registered offerings a banking entity may be asked to underwrite by an
issuer or selling security holder. Fourth, the definition of
``underwriter'' has been refined to clarify that both members of the
underwriting syndicate and selling group members may qualify as
underwriters for purposes of this exemption. Finally, the word
``solely'' has been removed to clarify that a broader scope of
activities conducted in connection with underwriting (e.g.,
stabilization activities) are permitted under this exemption. These
issues are discussed in turn below.
---------------------------------------------------------------------------

    \373\ Final rule Sec.  ----.4(a)(2)(i). The terms
``distribution'' and ``underwriter'' are defined in final rule Sec.
----.4(a)(3) and Sec.  ----.4(a)(4), respectively.
    \374\ Proposed rule Sec.  ----.4(a)(2)(iii) required that
``[t]he purchase or sale is effected solely in connection with a
distribution of securities for which the covered banking entity is
acting as underwriter.''
---------------------------------------------------------------------------

i. Definition of ``Underwriting Position''
    In response to commenters' concerns about transaction-by-
transaction analyses,\375\ the Agencies are modifying

the exemption to clarify the level at which compliance with certain
provisions will be assessed. The proposal was not intended to impose a
transaction-by-transaction approach, and the final rule's requirements
generally focus on the long or short positions in one or more
securities held by a banking entity or its affiliate, and managed by a
particular trading desk, in connection with a particular distribution
of securities for which such banking entity or its affiliate is acting
as an underwriter. Like Sec.  ----.4(a)(2)(ii) of the proposed rule,
the definition of ``underwriting position'' is limited to positions in
securities because the common usage and understanding of the term
``underwriting'' is limited to activities in securities.
---------------------------------------------------------------------------

    \375\ See, e.g., Goldman (Prop. Trading); SIFMA et al. (Prop.
Trading) (Feb. 2012).
---------------------------------------------------------------------------

    A trading desk's underwriting position constitutes the securities
positions that are acquired in connection with a single distribution
for which the relevant banking entity is acting as an underwriter. A
trading desk may not aggregate securities positions acquired in
connection with two or more distributions to determine its
``underwriting position.'' A trading desk may, however, have more than
one ``underwriting position'' at a particular point in time if the
banking entity is acting as an underwriter for more than one
distribution. As a result, the underwriting exemption's requirements
pertaining to a trading desk's underwriting position will apply on a
distribution-by-distribution basis.
    A trading desk's underwriting position can include positions in
securities held at different affiliated legal entities, provided the
banking entity is able to provide supervisors or examiners of any
Agency that has regulatory authority over the banking entity pursuant
to section 13(b)(2)(B) of the BHC Act with records, promptly upon
request, that identify any related positions held at an affiliated
entity that are being included in the trading desk's underwriting
position for purposes of the underwriting exemption. Banking entities
should be prepared to provide all records that identify all of the
positions included in a trading desk's underwriting position and where
such positions are held.
    The Agencies believe that a distribution-by-distribution approach
is appropriate due to the relatively distinct nature of underwriting
activities for a single distribution on behalf of an issuer or selling
security holder. The Agencies do not believe that a narrower
transaction-by-transaction analysis is necessary to determine whether a
banking entity is engaged in permitted underwriting activities. The
Agencies also decline to take a broader approach, which would allow a
banking entity to aggregate positions from multiple distributions for
which it is acting as an underwriter, because it would be more
difficult for the banking entity's internal compliance personnel and
Agency supervisors and examiners to review the trading desk's positions
to assess the desk's compliance with the underwriting exemption. A more
aggregated approach would increase the number of positions in different
types of securities that could be included in the underwriting
position, which would make it more difficult to determine that an
individual position is related to a particular distribution of
securities for which the banking entity is acting as an underwriter
and, in turn, increase the potential for evasion of the general
prohibition on proprietary trading.
ii. Definition of ``Trading Desk''
    The proposed underwriting exemption would have applied certain
requirements across an entire banking entity. To promote consistency
with the market-making exemption and address potential evasion
concerns, the final rule applies the requirements of the underwriting
exemption at the trading desk level of organization.\376\ This approach
will result in the requirements of the underwriting exemption applying
to the aggregate trading activities of a relatively limited group of
employees on a single desk. Applying requirements at the trading desk
level should facilitate banking entity and Agency monitoring and review
of compliance with the exemption by limiting the location where
underwriting activity may occur and allowing better identification of
the aggregate trading volume that must be reviewed to determine whether
the desk's activities are being conducted in a manner that is
consistent with the underwriting exemption, while also allowing
adequate consideration of the particular facts and circumstances of the
desk's trading activities.
---------------------------------------------------------------------------

    \376\ See infra Part IV.A.3.c. (discussing the final market-
making exemption).
---------------------------------------------------------------------------

    The trading desk should be managed and operated as an individual
unit and should reflect the level at which the profit and loss of
employees engaged in underwriting activities is attributed. The term
``trading desk'' in the underwriting context is intended to encompass
what is commonly thought of as an underwriting desk. A trading desk
engaged in underwriting activities would not necessarily be an active
market participant that engages in frequent trading activities.
    A trading desk may manage an underwriting position that includes
positions held by different affiliated legal entities.\377\ Similarly,
a trading desk may include employees working on behalf of multiple
affiliated legal entities or booking trades in multiple affiliated
entities. The geographic location of individual traders is not
dispositive for purposes of determining whether the employees are
engaged in activities for a single trading desk.
---------------------------------------------------------------------------

    \377\ See supra note 302 and accompanying text.
---------------------------------------------------------------------------

iii. Definition of ``Distribution''
    The term ``distribution'' is defined in the final rule as: (i) An
offering of securities, whether or not subject to registration under
the Securities Act, that is distinguished from ordinary trading
transactions by the presence of special selling efforts and selling
methods; or (ii) an offering of securities made pursuant to an
effective registration statement under the Securities Act.\378\ In
response to comments, the proposed definition has been revised to
eliminate the need to consider the ``magnitude'' of an offering and
instead supplements the definition with an alternative prong for
registered offerings under the Securities Act.\379\
---------------------------------------------------------------------------

    \378\ Final rule Sec.  ----.4(a)(3).
    \379\ Proposed rule Sec.  ----.4(a)(3) defined ``distribution''
as ``an offering of securities, whether or not subject to
registration under the Securities Act, that is distinguished from
ordinary trading transactions by the magnitude of the offering and
the presence of special selling efforts and selling methods.''
---------------------------------------------------------------------------

    The proposed definition's reference to magnitude caused some
commenter concern with respect to whether it could be interpreted to
preclude a banking entity from intermediating a small private
placement. After considering comments, the Agencies have determined
that the requirement to have special selling efforts and selling
methods is sufficient to distinguish between permissible securities
offerings and prohibited proprietary trading, and the additional
magnitude factor is not needed to further this objective.\380\ As
proposed, the Agencies will rely on the same factors considered under
Regulation M to analyze the presence of special selling efforts and
selling

methods.\381\ Indicators of special selling efforts and selling methods
include delivering a sales document (e.g., a prospectus), conducting
road shows, and receiving compensation that is greater than that for
secondary trades but consistent with underwriting compensation.\382\
For purposes of the final rule, each of these factors need not be
present under all circumstances. Offerings that qualify as
distributions under this prong of the definition include, among others,
private placements in which resales may be made in reliance on the
SEC's Rule 144A or other available exemptions \383\ and, to the extent
the commercial paper being offered is a security, commercial paper
offerings that involve the underwriter receiving special
compensation.\384\
---------------------------------------------------------------------------

    \380\ The policy goals of this rule differ from those of the
SEC's Regulation M, which is an anti-manipulation rule. The focus on
magnitude is appropriate for that regulation because it helps
identify offerings that can give rise to an incentive to condition
the market for the offered security. To the contrary, this rule is
intended to allow banking entities to continue to provide client-
oriented financial services, including underwriting services. The
SEC emphasizes that this rule does not have any impact on Regulation
M.
    \381\ See Joint Proposal, 76 FR 68,867; CFTC Proposal, 77 FR
8352.
    \382\ See Joint Proposal, 76 FR 68,867; CFTC Proposal, 77 FR
8352; Review of Antimanipulation Regulation of Securities Offering,
Exchange Act Release No. 33924 (Apr. 19, 1994), 59 FR 21,681,
21,684-21,685 (Apr. 26, 1994).
    \383\ The final rule does not provide safe harbors for
particular distribution techniques. A safe harbor-based approach
would provide certainty for specific types of offerings, but may not
account for evolving market practices and distribution techniques
that could technically satisfy a safe harbor but that might
implicate the concerns that led Congress to enact section 13 of the
BHC Act. See RBC.
    \384\ This clarification is intended to address commenters'
concern regarding potential limitations on banking entities' ability
to facilitate commercial paper offerings under the proposed
underwriting exemption. See supra Part IV.A.2.c.1.b.i.
---------------------------------------------------------------------------

    The Agencies are also adopting a second prong to this definition,
which will independently capture all offerings of securities that are
made pursuant to an effective registration statement under the
Securities Act.\385\ The registration prong of the definition is
intended to provide another avenue by which an offering of securities
may be conducted under the exemption, absent other special selling
efforts and selling methods or a determination of whether such efforts
and methods are being conducted. The Agencies believe this prong
reduces potential administrative burdens by providing a bright-line
test for what constitutes a distribution for purposes of the final
rule. In addition, this prong is consistent with the purpose and goals
of the statute because it reflects a common type of securities offering
and does not raise evasion concerns as it is unlikely that an entity
would go through the registration process solely to facilitate or
engage in speculative proprietary trading.\386\ This prong would
include, among other things, the following types of registered
securities offerings: Offerings made pursuant to a shelf registration
statement (whether on a continuous or delayed basis),\387\ bought
deals,\388\ at the market offerings,\389\ debt offerings, asset-backed
security offerings, initial public offerings, and other registered
offerings. An offering can be a distribution for purposes of either
Sec.  ----.4(a)(3)(i) or Sec.  ----.4(a)(3)(ii) of the final rule
regardless of whether the offering is issuer driven, selling security
holder driven, or arises as a result of a reverse inquiry.\390\
Provided the definition of distribution is met, an offering can be a
distribution for purposes of this rule regardless of how it is
conducted, whether by direct communication, exchange transactions, or
automated execution system.\391\
---------------------------------------------------------------------------

    \385\ See, e.g., Form S-1 (17 CFR 239.11); Form S-3 (17 CFR
239.13); Form S-8 (17 CFR 239.16b); Form F-1 (17 CFR 239.31); Form
F-3 (17 CFR 239.33).
    \386\ Although the Agencies are providing an additional prong to
the definition of ``distribution'' for registered offerings, the
final rule does not limit the availability of the underwriting
exemption to registered offerings, as suggested by one commenter.
The statute does not include such an express limitation, and the
Agencies decline to construe the statute to require such an
approach. In response to the commenter stating that permitting a
banking entity to participate in a private placement may facilitate
evasion of the prohibition on proprietary trading, the Agencies
believe this concern is addressed by the provision in the final rule
requiring that a trading desk have a reasonable expectation of
demand from other market participants for the amount and type of
securities to be acquired from an issuer or selling security holder
for distribution and make reasonable efforts to sell its
underwriting position within a reasonable period. As discussed
below, the Agencies believe this requirement in the final rule
appropriately addresses evasion concerns that a banking entity may
retain an unsold allotment for purely speculative purposes. Further,
the Agencies believe that preventing a banking entity from
facilitating a private offering could unnecessarily hinder capital-
raising without providing commensurate benefits because issuers use
private offerings to raise capital in a variety of situations and
the underwriting exemption's requirements limit the potential for
evasion for both registered and private offerings, as noted above.
    \387\ See Securities Offering Reform, Securities Act Release No.
8591 (July 19, 2005), 70 FR 44,722 (Aug. 3, 2005); 17 CFR 230.405
(defining ``automatic shelf registration statement'' as a
registration statement filed on Form S-3 (17 CFR 239.13) or Form F-3
(17 CFR 239.33) by a well-known seasoned issuer pursuant to General
Instruction I.D. or I.C. of such forms, respectively); 17 CFR
230.415.
    \388\ A bought deal is a distribution technique whereby an
underwriter makes a bid for securities without engaging in a
preselling effort, such as book building or distribution of a
preliminary prospectus. See, e.g., Delayed or Continuous Offering
and Sale of Securities, Securities Act Release No. 6470 (June 9,
1983), n.5.
    \389\ See, e.g., 17 CFR 230.415(a)(4) (defining ``at the market
offering'' as ``an offering of equity securities into an existing
trading market for outstanding shares of the same class at other
than a fixed price''). At the market offerings may also be referred
to as ``dribble out'' programs.
    \390\ Under the ``reverse inquiry'' process, an investor may be
allowed to purchase securities from the issuer through an
underwriter that is not designated in the prospectus as the issuer's
agent by having such underwriter approach the issuer with an
interest from the investor. See Joseph McLaughlin and Charles J.
Johnson, Jr., ``Corporate Finance and the Securities Laws'' (4th ed.
2006, supplemented 2012).
    \391\ See SIFMA et al. (Prop. Trading) (Feb. 2012).
---------------------------------------------------------------------------

