction'' in section 13(f) of the BHC Act
should incorporate the exemptions available under section 23A and the
Board's Regulation W.\2483\ These commenters alleged that the statute's
general reference to section 23A suggests that the term ``covered
transaction'' should be construed in light of section 23A as a whole,
including the exemptions in subsection (d) of that Act and as
implemented in the Board's Regulation W.\2484\ These commenters also
argued that the Board's authority to interpret and issue rules pursuant
to section 23A of the FR Act and section 5(b) of the BHC Act, the
general rule-making authority contained in section 13(b) of the BHC
Act, and the exemptive authority in section 13(d)(1)(J) all provide a
basis for providing such exemptions.\2485\
---------------------------------------------------------------------------

    \2482\ The term ``covered transaction'' is defined in section
23A of the FR Act to mean, with respect to an affiliate of a member
bank: (i) a loan or extension of credit to the affiliate, including
a purchase of assets subject to an agreement to repurchase; (ii) a
purchase of or an investment in securities issued by the affiliate;
(iii) a purchase of assets from the affiliate, except such purchase
of real and personal property as may be specifically exempted by the
Board by order or regulation; (iv) the acceptance of securities or
other debt obligations issued by the affiliate as collateral
security for a loan or extension of credit to any person or company;
(v) the issuance of a guarantee, acceptance, or letter of credit,
including an endorsement or standby letter of credit, on behalf of
an affiliate; (vi) a transaction with an affiliate that involves the
borrowing or lending of securities, to the extent that the
transaction causes a member bank or subsidiary to have credit
exposure to the affiliate; or (vii) a derivative transaction, as
defined in paragraph (3) of section 5200(b) of the Revised Statutes
of the United States (12 U.S.C. 84(b)), with an affiliate, to the
extent that the transaction causes a member bank or a subsidiary to
have credit exposure to the affiliate. See 12 U.S.C. 371c(b)(7), as
amended by section 608 of the Dodd-Frank Act.
    \2483\ See 12 U.S.C. 371c(d); 12 CFR 223.42; ABA (Keating);
Ass'n. of Institutional Investors (Feb. 2012); BoA; BNY Mellon et
al.; Credit Suisse (Williams); SIFMA et al. (Covered Funds) (Feb.
2012); See also Allen & Overy (on behalf of Foreign Bank Group).
    \2484\ See ABA (Keating); Ass'n. of Institutional Investors
(Feb. 2012); BoA; BNY Mellon et al.; SIFMA et al. (Covered Funds)
(Feb. 2012).
    \2485\ See BNY Mellon et al.; SIFMA et al. (Covered Funds) (Feb.
2012); See also Credit Suisse (Williams).
---------------------------------------------------------------------------

    In particular, commenters argued that intraday extensions of
credit;\2486\ transactions fully secured by cash or U.S. government
securities;\2487\ purchases of liquid assets and marketable securities
from covered funds;\2488\ and riskless principal transactions with
covered funds all should be exempt from the restrictions in section
13(f) of the BHC Act.\2489\ These commenters argued that providing an
exemption for intraday extensions of credit in particular was necessary
to allow a banking entity to continue to provide affiliated covered
funds with standard custody, clearing, and settlement services that
include intra-day or overnight overdrafts necessary to facilitate
securities settlement, contractual settlement, pre-determined income,
or similar custody-related transactions. Some commenters argued that
transactions fully secured by

cash or U.S. government securities do not expose banking entities to
inappropriate risks, are permitted in unlimited amounts under section
23A, and should not be entirely prohibited under the rule.\2490\ A few
commenters argued that the proposal would prohibit securities lending
transactions and argued that borrower default indemnifications by a
banking entity in agency securities lending arrangements should not be
prohibited under section 13(f).\2491\ Some commenters argued that a
banking entity should be allowed to accept the shares of a sponsored
covered fund as collateral for a loan to any person or entity, in
particular where the loan is not for the purpose of purchasing
interests in the covered fund.\2492\
---------------------------------------------------------------------------

    \2486\ See ABA (Keating); AFG; Ass'n. of Institutional Investors
(Feb. 2012); BoA; BNY Mellon et al.; Credit Suisse (Williams);
EFAMA; French Treasury et al.; JPMC; IMA; RMA; SIFMA et al. (Covered
Funds) (Feb. 2012); State Street (Feb. 2012); SSgA (Feb. 2012);
Vanguard.
    \2487\ See BoA; Credit Suisse (Williams); SIFMA et al. (Covered
Funds) (Feb. 2012).
    \2488\ See Credit Suisse (Williams).
    \2489\ See, e.g., Credit Suisse (Williams).
    \2490\ See BoA; Credit Suisse (Williams); SIFMA et al. (Covered
Funds) (Feb. 2012).
    \2491\ See State Street (Feb. 2012); RMA.
    \2492\ See BoA; SIFMA et al. (Covered Funds) (Feb. 2012); See
also Katten (on behalf of Int'l Clients).
---------------------------------------------------------------------------

    One commenter argued that no exceptions should be granted to the
definition of covered transaction, and financing of covered funds would
relate to greater fund risk.\2493\ In addition, that commenter
contended that the Agencies should prohibit a sale of securities by a
banking entity to a covered fund even though these transactions are not
within the definition of covered transaction for purposes of section
23A of the FR Act.\2494\
---------------------------------------------------------------------------

    \2493\ See Occupy.
    \2494\ See 12 U.S.C. 371c(b)(7); See also 12 U.S.C. 371c-
1(a)(2)(B) (including the sale of securities or other assets to an
affiliate as a transaction subject to section 23B).
---------------------------------------------------------------------------

    The final rule continues to apply the same definition of covered
transaction as the proposal. Section 13(f) refers to a covered
transaction, as defined in section 23A of the FR Act. Section 13(f) of
the BHC Act does not incorporate or reference the exemptions contained
in section 23A of the FR Act or the Board's Regulation W. Indeed, the
exemptions for these transactions are not included in the definition of
covered transactions in section 23A; the exemptions are instead in a
different subsection of section 23A and provide an exemption from only
some (but not all) of the provisions of section 23A governing covered