    As discussed above, some commenters expressed concern that the
proposed definition of ``distribution'' would prevent a banking entity
from acquiring and reselling securities issued in lieu of or to
refinance bridge loan facilities in reliance on the underwriting
exemption. Bridge financing arrangements can be structured in many
different ways, depending on the context and the specific objectives of
the parties involved. As a result, the treatment of securities acquired
in lieu of or to refinance a bridge loan and the subsequent sale of
such securities under the final rule depends on the facts and
circumstances. A banking entity may meet the terms of the underwriting
exemption for its bridge loan activity, or it may be able to rely on
the market-making exemption. If the banking entity's bridge loan
activity does not qualify for an exemption under the rule, then it
would not be permitted to engage in such activity.
iv. Definition of ``Underwriter''
    In response to comments, the Agencies are adopting certain
modifications to the proposed definition of ``underwriter'' to better
capture selling group members and to more closely resemble the
definition of ``distribution participant'' in Regulation M. In
particular, the Agencies are defining ``underwriter'' as: (i) A person
who has agreed with an issuer or selling security holder to: (A)
Purchase securities from the issuer or selling security holder for
distribution; (B) engage in a distribution of securities for or on
behalf of the issuer or selling security holder; or (C) manage a
distribution of securities for or on behalf of the issuer or selling
security holder; or (ii) a person who has agreed to participate or is
participating in a distribution of such securities for or on behalf of
the issuer or selling security holder.\392\
---------------------------------------------------------------------------

    \392\ See final rule Sec.  ----.4(a)(4).
---------------------------------------------------------------------------

    A number of commenters requested that the Agencies broaden the
underwriting exemption to permit activities in connection with a
distribution of securities by any distribution participant. A few of
these commenters interpreted the proposed definition of ``underwriter''
as requiring a selling group member to have a written agreement with
the underwriter

to participate in the distribution.\393\ These commenters noted that
such a written agreement may not exist under all circumstances. The
Agencies did not intend to require that members of the underwriting
syndicate or the lead underwriter have a written agreement with all
selling group members for each offering or that they be in privity of
contract with the issuer or selling security holder. To provide clarity
on this issue, the Agencies have modified the language of subparagraph
(ii) of the definition to include firms that, while not members of the
underwriting syndicate, have agreed to participate or are participating
in a distribution of securities for or on behalf of the issuer or
selling security holder.
---------------------------------------------------------------------------

    \393\ The basic documents in firm commitment underwritten
securities offerings generally are: (i) The agreement among
underwriters, which establishes the relationship among the managing
underwriter, any co-managers, and the other members of the
underwriting syndicate; (ii) the underwriting (or ``purchase'')
agreement, in which the underwriters commit to purchase the
securities from the issuer or selling security holder; and (iii) the
selected dealers agreement, in which selling group members agree to
certain provisions relating to the distribution. See Joseph
McLaughlin and Charles J. Johnson, Jr., ``Corporate Finance and the
Securities Laws'' (4th ed. 2006, supplemented 2012), Ch. 2. The
Agencies understand that two firms may enter into a master agreement
that governs all offerings in which both firms participate as
members of the underwriting syndicate or as a member of the
syndicate and a selling group member. See, e.g., SIFMA Master
Selected Dealers Agreement (June 10, 2011), available at
www.sifma.org.
---------------------------------------------------------------------------

    The final rule does not adopt a narrower definition of
``underwriter,'' as suggested by two commenters.\394\ Although selling
group members do not have a direct relationship with the issuer or
selling security holder, they do help facilitate the successful
distribution of securities to a wider variety of purchasers, such as
regional or retail purchasers that members of the underwriting
syndicate may not be able to access as easily. Thus, the Agencies
believe it is consistent with the purpose of the statutory underwriting
exemption and beneficial to recognize and allow the current market
practice of an underwriting syndicate and selling group members
collectively facilitating a distribution of securities. The Agencies
note that because banking entities that are selling group members will
be underwriters under the final rule, they will be subject to all the
requirements of the underwriting exemption.
---------------------------------------------------------------------------

    \394\ See AFR et al. (Feb. 2012); Public Citizen.
---------------------------------------------------------------------------

    As provided in the preamble to the proposed rule, engaging in the
following activities may indicate that a banking entity is acting as an
underwriter under Sec.  ----.4(a)(4) as part of a distribution of
securities:
     Assisting an issuer in capital-raising;
     Performing due diligence;
     Advising the issuer on market conditions and assisting in
the preparation of a registration statement or other offering document;
     Purchasing securities from an issuer, a selling security
holder, or an underwriter for resale to the public;
     Participating in or organizing a syndicate of investment
banks;
     Marketing securities; and
     Transacting to provide a post-issuance secondary market
and to facilitate price discovery.\395\
---------------------------------------------------------------------------

    \395\ See Joint Proposal, 76 FR 68,867; CFTC Proposal, 77 FR
8352. Post-issuance secondary market activity is expected to be
conducted in accordance with the market-making exemption.

The Agencies continue to take the view that the precise activities
performed by an underwriter will vary depending on the liquidity of the
securities being underwritten and the type of distribution being
conducted. A banking entity is not required to engage in each of the
above-noted activities to be considered an underwriter for purposes of
this rule. In addition, the Agencies note that, to the extent a banking
entity does not meet the definition of ``underwriter'' in the final
rule, it may be able to rely on the market-making exemption in the
final rule for its trading activity. In response to comments noting
that APs for ETFs do not engage in certain of these activities and
inquiring whether an AP would be able to qualify for the underwriting
exemption for certain of its activities, the Agencies believe that many
AP activities, such as conducting general creations and redemptions of
ETF shares, are better suited for analysis under the market-making
exemption because they are driven by the demands of other market
participants rather than the issuer, the ETF.\396\ Whether an AP may
rely on the underwriting exemption for its activities in an ETF will
depend on the facts and circumstances, including, among other things,
whether the AP meets the definition of ``underwriter'' and the offering
of ETF shares qualifies as a ``distribution.''
---------------------------------------------------------------------------

    \396\ See infra Part IV.A.3.

    To provide further clarity about the scope of the definition of
``underwriter,'' the Agencies are defining the terms ``selling security
holder'' and ``issuer'' in the final rule. The Agencies are using the
definition of ``issuer'' from the Securities Act because this
definition is commonly used in the context of securities offerings and
is well understood by market participants.\397\ A ``selling security
holder'' is defined as ``any person, other than an issuer, on whose
behalf a distribution is made.'' \398\ This definition is consistent
with the definition of ``selling security holder'' found in the SEC's
Regulation M.\399\
---------------------------------------------------------------------------

    \397\ See final rule Sec.  ----.3(e)(9) (defining the term
``issuer'' for purposes of the proprietary trading provisions in
subpart B of the final rule). Under section 2(a)(4) of the
Securities Act, ``issuer'' is defined as ``every person who issues
or proposes to issue any security; except that with respect to
certificates of deposit, voting-trust certificates, or collateral-
trust certificates, or with respect to certificates of interest or
shares in an unincorporated investment trust not having a board of
directors (or persons performing similar functions) or of the fixed,
restricted management, or unit type, the term `issuer' means the
person or persons performing the acts and assuming the duties of
depositor or manager pursuant to the provisions of the trust or
other agreement or instrument under which such securities are
issued; except that in the case of an unincorporated association
which provides by its articles for limited liability of any or all
of its members, or in the case of a trust, committee, or other legal
entity, the trustees or members thereof shall not be individually
liable as issuers of any security issued by the association, trust,
committee, or other legal entity; except that with respect to
equipment-trust certificates or like securities, the term `issuer'
means the person by whom the equipment or property is or is to be
used; and except that with respect to fractional undivided interests
in oil, gas, or other mineral rights, the term `issuer' means the
owner of any such right or of any interest in such right (whether
whole or fractional) who creates fractional interests therein for
the purpose of public offering.'' 15 U.S.C. 77b(a)(4).
    \398\ Final rule Sec.  ----.4(a)(5).
    \399\ See 17 CFR 242.100(b).
---------------------------------------------------------------------------

v. Activities Conducted ``in Connection With'' a Distribution
    As discussed above, several commenters expressed concern that the
proposed underwriting exemption would not allow a banking entity to
engage in certain auxiliary activities that may be conducted in
connection with acting as an underwriter for a distribution of
securities in the normal course. These commenters' concerns generally
arose from the use of the word ``solely'' in Sec.  ----.4(a)(2)(iii) of
the proposed rule, which commenters noted was not included in the
statute's underwriting exemption.\400\ In addition, a number of
commenters discussed particular activities they believed should be
permitted under the underwriting exemption and indicated the term
``solely'' created uncertainty about whether such activities would be
permitted.\401\
---------------------------------------------------------------------------

    \400\ See supra Part IV.A.2.c.1.b.iii.
    \401\ See supra notes 357, 358, 363-372 and accompanying text.
---------------------------------------------------------------------------

    To reduce uncertainty in response to comments, the final rule
requires a trading desk's underwriting position to be ``held . . . and
managed . . . in connection with'' a single distribution

for which the relevant banking entity is acting as an underwriter,
rather than requiring that a purchase or sale be ``effected solely in
connection with'' such a distribution. Importantly, for purposes of
establishing an underwriting position in reliance on the underwriting
exemption, a trading desk may only engage in activities that are
related to a particular distribution of securities for which the
banking entity is acting as an underwriter. Activities that may be
permitted under the underwriting exemption include stabilization
activities,\402\ syndicate shorting and aftermarket short
covering,\403\ holding an unsold allotment when market conditions may
make it impracticable to sell the entire allotment at a reasonable
price at the time of the distribution and selling such position when it
is reasonable to do so,\404\ and helping the issuer mitigate its risk
exposure arising from the distribution of its securities (e.g.,
entering into a call-spread option with an issuer as part of a
convertible debt offering to mitigate dilution to existing
shareholders).\405\ Such activities should be intended to effectuate
the distribution process and provide benefits to issuers, selling
security holders, or purchasers in the distribution. Existing laws,
regulations, and self-regulatory organization rules limit or place
certain requirements around many of these activities. For example, an
underwriter's subsequent sale of an unsold allotment must comply with
applicable provisions of the federal securities laws and the rules
thereunder. Moreover, any position resulting from these activities must
be included in the trading desk's underwriting position, which is
subject to a number of restrictions in the final rule. Specifically, as
discussed in more detail below, the trading desk must make reasonable
efforts to sell or otherwise reduce its underwriting position within a
reasonable period,\406\ and each trading desk must have robust limits
on, among other things, the amount, types, and risks of its
underwriting position and the period of time a security may be
held.\407\ Thus, in general, the underwriting exemption would not
permit a trading desk, for example, to acquire a position as part of
its stabilization activities and hold that position for an extended
period.
---------------------------------------------------------------------------

    \402\ See SIFMA et al. (Prop. Trading) (Feb. 2012). See Anti-
Manipulation Rules Concerning Securities Offerings, Exchange Act
Release No. 38067 (Dec. 20, 1996), 62 FR 520, 535 (Jan. 3, 1997)
(``Although stabilization is price-influencing activity intended to
induce others to purchase the offered security, when appropriately
regulated it is an effective mechanism for fostering an orderly
distribution of securities and promotes the interests of
shareholders, underwriters, and issuers.'').
    \403\ See SIFMA et al. (Prop. Trading) (Feb. 2012); RBC; Goldman
(Prop. Trading). See Proposed Amendments to Regulation M: Anti-
Manipulation Rules Concerning Securities Offerings, Exchange Act
Release No. 50831 (Dec. 9, 2004), 69 FR 75,774, 75,780 (Dec. 17,
2004) (``In the typical offering, the syndicate agreement allows the
managing underwriter to `oversell' the offering, i.e., establish a
short position beyond the number of shares to which the underwriting
commitment relates. The underwriting agreement with the issuer often
provides for an `overallotment option' whereby the syndicate can
purchase additional shares from the issuer or selling shareholders
in order to cover its short position. To the extent that the
syndicate short position is in excess of the overallotment option,
the syndicate is said to have taken an `uncovered' short position.
The syndicate short position, up to the amount of the overallotment
option, may be covered by exercising the option or by purchasing
shares in the market once secondary trading begins.'').
    \404\ See SIFMA et al. (Prop. Trading) (Feb. 2012); RBC; BoA;
BDA (Feb. 2012).
    \405\ See SIFMA et al. (Prop. Trading) (Feb. 2012); RBC; Goldman
(Prop. Trading).
    \406\ See final rule Sec.  ----.4(a)(2)(ii); infra Part
IV.A.2.c.2.c. (discussing the requirement to make reasonable efforts
to sell or otherwise reduce the underwriting position).
    \407\ See final rule Sec.  ----.4(a)(2)(iii)(B); infra Part
IV.A.2.c.3.c. (discussing the required limits for trading desks
engaged in underwriting activity).
---------------------------------------------------------------------------

    This approach does not mean that any activity that is arguably
connected to a distribution of securities is permitted under the
underwriting exemption. Certain activities noted by commenters are not
core to the underwriting function and, thus, are not permitted under
the final underwriting exemption. However, a banking entity may be able
to rely on another exemption for such activities (e.g., the market-
making or hedging exemptions), if applicable. For example, a trading
desk would not be able to use the underwriting exemption to purchase a
financial instrument from a customer to facilitate the customer's
ability to buy securities in the distribution.\408\ Further, purchasing
another financial instrument to help determine how to price the
securities that are subject to a distribution would not be permitted
under the underwriting exemption.\409\ These two activities may be
permitted under the market-making exemption, depending on the facts and
circumstances. In response to one commenter's suggestion that hedging
the underwriter's risk exposure be permissible under this exemption,
the Agencies emphasize that hedging the underwriter's risk exposure is
not permitted under the underwriting exemption.\410\ A banking entity
must comply with the hedging exemption for such activity.
---------------------------------------------------------------------------

    \408\ See Wells Fargo (Prop. Trading). The Agencies do not
believe this activity is consistent with underwriting activity
because it could result in an underwriting desk holding a variety of
positions over time that are not directly related to a distribution
of securities the desk is conducting on behalf of an issuer or
selling security holder. Further, the Agencies believe this activity
may be more appropriately analyzed under the market-making exemption
because market makers generally purchase or sell a financial
instrument at the request of customers and otherwise routinely stand
ready to purchase and sell a variety of related financial
instruments.
    \409\ See id. The Agencies view this activity as inconsistent
with underwriting because underwriters typically engage in other
activities, such as book-building and other marketing efforts, to
determine the appropriate price for a security and these activities
do not involve taking positions that are unrelated to the securities
subject to distribution. See infra IV.A.2.c.2.
    \410\ Although one commenter suggested that an underwriter's
hedging activity be permitted under the underwriting exemption, we
do not believe the requirements in the proposed hedging exemption
would be unworkable or overly burdensome in the context of an
underwriter's hedging activity. See Goldman (Prop. Trading). As
noted above, underwriting activity is of a relatively distinct
nature, which is substantially different from market-making
activity, which is more dynamic and involves more frequent trading
activity giving rise to a variety of positions that may naturally
hedge the risks of certain other positions. The Agencies believe it
is appropriate to require that a trading desk comply with the
requirements of the hedging exemption when it is hedging the risks
of its underwriting position, while allowing a trading desk's market
making-related hedging under the market-making exemption.
---------------------------------------------------------------------------

    In response to comments about the sale of a security to an
intermediate entity in connection with a structured finance
product,\411\ the Agencies have not modified the underwriting
exemption. Underwriting is distinct from product development. Thus,
parties must adjust activities associated with developing structured
finance products or meet the terms of other available exemptions.
Similarly, the accumulation of securities or other assets in
anticipation of a securitization or resecuritization is not an activity
conducted ``in connection with'' underwriting for purposes of the
exemption.\412\ This activity is typically engaged in by an issuer or
sponsor of a securitized product in that capacity, rather than in the
capacity of an underwriter. The underwriting exemption only permits a
banking entity's activities when it is acting as an underwriter.
---------------------------------------------------------------------------

    \411\ See ICI (Feb. 2012); AFR et al. (Feb. 2012); Occupy;
Alfred Brock.
    \412\ A banking entity may accumulate loans in anticipation of
securitization because loans are not financial instruments under the
final rule. See supra Part IV.A.1.c.
---------------------------------------------------------------------------

2. Near Term Customer Demand Requirement
a. Proposed Near Term Customer Demand Requirement
    Like the statute, Sec.  ----.4(a)(2)(v) of the proposed rule
required that the underwriting activities of the banking entity with
respect to the covered

financial position be designed not to exceed the reasonably expected
near term demands of clients, customers, or counterparties.\413\
---------------------------------------------------------------------------

    \413\ See proposed rule Sec.  ----.4(a)(2)(v); Joint Proposal,
76 FR 68,867; CFTC Proposal, 77 FR 8353.
---------------------------------------------------------------------------

b. Comments Regarding the Proposed Near Term Customer Demand
Requirement
    Both the statute and the proposed rule require a banking entity's
underwriting activity to be ``designed not to exceed the reasonably
expected near term demands of clients, customers, or counterparties.''
\414\ Several commenters requested that this standard be interpreted in
a flexible manner to allow a banking entity to participate in an
offering that may require it to retain an unsold allotment for a period
of time.\415\ In addition, one commenter stated that the final rule
should provide flexibility in this standard by recognizing that the
concept of ``near term'' differs between asset classes and depends on
the liquidity of the market.\416\ Two commenters expressed views on how
the near term customer demand requirement should work in the context of
a securitization or creating what the commenters characterized as
``structured products'' or ``structured instruments.'' \417\
---------------------------------------------------------------------------

    \414\ See supra Part IV.A.2.c.2.a.
    \415\ See SIFMA et al. (Prop. Trading) (Feb. 2012); BoA; BDA
(Feb. 2012); RBC. Another commenter requested that this requirement
be eliminated or changed to ``underwriting activities of the banking
entity with respect to the covered financial position must be
designed to meet the near-term demands of clients, customers, or
counterparties.'' See Japanese Bankers Ass'n.
    \416\ See RBC (stating that the Board has found acceptable the
retention of assets acquired in connection with underwriting
activities for a period of 90 to 180 days and has further permitted
holding periods of up to a year in certain circumstances, such as
for less liquid securities).
    \417\ See AFR et al. (Feb. 2012); Sens. Merkley & Levin (Feb.
2012).
---------------------------------------------------------------------------

    Many commenters expressed concern that the proposed requirement, if
narrowly interpreted, could prevent an underwriter from holding a
residual position for which there is no immediate demand from clients,
customers, or counterparties.\418\ Commenters noted that there are a
variety of offerings that present some risk of an underwriter having to
hold a residual position that cannot be sold in the initial
distribution, including ``bought deals,'' \419\ rights offerings,\420\
and fixed-income offerings.\421\ A few commenters noted that similar
scenarios can arise in the case of an AP creating more shares of an ETF
than it can sell \422\ and bridge loans.\423\ Two commenters indicated
that if the rule does not provide greater clarity and flexibility with
respect to the near term customer demand requirement, a banking entity
may be less inclined to participate in a distribution where there is
the potential risk of an unsold allotment, may price such risk into the
fees charged to underwriting clients, or may be forced into a ``fire
sale'' of the unsold allotment.\424\
---------------------------------------------------------------------------

    \418\ See SIFMA et al. (Prop. Trading) (Feb. 2012); BoA; BDA
(Feb. 2012); RBC.
    \419\ See SIFMA et al. (Prop. Trading) (Feb. 2012); BoA; RBC.
These commenters generally stated that an underwriter for a ``bought
deal'' may end up with an unsold allotment because, pursuant to this
type of offering, an underwriter makes a commitment to purchase
securities from an issuer or selling security holder, without pre-
commitment marketing to gauge customer interest, in order to provide
greater speed and certainty of execution. See SIFMA et al. (Prop.
Trading) (Feb. 2012); RBC.
    \420\ See SIFMA et al. (Prop. Trading) (Feb. 2012) (representing
that because an underwriter generally backstops a rights offering by
committing to exercise any rights not exercised by shareholders, the
underwriter may end up holding a residual portion of the offering if
investors do not exercise all of the rights).
    \421\ See BDA (Feb. 2012). This commenter stated that
underwriters frequently underwrite bonds in the fixed-income market
knowing that they may need to retain unsold allotments in their
inventory. The commenter indicated that this scenario arises because
the fixed-income market is not as deep as other markets, so
underwriters frequently cannot sell bonds when they go to market;
instead, the underwriters will retain the bonds until a sufficient
amount of liquidity is available in the market. See id.
    \422\ See SIFMA et al. (Prop. Trading) (Feb. 2012); BoA.
    \423\ See BoA; RBC; LSTA (Feb. 2012). One of these commenters
stated that, in the case of securities issued in lieu of or to
refinance bridge loan facilities, market conditions or investor
demand may change during the period of time between extension of the
bridge commitment and when the bridge loan is required to be funded
or such securities are required to be issued. As a result, this
commenter requested that the near term demands of clients,
customers, or counterparties be measured at the time of the initial
extension of the bridge commitment. See LSTA (Feb. 2012).
    \424\ See SIFMA et al. (Prop. Trading) (Feb. 2012); RBC.
---------------------------------------------------------------------------

    Several other commenters provided views on whether a banking entity
should be able to hold a residual position from an offering pursuant to
the underwriting exemption, although they did not generally link their
comments to the proposed near term demand requirement.\425\ Many of
these commenters expressed concern about permitting a banking entity to
retain a portion of an underwriting and noted potential risks that may
arise from such activity.\426\ For example, some of these commenters
stated that retention or warehousing of underwritten securities can be
an indication of impermissible proprietary trading intent (particularly
if systematic), or may otherwise result in high-risk exposures or
conflicts of interests.\427\ One of these commenters recommended the
Agencies use a metric to monitor the size of residual positions
retained by an underwriter,\428\ while another commenter suggested
adding a requirement to the proposed exemption to provide that a
``substantial'' unsold or retained allotment would be an indication of
prohibited proprietary trading.\429\ Similarly, one commenter
recommended that the Agencies consider whether there are sufficient
provisions in the proposed rule to reduce the risks posed by banking
entities retaining or warehousing underwritten instruments, such as
subprime mortgages, collateralized debt obligation tranches, and high
yield debt of leveraged buyout issuers, which poses heightened
financial risk at the top of economic cycles.\430\
---------------------------------------------------------------------------

    \425\ See AFR et al. (Feb. 2012); CalPERS; Occupy; Public
Citizen; Goldman (Prop. Trading); Fidelity; Japanese Bankers Ass'n.;
Sens. Merkley & Levin (Feb. 2012); Alfred Brock.
    \426\ See AFR et al. (Feb. 2012); CalPERS; Occupy; Public
Citizen; Alfred Brock.
    \427\ See AFR et al. (Feb. 2012) (recognizing, however, that a
small portion of an underwriting may occasionally be ``hung'');
CalPERS; Occupy (stating that a banking entity's retention of unsold
allotments may result in potential conflicts of interest).
    \428\ See AFR et al. (Feb. 2012).
    \429\ See Occupy (stating that the meaning of the term
``substantial'' would depend on the circumstances of the particular
offering).
    \430\ See CalPERS.
---------------------------------------------------------------------------

    Other commenters indicated that undue restrictions on an
underwriter's ability to retain a portion of an offering may result in
certain harms to the capital-raising process. These commenters
represented that unclear or negative treatment of residual positions
will make banking entities averse to the risk of an unsold allotment,
which may result in banking entities underwriting smaller offerings,
less capital generation for issuers, or higher underwriting discounts,
which would increase the cost of raising capital for businesses.\431\
One of these commenters suggested that a banking entity be permitted to
hold a residual position under the underwriting exemption as long as it
continues to take reasonable steps to attempt to dispose of the
residual position in light of existing market conditions.\432\
---------------------------------------------------------------------------

    \431\ See Goldman (Prop. Trading); Fidelity (expressing concern
that this may result in a more concentrated supply of securities
and, thus, decrease the opportunity for diversification in the
portfolios of shareholders' funds).
    \432\ See Goldman (Prop. Trading).
---------------------------------------------------------------------------

    In addition, in response to a question in the proposal, one
commenter

expressed the view that the rule should not require documentation with
respect to residual positions held by an underwriter.\433\ In the case
of securitizations, one commenter stated that if the underwriter wishes
to retain some of the securities or bonds in its longer-term investment
book, such decisions should be made by a separate officer, subject to
different standards and compensation.\434\
---------------------------------------------------------------------------

    \433\ See Japanese Bankers Ass'n.
    \434\ See Sens. Merkley & Levin (Feb. 2012).
---------------------------------------------------------------------------

    Two commenters discussed how the near term customer demand
requirement should apply in the context of a banking entity acting as
an underwriter for a securitization or structured product.\435\ One of
these commenters indicated that the near term demand requirement should
be interpreted to require that a distribution of securities facilitate
pre-existing client demand. This commenter stated that a banking entity
should not be considered to meet the terms of the proposed requirement
if, on the firm's own initiative, it designs and structures a complex,
novel instrument and then seeks customers for the instrument, while
retaining part of the issuance on its own book. The commenter further
emphasized that underwriting should involve two-way demand--clients who
want assistance in marketing their securities and customers who may
wish to purchase the securities--with the banking entity serving as an
intermediary.\436\ Another commenter indicated that an underwriting
should likely be seen as a distribution of all, or nearly all, of the
securities related to a securitization (excluding any amount required
for credit risk retention purposes) along a time line designed not to
exceed reasonably expected near term demands of clients, customers, or
counterparties. According to the commenter, this approach would serve
to minimize the arbitrage and risk concentration possibilities that can
arise through the securitization and sale of some tranches and the
retention of other tranches.\437\
---------------------------------------------------------------------------

    \435\ See AFR et al. (Feb. 2012); Sens. Merkley & Levin (Feb.
2012).
    \436\ See AFR et al. (Feb. 2012)
    \437\ See Sens. Merkley & Levin (Feb. 2012).
---------------------------------------------------------------------------

    One commenter expressed concern that the proposed near term
customer demand requirement may impact a banking entity's ability to
act as primary dealer because some primary dealers are obligated to bid
on each issuance of a government's sovereign debt, without regard to
expected customer demand.\438\ Two other commenters expressed general
concern that the proposed underwriting exemption may be too narrow to
permit banking entities that act as primary dealers in or for foreign
jurisdictions to continue to meet the relevant jurisdiction's primary
dealer requirements.\439\
---------------------------------------------------------------------------

    \438\ See Banco de M[eacute]xico.
    \439\ See SIFMA et al. (Prop. Trading) (Feb. 2012); IIB/EBF. One
of these commenters represented that many banking entities serve as
primary dealers in jurisdictions in which they operate, and primary
dealers often: (i) Are subject to minimum purchase and other
obligations in the jurisdiction's foreign sovereign debt; (ii) play
important roles in underwriting and market making in State,
provincial, and municipal debt issuances; and (iii) act as
intermediaries through which a government's financial and monetary
policies operate. This commenter stated that, due to these
considerations, restrictions on the ability of banking entities to
act as primary dealer are likely to harm the governments they serve.
See IIB/EBF.
---------------------------------------------------------------------------

c. Final Near Term Customer Demand Requirement
    The final rule requires that the amount and types of the securities
in the trading desk's underwriting position be designed not to exceed
the reasonably expected near term demands of clients, customers, or
counterparties, and reasonable efforts be made to sell or otherwise
reduce the underwriting position within a reasonable period, taking
into account the liquidity, maturity, and depth of the market for the
relevant type of security.\440\ As noted above, the near term demand
standard originates from section 13(d)(1)(B) of the BHC Act, and a
similar requirement was included in the proposed rule.\441\ The
Agencies are making certain modifications to the proposed approach in
response to comments.
---------------------------------------------------------------------------

    \440\ Final rule Sec.  ----.4(a)(2)(ii).
    \441\ The proposed rule required the underwriting activities of
the banking entity with respect to the covered financial position to
be designed not to exceed the reasonably expected near term demands
of clients, customers, or counterparties. See proposed rule Sec.  --
--.4(a)(2)(v).
---------------------------------------------------------------------------

    In particular, the Agencies are clarifying the operation of this
requirement, particularly with respect to unsold allotments.\442\ Under
this requirement, a trading desk must have a reasonable expectation of
demand from other market participants for the amount and type of
securities to be acquired from an issuer or selling security holder for
distribution.\443\ Such reasonable expectation may be based on factors
such as current market conditions and prior experience with similar
offerings of securities. A banking entity is not required to engage in
book-building or similar marketing efforts to determine investor demand
for the securities pursuant to this requirement, although such efforts
may form the basis for the trading desk's reasonable expectation of
demand. While an issuer or selling security holder can be considered to
be a client, customer, or counterparty of a banking entity acting as an
underwriter for its distribution of securities, this requirement cannot
be met by accounting solely for the issuer's or selling security
holder's desire to sell the securities.\444\ However, the expectation
of demand does not require a belief that the securities will be placed
immediately. The time it takes to carry out a distribution may differ
based on the liquidity, maturity, and depth of the market for the type
of security.\445\
---------------------------------------------------------------------------

    \442\ See supra Part IV.A.2.c.2.b. (discussing commenters'
concerns that the proposed near term customer demand requirement may
limit a banking entity's ability to retain an unsold allotment).
    \443\ A banking entity may not structure a complex instrument on
its own initiative using the underwriting exemption. It may use the
underwriting exemption only with respect to distributions of
securities that comply with the final rule. The Agencies believe
this requirement addresses one commenter's concern that a banking
entity could rely on the underwriting exemption without regard to
anticipated customer demand. See AFR et al. (Feb. 2012) In addition,
a trading desk hedging the risks of an underwriting position in a
complex, novel instrument must comply with the hedging exemption in
the final rule.
    \444\ An issuer or selling security holder for purposes of this
rule may include, among others, corporate issuers, sovereign issuers
for which the banking entity acts as primary dealer (or functional
equivalent), or any other person that is an issuer, as defined in
final rule Sec.  ----.3(e)(9), or a selling security holder, as
defined in final rule Sec.  ----.4(a)(5). The Agencies believe that
the underwriting exemption in the final rule should generally allow
a primary dealer (or functional equivalent) to act as an underwriter
for a sovereign government's issuance of its debt because, similar
to other underwriting activities, this involves a banking entity
agreeing to distribute securities for an issuer (in this case, the
foreign sovereign) and engaging in a distribution of such
securities. See SIFMA et al. (Prop. Trading) (Feb. 2012); IIB/EBF;
Banco de M[eacute]xico. A banking entity acting as primary dealer
(or functional equivalent) may also be able to rely on the market-
making exemption or other exemptions for some of its activities. See
infra Part IV.A.3.c.2.c. The final rule defines ``client, customer,
or counterparty'' for purposes of the underwriting exemption as
``market participants that may transact with the banking entity in
connection with a particular distribution for which the banking
entity is acting as underwriter.'' Final rule Sec.  ----.4(a)(7).
    \445\ One commenter stated that, in the case of a
securitization, an underwriting should be seen as a distribution of
all, or nearly all, of the securities related to a securitization
(excluding the amount required for credit risk retention purposes)
along a time line designed not to exceed the reasonably expected
near term demands of clients, customers, or counterparties. See
Sens. Merkley & Levin (Feb. 2012). The final rule's near term
customer demand requirement considers the liquidity, maturity, and
depth of the market for the type of security and recognizes that the
amount of time a trading desk may need to hold an underwriting
position may vary based on these factors. The final rule does not,
however, adopt a standard that applies differently based solely on
the particular type of security being distributed (e.g., an asset-
backed security versus an equity security) or that precludes certain
types of securities from being distributed by a banking entity
acting as an underwriter in accordance with the requirements of this
exemption because the Agencies believe the statute is best read to
permit a banking entity to engage in underwriting activity to
facilitate distributions of securities by issuers and selling
security holders, regardless of type, to provide client-oriented
financial services. That reading is consistent with the statute's
language and finds support in the legislative history. See 156 Cong.
Rec. S5895-S5896 (daily ed. July 15, 2010) (statement of Sen.
Merkley) (stating that the underwriting exemption permits
``transactions that are technically trading for the account of the
firm but, in fact, facilitate the provision of near-term client-
oriented financial services''). In addition, with respect to this
commenter's statement regarding credit risk retention requirements,
the Agencies note that compliance with the credit risk retention
requirements of Section 15G of the Exchange Act would not impact the
availability of the underwriting exemption in the final rule.

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

    This requirement is not intended to prevent a trading desk from
distributing an offering over a reasonable time consistent with market
conditions or from retaining an unsold allotment of the securities
acquired from an issuer or selling security holder where holding such
securities is necessary due to circumstances such as less-than-expected
purchaser demand at a given price.\446\ An unsold allotment is,
however, subject to the requirement to make reasonable efforts to sell
or otherwise reduce the underwriting position.\447\ The definition of
``underwriting position'' includes, among other things, any residual
position from the distribution that is managed by the trading desk. The
final rule includes the requirement to make reasonable efforts to sell
or otherwise reduce the trading desk's underwriting position in order
to respond to comments on the issue of when a banking entity may retain
an unsold allotment when it is acting as an underwriter, as discussed
in more detail below, and ensure that the exemption is available only
for activities that involve underwriting activities, and not prohibited
proprietary trading.\448\
---------------------------------------------------------------------------

    \446\ This approach should help address commenters' concerns
that an inflexible interpretation of the near term demand
requirement could result in fire sales, higher fees for underwriting
services, or reluctance to act as an underwriter for certain types
of distributions that present a greater risk of unsold allotments.
See SIFMA et al. (Prop. Trading) (Feb. 2012); RBC. Further, the
Agencies believe this should reduce commenters' concerns that, to
the extent a delayed distribution of securities, which are acquired
as a result of an outstanding bridge loan, is able to qualify for
the underwriting exemption, a stringent interpretation of the near
term demand requirement could prevent a banking entity from
retaining such securities if market conditions are suboptimal or
marketing efforts are not entirely successful. See RBC; BoA; LSTA
(Feb. 2012). In response to one commenter's request that the
Agencies allow a banking entity to assess near term demand at the
time of the initial extension of the bridge commitment, the Agencies
believe it could be appropriate to determine whether the banking
entity has a reasonable expectation of demand from other market
participants for the amount and type of securities to be acquired at
that time, but note that the trading desk would continue to be
subject to the requirement to make reasonable efforts to sell the
resulting underwriting position at the time of the initial
distribution and for the remaining time the securities are in its
inventory. See LSTA (Feb. 2012).
    \447\ The Agencies believe that requiring a trading desk to make
reasonable efforts to sell or otherwise reduce its underwriting
position addresses commenters' concerns about the risks associated
with unsold allotments or the retention of underwritten instruments
because this requirement is designed to prevent a trading desk from
retaining an unsold allotment for speculative purposes when there is
customer buying interest for the relevant security at commercially
reasonable prices. Thus, the Agencies believe this obviates the need
for certain additional requirements suggested by commenters. See,
e.g., Occupy; AFR et al. (Feb. 2012); CalPERS. The final rule
strikes an appropriate balance between the concerns raised by these
commenters and those noted by other commenters regarding the
potential market impacts of strict requirements against holding an
unsold allotment, such as higher fees to underwriting clients, fire
sales of unsold allotments, or general reluctance to participate in
any distribution that presents a risk of an unsold allotment. The
requirement to make reasonable efforts to sell or otherwise reduce
the underwriting position should not cause the market impacts
predicted by these commenters because it does not prevent an
underwriter from retaining an unsold allotment for a reasonable
period or impose strict holding period limits on unsold allotments.
See SIFMA et al. (Prop. Trading) (Feb. 2012); RBC; Goldman (Prop.
Trading); Fidelity.
    \448\ This approach is generally consistent with one commenter's
suggested approach to addressing the issue of unsold allotments.
See, e.g., Goldman (Prop. Trading) (suggesting that a banking entity
be permitted to hold a residual position under the underwriting
exemption as long as it continues to take reasonable steps to
attempt to dispose of the residual position in light of existing
market conditions). In addition, allowing an underwriter to retain
an unsold allotment under certain circumstances is consistent with
the proposal. See Joint Proposal, 76 FR 68,867 (``There may be
circumstances in which an underwriter would hold securities that it
could not sell in the distribution for investment purposes. If the
acquisition of such unsold securities were in connection with the
underwriting pursuant to the permitted underwriting activities
exemption, the underwriter would also be able to dispose of such
securities at a later time.''); CFTC Proposal, 77 FR 8352. A number
of commenters raised questions about whether the rule would permit
retaining an unsold allotment. See Goldman (Prop. Trading);
Fidelity; SIFMA et al. (Prop. Trading) (Feb. 2012); BoA; RBC; AFR et
al. (Feb. 2012); CalPERS; Occupy; Public Citizen; Alfred Brock.
---------------------------------------------------------------------------

    As a general matter, commenters expressed differing views on
whether an underwriter should be permitted to hold an unsold allotment
for a certain period of time after the initial distribution. For
example, a few commenters suggested that limitations on retaining an
unsold allotment would increase the cost of raising capital \449\ or
would negatively impact certain types of securities offerings (e.g.,
bought deals, rights offerings, and fixed-income offerings).\450\ Other
commenters, however, expressed concern that the proposed exemption
would allow a banking entity to retain a portion of a distribution for
speculative purposes.\451\
---------------------------------------------------------------------------

    \449\ See Goldman (Prop. Trading); Fidelity.
    \450\ See SIFMA et al. (Prop. Trading) (Feb. 2012); BoA; RBC.
    \451\ See AFR et al. (Feb. 2012); CalPERS; Occupy; Public
Citizen; Alfred Brock.
---------------------------------------------------------------------------

    The Agencies believe the requirement to make reasonable efforts to
sell or otherwise reduce the underwriting position appropriately
addresses both sets of comments. More specifically, this standard
clarifies that an underwriter generally may retain an unsold allotment
that it was unable to sell to purchasers as part of the initial
distribution of securities, provided it had a reasonable expectation of
buying interest and engaged in reasonable selling efforts.\452\ This
should reduce the potential for the negative impacts of a more
stringent approach predicted by commenters, such as increased fees for
underwriting, greater costs to businesses for raising capital, and
potential fire sales of unsold allotments.\453\ However, to address
concerns that a banking entity may retain an unsold allotment for
purely speculative purposes, the Agencies are requiring that reasonable
efforts be made to sell or otherwise reduce the underwriting position,
which includes any unsold allotment, within a reasonable period. The
Agencies agree with these commenters that systematic retention of an
underwriting position, without engaging in efforts to sell the position
and without regard to whether the trading desk is able to sell the
securities at a commercially reasonable price, would be indicative of
impermissible proprietary trading intent.\454\ The Agencies recognize
that the meaning of ``reasonable period'' may differ based on the
liquidity, maturity, and depth of the market for the relevant type of
securities. For example, an underwriter may be more likely to retain an
unsold allotment in a bond offering because liquidity in the fixed-
income market is generally not as deep as that in the equity market. If
a trading desk retains an underwriting position for a period of time
after the distribution, the trading desk must manage the risk of its
underwriting position in accordance with its inventory and risk limits
and authorization procedures. As discussed above, hedging transactions
undertaken in connection with such risk management activities must be
conducted in compliance with the

hedging exemption in Sec.  ----.5 of the final rule.
---------------------------------------------------------------------------

    \452\ To the extent that an AP for an ETF is able to meet the
terms of the underwriting exemption for its activity, it may be able
to retain ETF shares that it created if it had a reasonable
expectation of buying interest in the ETF shares and engages in
reasonable efforts to sell the ETF shares. See SIFMA et al. (Prop.
Trading) (Feb. 2012); BoA.
    \453\ See Goldman (Prop. Trading); Fidelity; SIFMA et al. (Prop.
Trading) (Feb. 2012); RBC.
    \454\ See AFR et al. (Feb. 2012); CalPERS; Occupy.
---------------------------------------------------------------------------

    The Agencies emphasize that the requirement to make reasonable
efforts to sell or otherwise reduce the underwriting position applies
to the entirety of the trading desk's underwriting position. As a
result, this requirement applies to a number of different scenarios in
which an underwriter may hold a long or short position in the
securities that are the subject of a distribution for a period of time.
For example, if an underwriter is facilitating a distribution of
securities for which there is sufficient investor demand to purchase
the securities at the offering price, this requirement would prevent
the underwriter from retaining a portion of the allotment for its own
account instead of selling the securities to interested investors. If
instead there was insufficient investor demand at the time of the
initial offering, this requirement would recognize that it may be
appropriate for the underwriter to hold an unsold allotment for a
reasonable period of time. Under these circumstances, the underwriter
would need to make reasonable efforts to sell the unsold allotment when
there is sufficient market demand for the securities.\455\ This
requirement would also apply in situations where the underwriters sell
securities in excess of the number of securities to which the
underwriting commitment relates, resulting in a syndicate short
position in the same class of securities that were the subject of the
distribution.\456\ This provision of the final exemption would require
reasonable efforts to reduce any portion of the syndicate short
position attributable to the banking entity that is acting as an
underwriter. Such reduction could be accomplished if, for example, the
managing underwriter exercises an overallotment option or shares are
purchased in the secondary market to cover the short position.
---------------------------------------------------------------------------

    \455\ The trading desk's retention and sale of the unsold
allotment must comply with the federal securities laws and
regulations, but is otherwise permitted under the underwriting
exemption.
    \456\ See supra note 403.
---------------------------------------------------------------------------

    The near term demand requirement, including the requirement to make
reasonable efforts to reduce the underwriting position, represents a
new regulatory requirement for banking entities engaged in
underwriting. At the margins, this requirement could alter the
participation decision for some banking entities with respect to
certain types of distributions, such as distributions that are more
likely to result in the banking entity retaining an underwriting
position for a period of time.\457\ However, the Agencies recognize
that liquidity, maturity, and depth of the market vary across types of
securities, and the Agencies expect that the express recognition of
these differences in the rule should help mitigate any incentive to
exit the underwriting business for certain types of securities or types
of distributions.
---------------------------------------------------------------------------

    \457\ For example, some commenters suggested that the proposed
underwriting exemption could have a chilling effect on banking
entities' willingness to engage in underwriting activities. See,
e.g., Lord Abbett; Fidelity. Further, some commenters expressed
concern that the proposed near term customer demand requirement
might negatively impact certain forms of capital-raising if the
requirement is interpreted narrowly or inflexibly. See SIFMA et al.
(Prop. Trading) (Feb. 2012); BoA; BDA (Feb. 2012); RBC.
---------------------------------------------------------------------------

3. Compliance Program Requirement
a. Proposed Compliance Program Requirement
    Section ----.4(a)(2)(i) of the proposed exemption required a
banking entity to establish an internal compliance program, as required
by Sec.  ----.20 of the proposed rule, that is designed to ensure the
banking entity's compliance with the requirements of the underwriting
exemption, including reasonably designed written policies and
procedures, internal controls, and independent testing.\458\ This
requirement was proposed so that any banking entity relying on the
underwriting exemption would have reasonably designed written policies
and procedures, internal controls, and independent testing in place to
support its compliance with the terms of the exemption.\459\
---------------------------------------------------------------------------

    \458\ See proposed rule Sec.  ----.4(a)(2)(i).
    \459\ See Joint Proposal, 76 FR 68,866; CFTC Proposal, 77 FR
8352.
---------------------------------------------------------------------------

b. Comments on the Proposed Compliance Program Requirement
    Commenters did not directly address the proposed compliance program
requirement in the underwriting exemption. Comments on the proposed
compliance program requirement of Sec.  ----.20 of the proposed rule
are discussed in Part IV.C., below.
c. Final Compliance Program Requirement
    The final rule includes a compliance program requirement that is
similar to the proposed requirement, but the Agencies are making
certain enhancements to emphasize the importance of a strong internal
compliance program. More specifically, the final rule requires that a
banking entity's compliance program specifically include reasonably
designed written policies and procedures, internal controls, analysis
and independent testing \460\ identifying and addressing: (i) The
products, instruments or exposures each trading desk may purchase,
sell, or manage as part of its underwriting activities; \461\ (ii)
limits for each trading desk, based on the nature and amount of the
trading desk's underwriting activities, including the reasonably
expected near term demands of clients, customers, or counterparties;
\462\ (iii) internal controls and ongoing monitoring and analysis of
each trading desk's compliance with its limits; \463\ and (iv)
authorization procedures, including escalation procedures that require
review and approval of any trade that would exceed one or more of a
trading desk's limits, demonstrable analysis of the basis for any
temporary or permanent increase to one or more of a trading desk's
limits, and independent review (i.e., by risk managers and compliance
officers at the appropriate level independent of the trading desk) of
such demonstrable analysis and approval.\464\
---------------------------------------------------------------------------

    \460\ The independent testing standard is discussed in more
detail in Part IV.C., which discusses the compliance program
requirement in Sec.  ----.20 of the final rule.
    \461\ See final rule Sec.  ----.4(a)(2)(iii)(A).
    \462\ See final rule Sec.  ----.4(a)(2)(iii)(B). A trading desk
must have limits on the amount, types, and risk of the securities in
its underwriting position, level of exposures to relevant risk
factors arising from its underwriting position, and period of time a
security may be held. See id.
    \463\ See final rule Sec.  ----.4(a)(2)(iii)(C).
    \464\ See final rule Sec.  ----.4(a)(2)(iii)(D).
---------------------------------------------------------------------------

    As noted above, the proposed compliance program requirement did not
include the four specific elements listed above in the proposed
underwriting exemption, although each of these provisions was included
in some form in the detailed compliance program requirement under
Appendix C of the proposed rule.\465\ The Agencies are moving these
particular requirements, with certain enhancements, into the
underwriting exemption because the Agencies believe these are core
elements of a program to ensure compliance with the underwriting
exemption. These compliance procedures must be established,
implemented, maintained, and enforced for each trading desk engaged in
underwriting activity under Sec.  ----.4(a) of the final rule. Each of
the

requirements in paragraphs (a)(2)(iii)(A) through (D) must be
appropriately tailored to the individual trading activities and
strategies of each trading desk.
---------------------------------------------------------------------------

    \465\ See Joint Proposal, 76 FR 68,963-68,967 (requiring certain
banking entities to establish, maintain, and enforce compliance
programs with, among other things: (i) Written policies and
procedures that describe a trading unit's authorized instruments and
products; (ii) internal controls for each trading unit, including
risk limits for each trading unit and surveillance procedures; and
(iii) a management framework, including management procedures for
overseeing compliance with the proposed rule).
---------------------------------------------------------------------------

    The compliance program requirement in the underwriting exemption is
substantially similar to the compliance program requirement in the
market-making exemption, except that the Agencies are requiring more
detailed risk management procedures in the market-making exemption due
to the nature of that activity.\466\ The Agencies believe including
similar compliance program requirements in the underwriting and market-
making exemptions may reduce burdens associated with building and
maintaining compliance programs for each trading desk.
---------------------------------------------------------------------------

    \466\ See final rule Sec. Sec.  ----.4(a)(2)(iii), --
--.4(b)(2)(iii).
---------------------------------------------------------------------------

    Identifying in the compliance program the relevant products,
instruments, and exposures in which a trading desk is permitted to
trade will facilitate monitoring and oversight of compliance with the
underwriting exemption. For example, this requirement should prevent an
individual trader on an underwriting desk from establishing positions
in instruments that are unrelated to the desk's underwriting function.
Further, the identification of permissible products, instruments, and
exposures will help form the basis for the specific types of position
and risk limits that the banking entity must establish and is relevant
to considerations throughout the exemption regarding the liquidity,
maturity, and depth of the market for the relevant type of security.
    A trading desk must have limits on the amount, types, and risk of
the securities in its underwriting position, level of exposures to
relevant risk factors arising from its underwriting position, and
period of time a security may be held. Limits established under this
provision, and any modifications to these limits made through the
required escalation procedures, must account for the nature and amount
of the trading desk's underwriting activities, including the reasonably
expected near term demands of clients, customers, or counterparties.
Among other things, these limits should be designed to prevent a
trading desk from systematically retaining unsold allotments even when
there is customer demand for the positions that remain in the trading
desk's inventory. The Agencies recognize that trading desks' limits may
differ across types of securities and acknowledge that trading desks
engaged in underwriting activities in less liquid securities, such as
corporate bonds, may require different inventory, risk exposure, and
holding period limits than trading desks engaged in underwriting
activities in more liquid securities, such as certain equity
securities. A trading desk hedging the risks of an underwriting
position must comply with the hedging exemption, which provides for
compliance procedures regarding risk management.\467\
---------------------------------------------------------------------------

    \467\ See final rule Sec.  ----.5.
---------------------------------------------------------------------------

    Furthermore, a banking entity must establish internal controls and
ongoing monitoring and analysis of each trading desk's compliance with
its limits, including the frequency, nature, and extent of a trading
desk exceeding its limits.\468\ This may include the use of management
and exception reports. Moreover, the compliance program must set forth
a process for determining the circumstances under which a trading
desk's limits may be modified on a temporary or permanent basis (e.g.,
due to market changes).
---------------------------------------------------------------------------

    \468\ See final rule Sec.  ----.4(a)(2)(iii)(C).
---------------------------------------------------------------------------

    As noted above, a banking entity's compliance program for trading
desks engaged in underwriting activity must also include escalation
procedures that require review and approval of any trade that would
exceed one or more of a trading desk's limits, demonstrable analysis
that the basis for any temporary or permanent increase to one or more
of a trading desk's limits is consistent with the near term customer
demand requirement, and independent review of such demonstrable
analysis and approval.\469\ Thus, to increase a limit of a trading
desk, there must be an analysis of why such increase would be
appropriate based on the reasonably expected near term demands of
clients, customers, or counterparties, which must be independently
reviewed. A banking entity also must maintain documentation and records
with respect to these elements, consistent with the requirement of
Sec.  ----.20(b)(6).
---------------------------------------------------------------------------

    \469\ See final rule Sec.  ----.4(a)(2)(iii)(D).
---------------------------------------------------------------------------

    As discussed in more detail in Part IV.C., the Agencies recognize
that the compliance program requirements in the final rule will impose
certain costs on banking entities but, on balance, the Agencies believe
such requirements are necessary to facilitate compliance with the
statute and the final rule and to reduce the risk of evasion.\470\
---------------------------------------------------------------------------

    \470\ See Part IV.C. (discussing the compliance program
requirement in Sec.  ----.20 of the final rule).
---------------------------------------------------------------------------

4. Compensation Requirement
a. Proposed Compensation Requirement
    Another provision of the proposed underwriting exemption required
that the compensation arrangements of persons performing underwriting
activities at the banking entity must be designed not to encourage
proprietary risk-taking.\471\ In connection with this requirement, the
proposal clarified that although a banking entity relying on the
underwriting exemption may appropriately take into account revenues
resulting from movements in the price of securities that the banking
entity underwrites to the extent that such revenues reflect the
effectiveness with which personnel have managed underwriting risk, the
banking entity should provide compensation incentives that primarily
reward client revenues and effective client service, not proprietary
risk-taking.\472\
---------------------------------------------------------------------------

    \471\ See proposed rule Sec.  ----.4(a)(2)(vii); Joint Proposal,
76 FR 68,868; CFTC Proposal, 77 FR 8353.
    \472\ See id.
---------------------------------------------------------------------------

b. Comments on the Proposed Compensation Requirement
    A few commenters expressed general support for the proposed
requirement, but suggested certain modifications that they believed
would enhance the requirement and make it more effective.\473\
Specifically, one commenter suggested tailoring the requirement to
underwriting activity by, for example, ensuring that personnel involved
in underwriting are given compensation incentives for the successful
distribution of securities off the firm's balance sheet and are not
rewarded for profits associated with securities that are not
successfully distributed (although losses from such positions should be
taken into consideration in determining the employee's compensation).
This commenter further recommended that bonus compensation for a deal
be withheld until all or a high percentage of the relevant securities
are distributed.\474\ Finally, one commenter suggested that the term
``designed'' should be removed from this provision.\475\
---------------------------------------------------------------------------

    \473\ See Occupy; AFR et al. (Feb. 2012); Better Markets (Feb.
2012).
    \474\ See AFR et al. (Feb. 2012).
    \475\ See Occupy.
---------------------------------------------------------------------------

c. Final Compensation Requirement
    Similar to the proposed rule, the underwriting exemption in the
final rule requires that the compensation arrangements of persons
performing the banking entity's underwriting activities, as described
in the exemption, be

designed not to reward or incentivize prohibited proprietary
trading.\476\ The Agencies do not intend to preclude an employee of an
underwriting desk from being compensated for successful underwriting,
which involves some risk-taking.
---------------------------------------------------------------------------

    \476\ See final rule Sec.  ----.4(a)(2)(iv); proposed rule Sec.
----.4(a)(2)(vii). This is consistent with the final compensation
requirements in the market-making and hedging exemptions. See final
rule Sec.  ----.4(b)(2)(v); final rule Sec.  ----.5(b)(3).
---------------------------------------------------------------------------

    Consistent with the proposal, activities for which a banking entity
has established a compensation incentive structure that rewards
speculation in, and appreciation of, the market value of securities
underwritten by the banking entity are inconsistent with the
underwriting exemption. A banking entity may, however, take into
account revenues resulting from movements in the price of securities
that the banking entity underwrites to the extent that such revenues
reflect the effectiveness with which personnel have managed
underwriting risk. The banking entity should provide compensation
incentives that primarily reward client revenues and effective client
services, not prohibited proprietary trading. For example, a
compensation plan based purely on net profit and loss with no
consideration for inventory control or risk undertaken to achieve those
profits would not be consistent with the underwriting exemption.
    The Agencies are not adopting an approach that prevents an employee
from receiving any compensation related to profits arising from an
unsold allotment, as suggested by one commenter, because the Agencies
believe the final rule already includes sufficient controls to prevent
a trading desk from intentionally retaining an unsold allotment to make
a speculative profit when such allotment could be sold to
customers.\477\ The Agencies also are not requiring compensation to be
vested for a period of time, as recommended by one commenter to reduce
traders' incentives for undue risk-taking. The Agencies believe the
final rule includes sufficient controls around risk-taking activity
without a compensation vesting requirement because a banking entity
must establish limits for a trading desk's underwriting position and
the trading desk must make reasonable efforts to sell or otherwise
reduce the underwriting position within a reasonable period.\478\ The
Agencies continue to believe it is appropriate to focus on the design
of a banking entity's compensation structure, so the Agencies are not
removing the term ``designed'' from this provision.\479\ This retains
an objective focus on actions that the banking entity can control--the
design of its incentive compensation program--and avoids a subjective
focus on whether an employee feels incentivized by compensation, which
may be more difficult to assess. In addition, the framework of the
final compensation requirement will allow banking entities to better
plan and control the design of their compensation arrangements, which
should reduce costs and uncertainty and enhance monitoring, than an
approach focused solely on individual outcomes.
---------------------------------------------------------------------------

    \477\ See AFR et al. (Feb. 2012); supra Part IV.A.2.c.2.c.
(discussing the requirement to make reasonable efforts to sell or
otherwise reduce the underwriting position).
    \478\ See AFR et al. (Feb. 2012).
    \479\ See Occupy.
---------------------------------------------------------------------------

5. Registration Requirement
a. Proposed Registration Requirement
    Section ----.4(a)(2)(iv) of the proposed rule would have required
that a banking entity have the appropriate dealer registration or be
exempt from registration or excluded from regulation as a dealer to the
extent that, in order to underwrite the security at issue, a person
must generally be a registered securities dealer, municipal securities
dealer, or government securities dealer.\480\ Further, if the banking
entity was engaged in the business of a dealer outside the United
States in a manner for which no U.S. registration is required, the
proposed rule would have required the banking entity to be subject to
substantive regulation of its dealing business in the jurisdiction in
which the business is located.
---------------------------------------------------------------------------

    \480\ See proposed rule Sec.  ----.4(a)(2)(iv); Joint Proposal,
76 FR 68,867; CFTC Proposal, 77 FR 8353. The proposal clarified
that, in the case of a financial institution that is a government
securities dealer, such institution must have filed notice of that
status as required by section 15C(a)(1)(B) of the Exchange Act. See
Joint Proposal, 76 FR 68,867; CFTC Proposal, 77 FR 8353.
---------------------------------------------------------------------------

b. Comments on Proposed Registration Requirement
    Commenters generally did not address the proposed dealer
requirement in the underwriting exemption. However, as discussed below
in Part IV.A.3.c.2.b., a number of commenters addressed a similar
requirement in the proposed market-making exemption.
c. Final Registration Requirement
    The requirement in Sec.  ----.4(a)(2)(vi) of the underwriting
exemption, which provides that the banking entity must be licensed or
registered to engage in underwriting activity in accordance with
applicable law, is substantively similar to the proposed dealer
registration requirement in Sec.  ----.4(a)(2)(iv) of the proposed
rule. The primary difference between the proposed requirement and the
final requirement is that the Agencies have simplified the language of
the rule. The Agencies have also made conforming changes to the
corresponding requirement in the market-making exemption to promote
consistency across the exemptions, where appropriate.\481\
---------------------------------------------------------------------------

    \481\ See Part IV.A.3.c.6. (discussing the registration
requirement in the market-making exemption).
---------------------------------------------------------------------------

    As was proposed, this provision will require a U.S. banking entity
to be an SEC-registered dealer in order to rely on the underwriting
exemption in connection with a distribution of securities--other than
exempted securities, security-based swaps, commercial paper, bankers
acceptances or commercial bills--unless the banking entity is exempt
from registration or excluded from regulation as a dealer.\482\ To the
extent that a banking entity relies on the underwriting exemption in
connection with a distribution of municipal securities or government
securities, rather than the exemption in Sec.  ----.6(a) of the final
rule, this provision may require the banking entity to be registered or
licensed as a municipal securities dealer or government securities
dealer, if required by applicable law. However, this provision does not
require a banking entity to register in order to qualify for the
underwriting exemption if the banking entity is not otherwise required
to register by applicable law.
---------------------------------------------------------------------------

    \482\ For example, if a banking entity is a bank engaged in
underwriting asset-backed securities for which it would be required
to register as a securities dealer but for the exclusion contained
in section 3(a)(5)(C)(iii) of the Exchange Act, the final rule would
not require the banking entity to be a registered securities dealer
to underwrite the asset-backed securities. See 15 U.S.C.
78c(a)(5)(C)(iii).
---------------------------------------------------------------------------

    The Agencies have determined that, for purposes of the underwriting
exemption, rather than require a banking entity engaged in the business
of a securities dealer outside the United States to be subject to
substantive regulation of its dealing business in the jurisdiction in
which the business is located, a banking entity's dealing activity
outside the U.S. should only be subject to licensing or registration
provisions if required under applicable foreign law (provided no U.S.
registration or licensing requirements apply to the banking entity's
activities). In response to comments, the final rule recognizes that
certain foreign jurisdictions may not provide for substantive
regulation of dealing

businesses.\483\ The Agencies do not believe it is necessary to
preclude banking entities from engaging in underwriting activities in
such foreign jurisdictions to achieve the goals of section 13 of the
BHC Act because these banking entities would continue to be subject to
the other requirements of the underwriting exemption.
---------------------------------------------------------------------------

    \483\ See infra Part IV.A.3.c.6.c. (discussing comments on this
issue with respect to the proposed dealer registration requirement
in the market-making exemption).
---------------------------------------------------------------------------

6. Source of Revenue Requirement
a. Proposed Source of Revenue Requirement
    Under Sec.  ----.4(a)(2)(vi) of the proposed rule, the underwriting
activities of a banking entity would have been required to be designed
to generate revenues primarily from fees, commissions, underwriting
spreads, or other income not attributable to appreciation in the value
of covered financial positions or hedging of covered financial
positions.\484\ The proposal clarified that underwriting spreads would
include any ``gross spread'' (i.e., the difference between the price an
underwriter sells securities to the public and the price it purchases
them from the issuer) designed to compensate the underwriter for its
services.\485\ This requirement provided that activities conducted in
reliance on the underwriting exemption should demonstrate patterns of
revenue generation and profitability consistent with, and related to,
the services an underwriter provides to its customers in bringing
securities to market, rather than changes in the market value of the
underwritten securities.\486\
---------------------------------------------------------------------------

    \484\ See proposed rule Sec.  ----.4(a)(2)(vi); Joint Proposal,
76 FR 68,867-68,868; CFTC Proposal, 77 FR 8353.
    \485\ See Joint Proposal, 76 FR 68,867-68,868 n.142; CFTC
Proposal, 77 FR 8353 n.148.
    \486\ See Joint Proposal, 76 FR 68,867-68,868; CFTC Proposal, 77
FR 8353.
---------------------------------------------------------------------------

b. Comments on the Proposed Source of Revenue Requirement
    A few commenters requested certain modifications to the proposed
source of revenue requirement. These commenters' suggested revisions
were generally intended either to refine the standard to better account
for certain activities or to make it more stringent.\487\ Three
commenters expressed concern that the proposed source of revenue
requirement would negatively impact a banking entity's ability to act
as a primary dealer or in a similar capacity.\488\
---------------------------------------------------------------------------

    \487\ See Goldman (Prop. Trading); Occupy; Sens. Merkley & Levin
(Feb. 2012).
    \488\ See Banco de M[eacute]xico (stating that primary dealers
need to profit from resulting proprietary positions in foreign
sovereign debt, including by holding significant positions in
anticipation of future price movements, in order to make the primary
dealer business financially attractive); IIB/EBF (noting that
primary dealers may actively seek to profit from price and interest
rate movements of their holdings, which the relevant sovereign
entity supports because such activity provides much-needed liquidity
for securities that are otherwise largely purchased pursuant to buy-
and-hold strategies by institutional investors and other entities
seeking safe returns and liquidity buffers); Japanese Bankers Ass'n.
---------------------------------------------------------------------------

    With respect to suggested modifications, one commenter recommended
that ``customer revenue'' include revenues attributable to syndicate
activities, hedging activities, and profits and losses from sales of
residual positions, as long as the underwriter makes a reasonable
effort to dispose of any residual position in light of existing market
conditions.\489\ Another commenter indicated that the rule would better
address securitization if it required compensation to be linked in part
to risk minimization for the securitizer and in part to serving
customers. This commenter suggested that such a framework would be
preferable because, in the context of securitizations, fee-based
compensation structures did not previously prevent banking entities
from accumulating large and risky positions with significant market
exposure.\490\
---------------------------------------------------------------------------

    \489\ See Goldman (Prop. Trading).
    \490\ See Sens. Merkley & Levin (Feb. 2012).
---------------------------------------------------------------------------

    To strengthen the proposed requirement, one commenter requested
that the terms ``designed'' and ``primarily'' be removed and replaced
by the word ``solely.'' \491\ Two other commenters requested that this
requirement be interpreted to prevent a banking entity from acting as
an underwriter for a distribution of securities if such securities lack
a discernible and sufficiently liquid pre-existing market and a
foreseeable market price.\492\
---------------------------------------------------------------------------

    \491\ See Occupy (requesting that the rule require automatic
disgorgement of any profits arising from appreciation in the value
of positions in connection with underwriting activities).
    \492\ See AFR et al. (Feb. 2012); Public Citizen.
---------------------------------------------------------------------------

c. Final Rule's Approach To Assessing Source of Revenue

    The Agencies believe the final rule includes sufficient controls
around an underwriter's source of revenue and have determined not to
adopt the additional requirement included in proposed rule Sec.  --
--.4(a)(2)(vi). The Agencies believe that removing this requirement
addresses commenters' concerns that the proposed requirement did not
appropriately reflect certain revenue sources from underwriting
activity \493\ or may impact primary dealer activities.\494\ At the
same time, the final rule continues to include provisions that focus on
whether an underwriter is generating underwriting-related revenue and
that should limit an underwriter's ability to generate revenues purely
from price appreciation. In particular, the requirement to make
reasonable efforts to sell or otherwise reduce the underwriting
position within a reasonable period, which was not included in the
proposed rule, should limit an underwriter's ability to gain revenues
purely from price appreciation related to its underwriter position.
Similarly, the determination of whether an underwriter receives special
compensation for purposes of the definition of ``distribution'' takes
into account whether a banking entity is generating underwriting-
related revenue.
---------------------------------------------------------------------------

    \493\ See Goldman (Prop. Trading).
    \494\ See Banco de M[eacute]xico; IIB/EBF; Japanese Bankers
Ass'n.
---------------------------------------------------------------------------

    The final rule does not adopt a requirement that prevents an
underwriter from generating any revenue from price appreciation out of
concern that such a requirement could prevent an underwriter from
retaining an unsold allotment under any circumstances, which would be
inconsistent with other provisions of the exemption.\495\ Similarly,
the Agencies are not adopting a source of revenue requirement that
would prevent a banking entity from acting as underwriter for a
distribution of securities if such securities lack a discernible and
sufficiently liquid pre-existing market and a foreseeable market price,
as suggested by two commenters.\496\ The Agencies believe these
commenters' concern is mitigated by the near term demand requirement,
which requires a trading desk to have a reasonable expectation of
demand from other market participants for the amount and type of
securities to be acquired from an issuer or selling security holder for
distribution.\497\ Further, one commenter recommended a revenue
requirement directed at securitization activities to prevent banking
entities from accumulating large and risky positions with significant
market

exposure.\498\ The Agencies believe the requirement to make reasonable
efforts to sell or otherwise reduce the underwriting position should
achieve this stated goal and, thus, the Agencies do not believe an
additional revenue requirement for securitization activity is
needed.\499\
---------------------------------------------------------------------------

    \495\ See Occupy; supra Part IV.A.2.c.2. (discussing comments on
unsold allotments and the requirement in the final rule to make
reasonable efforts to sell or otherwise reduce the underwriting
position).
    \496\ See AFR et al. (Feb. 2012); Public Citizen.
    \497\ See supra Part IV.A.2.c.2.
    \498\ See Sens. Merkley & Levin (Feb. 2012).
    \499\ See final rule Sec.  ----.4(a)(2)(ii). Further, as noted
above, this exemption does not permit the accumulation of assets for
securitization. See supra Part IV.A.2.c.1.c.v.
---------------------------------------------------------------------------

3. Section ----.4(b): Market-Making Exemption
a. Introduction
    In adopting the final rule, the Agencies are striving to balance
two goals of section 13 of the BHC Act: To allow market making, which
is important to well-functioning markets as well as to the economy, and
simultaneously to prohibit proprietary trading, unrelated to market
making or other permitted activities, that poses significant risks to
banking entities and the financial system. In response to comments on
the proposed market-making exemption, the Agencies are adopting certain
modifications to the proposed exemption to better account for the
varying characteristics of market making-related activities across
markets and asset classes, while requiring that banking entities
maintain a robust set of risk controls for their market making-related
activities. A flexible approach to this exemption is appropriate
because the activities a market maker undertakes to provide important
intermediation and liquidity services will differ based on the
liquidity, maturity, and depth of the market for a given type of
financial instrument. The statute specifically permits banking entities
to continue to provide these beneficial services to their clients,
customers, and counterparties.\500\ Thus, the Agencies are adopting an
approach that recognizes the full scope of market making-related
activities banking entities currently undertake and requires that these
activities be subject to clearly defined, verifiable, and monitored
risk parameters.
---------------------------------------------------------------------------

    \500\ As discussed in Part IV.A.3.c.2.c.i., infra, the terms
``client,'' ``customer,'' and ``counterparty'' are defined in the
same manner in the final rule. Thus, the Agencies use these terms
synonymously throughout this discussion and sometimes use the term
``customer'' to refer to all entities that meet the definition of
``client, customer, and counterparty'' in the final rule's market-
making exemption.
---------------------------------------------------------------------------

b. Overview
1. Proposed Market-Making Exemption
    Section 13(d)(1)(B) of the BHC Act provides an exemption from the
prohibition on proprietary trading for the purchase, sale, acquisition,
or disposition of securities, derivatives, contracts of sale of a
commodity for future delivery, and options on any of the foregoing in
connection with market making-related activities, to the extent that
such activities are designed not to exceed the reasonably expected near
term demands of clients, customers, or counterparties.\501\
---------------------------------------------------------------------------

    \501\ 12 U.S.C. 1851(d)(1)(B).
---------------------------------------------------------------------------

    Section ----.4(b) of the proposed rule would have implemented this
statutory exemption by requiring that a banking entity's market making-
related activities comply with seven standards. As discussed in the
proposal, these standards were designed to ensure that any banking
entity relying on the exemption would be engaged in bona fide market
making-related activities and, further, would conduct such activities
in a way that was not susceptible to abuse through the taking of
speculative, proprietary positions as a part of, or mischaracterized
as, market making-related activities. The Agencies proposed to use
additional regulatory and supervisory tools in conjunction with the
proposed market-making exemption, including quantitative measurements
for banking entities engaged in significant covered trading activity in
proposed Appendix A, commentary on how the Agencies proposed to
distinguish between permitted market making-related activity and
prohibited proprietary trading in proposed Appendix B, and a compliance
regime in proposed Sec.  ----.20 and, where applicable, Appendix C of
the proposal. This multi-faceted approach was intended to address the
complexities of differentiating permitted market making-related
activities from prohibited proprietary trading.\502\
---------------------------------------------------------------------------

    \502\ See Joint Proposal, 76 FR 68,869; CFTC Proposal, 77 FR
8354-8355.
---------------------------------------------------------------------------

2. Comments on the Proposed Market-Making Exemption
    The Agencies received significant comment regarding the proposed
market-making exemption. In this Part, the Agencies highlight the main
issues, concerns, and suggestions raised by commenters with respect to
the proposed market-making exemption. As discussed in greater detail
below, commenters' views on the effectiveness of the proposed exemption
varied. Commenters discussed a broad range of topics related to the
proposed market-making exemption including, among others: The overall
scope of the proposed exemption and potential restrictions on market
making in certain markets or asset classes; the potential market impact
of the proposed market-making exemption; the appropriate level of
analysis for compliance with the proposed exemption; the effectiveness
of the individual requirements of the proposed exemption; and specific
activities that should or should not be considered permitted market
making-related activity under the rule.
a. Comments on the Overall Scope of the Proposed Exemption
    With respect to the general scope of the exemption, a number of
commenters expressed concern that the proposed approach to implementing
the market-making exemption is too narrow or restrictive, particularly
with respect to less liquid markets. These commenters expressed concern
that the proposed exemption would not be workable in many markets and
asset classes and does not take into account how market-making services
are provided in those markets and asset classes.\503\ Some commenters
expressed particular concern that the proposed exemption may restrict
or limit certain activities currently conducted by market makers (e.g.,
holding inventory or interdealer trading).\504\ Several commenters
stated

that the proposed exemption would create too much uncertainty regarding
compliance \505\ and, further, may have a chilling effect on banking
entities' market making-related activities.\506\ Due to the perceived
restrictions and burdens of the proposed exemption, many commenters
indicated that the rule may change the way in which market-making
services are provided.\507\ A number of commenters expressed the view
that the proposed exemption is inconsistent with Congressional intent
because it would restrict and reduce banking entities' current market
making-related activities.\508\
---------------------------------------------------------------------------

    \503\ See, e.g., SIFMA et al. (Prop. Trading) (Feb. 2012)
(stating that the proposed exemption ``seems to view market making
based on a liquid, exchange-traded equity model in which market
makers are simple intermediaries akin to agents'' and that ``[t]his
view does not fit market making even in equity markets and widely
misses the mark for the vast majority of markets and asset
classes''); SIFMA (Asset Mgmt.) (Feb. 2012); Credit Suisse (Seidel);
ICI (Feb. 2012); BoA; Columbia Mgmt.; Comm. on Capital Markets
Regulation; Invesco; ASF (Feb. 2012) (``The seven criteria in the
proposed rule, and the related criterion for identifying permitted
hedging, are overly restrictive and will make it impractical for
dealers to continue making markets in most securitized products.'');
Chamber (Feb. 2012) (expressing particular concern about the
commercial paper market).
    \504\ Several commenters stated that the proposed rule would
limit a market maker's ability to maintain inventory. See, e.g.,
NASP; Oliver Wyman (Dec. 2011); Wellington; Prof. Duffie; Standish
Mellon; MetLife; Lord Abbett; NYSE Euronext; CIEBA; British
Columbia; SIFMA et al. (Prop. Trading) (Feb. 2012); Shadow Fin.
Regulatory Comm.; Credit Suisse (Seidel); Morgan Stanley; Goldman
(Prop. Trading); BoA; STANY; SIFMA (Asset Mgmt.) (Feb. 2012);
Chamber (Feb. 2012); IRSG; Abbott Labs et al. (Feb. 14, 2012);
Abbott Labs et al. (Feb. 21, 2012); Australian Bankers Ass'n. (Feb.
2012); FEI; ASF (Feb. 2012); RBC; PUC Texas; Columbia Mgmt.; SSgA
(Feb. 2012); PNC et al.; Fidelity; ICI (Feb. 2012); British Bankers'
Ass'n.; Comm. on Capital Markets Regulation; IHS; Oliver Wyman (Feb.
2012); Thakor Study (stating that by artificially constraining the
security holdings that a banking entity can have in its inventory
for market making or proprietary trading purposes, section 13 of the
BHC Act will make bank risk management less efficient and may
adversely impact the diversified financial services business model
of banks). However, some commenters stated that market makers should
seek to minimize their inventory or should not need large
inventories. See, e.g., AFR et al. (Feb. 2012); Public Citizen;
Johnson & Prof. Stiglitz. Other commenters expressed concern that
the proposed rule could limit interdealer trading. See, e.g., Prof.
Duffie; Credit Suisse (Seidel); JPMC; Morgan Stanley; Goldman (Prop.
Trading); Chamber (Feb. 2012); Oliver Wyman (Dec. 2011).
    \505\ See, e.g., BlackRock; Putnam; Fixed Income Forum/Credit
Roundtable; ACLI (Feb. 2012); MetLife; IAA; Wells Fargo (Prop.
Trading); T. Rowe Price; Sen. Bennet; Sen. Corker; PUC Texas;
Fidelity; ICI (Feb. 2012); Invesco.
    \506\ See, e.g., Wellington; Prof. Duffie; Standish Mellon;
Commissioner Barnier; NYSE Euronext; BoA; Citigroup (Feb. 2012);
STANY; ICE; Chamber (Feb. 2012); BDA (Feb. 2012); Putnam; FTN; Fixed
Income Forum/Credit Roundtable; ACLI (Feb. 2012); IAA; CME Group;
Capital Group; PUC Texas; Columbia Mgmt.; SSgA (Feb. 2012); Eaton
Vance; ICI (Feb. 2012); Invesco; Comm. on Capital Markets
Regulation; Oliver Wyman (Feb. 2012); SIFMA (Asset Mgmt.) (Feb.
2012); Thakor Study.
    \507\ For example, some commenters stated that market makers may
revert to an agency or ``special order'' model. See, e.g., Barclays;
Goldman (Prop. Trading); ACLI (Feb. 2012); Vanguard; RBC. In
addition, some commenters stated that new systems will be developed,
such as alternative market matching networks, but these commenters
disagreed about whether such changes would happen in the near term.
See, e.g., CalPERS; BlackRock; Stuyvesant; Comm. on Capital Markets
Regulation. Other commenters stated that it is unlikely that new
systems will be developed. See, e.g., SIFMA et al. (Prop. Trading)
(Feb. 2012); Oliver Wyman (Feb. 2012). One commenter stated that the
proposed rule may cause a banking organization that engages in
significant market-making activity to give up its banking charter or
spin off its market-making operations to avoid compliance with the
proposed exemption. See Prof. Duffie.
    \508\ See, e.g., NASP; Wellington; JPMC; Morgan Stanley; Credit
Suisse (Seidel); BoA; Goldman (Prop. Trading); Citigroup (Feb.
2012); STANY; SIFMA (Asset Mgmt.) (Feb. 2012); Chamber (Feb. 2012);
Putnam; ICI (Feb. 2012); Wells Fargo (Prop. Trading); NYSE Euronext;
Sen. Corker; Invesco.
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    Other commenters, however, stated that the proposed exemption was
too broad and recommended that the rule place greater restrictions on
market making, particularly in illiquid, nontransparent markets.\509\
Many of these commenters suggested that the exemption should only be
available for traditional market-making activity in relatively safe,
``plain vanilla'' instruments.\510\ Two commenters represented that the
proposed exemption would have little to no impact on banking entities'
current market making-related services.\511\
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    \509\ See, e.g., Better Markets (Feb. 2012); Sens. Merkley &
Levin (Feb. 2012); Occupy; AFR et al. (Feb. 2012); Public Citizen;
Johnson & Prof. Stiglitz.
    \510\ See, e.g., Johnson & Prof. Stiglitz; Sens. Merkley & Levin
(Feb. 2012); Occupy; AFR et al. (Feb. 2012); Public Citizen.
    \511\ See Occupy (``[I]t is unclear that this rule, as written,
will markedly alter the current customer-serving business. Indeed,
this rule has gone to excessive lengths to protect the covered
banking entities' ability to maintain responsible customer-facing
business.''); Alfred Brock.
---------------------------------------------------------------------------

    Commenters expressed differing views regarding the ease or
difficulty of distinguishing permitted market making-related activity
from prohibited proprietary trading. A number of commenters represented
that it is difficult or impossible to distinguish prohibited
proprietary trading from permitted market making-related activity.\512\
With regard to this issue, several commenters recommended that the
Agencies not try to remove all aspects of proprietary trading from
market making-related activity because doing so would likely restrict
certain legitimate market-making activity.\513\
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    \512\ See, e.g., Rep. Bachus et al.; IIF; Morgan Stanley
(stating that beyond walled-off proprietary trading, the line is
hard to draw, particularly because both require principal risk-
taking and the features of market making vary across markets and
asset classes and become more pronounced in times of market stress);
CFA Inst. (representing that the distinction is particularly
difficult in the fixed-income market); ICFR; Prof. Duffie; WR
Hambrecht.
    \513\ See, e.g., Chamber (Feb. 2012) (citing an article by
Stephen Breyer stating that society should not expend
disproportionate resources trying to reduce or eliminate ``the last
10 percent'' of the risks of a certain problem); JPMC; RBC; ICFR;
Sen. Hagan. One of these commenters indicated that any concerns that
banking entities would engage in speculative trading as a result of
an expansive market-making exemption would be addressed by other
reform initiatives (e.g., Basel III implementation will provide
laddered disincentives to holding positions as principal as a result
of capital and liquidity requirements). See RBC.
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    Other commenters were of the view that it is possible to
differentiate between prohibited proprietary trading and permitted
market making-related activity.\514\ For example, one commenter stated
that, while the analysis may involve subtle distinctions, the
fundamental difference between a banking entity's market-making
activities and proprietary trading activities is the emphasis in market
making on seeking to meet customer needs on a consistent and reliable
basis throughout a market cycle.\515\ According to another commenter,
holding substantial securities in a trading book for an extended period
of time assumes the character of a proprietary position and, while
there may be occasions when a customer-oriented purchase and subsequent
sale extend over days and cannot be more quickly executed or hedged,
substantial holdings of this character should be relatively rare and
limited to less liquid markets.\516\
---------------------------------------------------------------------------

    \514\ See Wellington; Paul Volcker; Better Markets (Feb. 2012);
Occupy.
    \515\ See Wellington.
    \516\ See Paul Volcker.
---------------------------------------------------------------------------

    Several commenters expressed general concern that the proposed
exemption may be applied on a transaction-by-transaction basis and
explained the burdens that may result from such an approach.\517\
Commenters appeared to attribute these concerns to language in the
proposed exemption referring to a ``purchase or sale of a [financial
instrument]'' \518\ or to language in Appendix B indicating that the
Agencies may assess certain factors and criteria at different levels,
including a ``single significant transaction.'' \519\ With respect to
the burdens of a transaction-by-transaction analysis, some commenters
noted that banking entities can engage in a large volume of market-
making transactions daily, which would make it burdensome to apply the
exemption to each trade.\520\ A few commenters indicated that, even if
the Agencies did not intend to require transaction-by-transaction
analysis, the proposed rule's language can be read to imply such a
requirement. These commenters indicated that ambiguity on this issue
could have a chilling effect on market making or could allow some
examiners to rigidly apply the requirements of the exemption on a
trade-by-trade basis.\521\ Other commenters indicated that it would be
difficult to determine whether a particular trade was or was not a
market-making trade without consideration of the relevant unit's
overall activities.\522\ One commenter elaborated on this point by
stating that

``an analysis that seeks to characterize specific transactions as
either market making. . . or prohibited activity does not accord with
the way in which modern trading units operate, which generally view
individual positions as a bundle of characteristics that contribute to
their complete portfolio.'' \523\ This commenter noted that a position
entered into as part of market making-related activities may serve
multiple functions at one time, such as responding to customer demand,
hedging a risk, and building inventory. The commenter also expressed
concern that individual transactions or positions may not be severable
or separately identifiable as serving a market-making purpose.\524\ Two
commenters suggested that the requirements in the market-making
exemption be applied at the portfolio level rather than the trade
level.\525\
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    \517\ See Wellington; SIFMA et al. (Prop. Trading) (Feb. 2012);
Barclays; Goldman (Prop. Trading); HSBC; Fixed Income Forum/Credit
Roundtable; ACLI (Feb. 2012); PUC Texas; ERCOT; Invesco. See also
IAA (stating that it is unclear whether the requirements must be
applied on a transaction-by-transaction basis or if compliance with
the requirements is based on overall activities). This issue is
addressed in Part IV.A.3.c.1.c., infra.
    \518\ See, e.g., Barclays; SIFMA et al. (Prop. Trading) (Feb.
2012). As explained above, the term ``covered financial position''
from the proposal has been replaced by the term ``financial
instrument'' in the final rule. Because the types of instruments
included in both definitions are identical, the term ``financial
instrument'' is used throughout this Part.
    \519\ See, e.g., Goldman (Prop. Trading); Wellington.
    \520\ See, e.g., SIFMA et al. (Prop. Trading) (Feb. 2012);
Barclays (stating that ``hundreds or thousands of trades can occur
in a single day in a single trading unit'').
    \521\ See, e.g., ICI (Feb. 2012); Barclays; Goldman (Prop.
Trading).
    \522\ See, e.g., SIFMA et al. (Prop. Trading) (Feb. 2012);
Goldman (Prop. Trading).
    \523\ SIFMA et al. (Prop. Trading) (Feb. 2012).
    \524\ See id. (suggesting that the Agencies ``give full effect
to the statutory intent to allow market making by viewing the
permitted activity on a holistic basis'').
    \525\ See ACLI (Feb. 2012); Fixed Income Forum/Credit
Roundtable.
---------------------------------------------------------------------------

    Moreover, commenters also set forth their views on the
organizational level at which the requirements of the proposed market-
making exemption should apply.\526\ The proposed exemption generally
applied requirements to a ``trading desk or other organizational unit''
of a banking entity. In response to this proposed approach, commenters
stated that compliance should be assessed at each trading desk or
aggregation unit \527\ or at each trading unit.\528\
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    \526\ See Wellington; Morgan Stanley; SIFMA et al. (Prop.
Trading) (Feb. 2012); ACLI (Feb. 2012); Fixed Income Forum/Credit
Roundtable. The Agencies address this topic in Part IV.A.3.c.1.c.,
infra.
    \527\ See Wellington. This commenter did not provide greater
specificity about how it would define ``trading desk'' or
``aggregation unit.'' See id.
    \528\ See Morgan Stanley (stating that ``trading unit'' should
be defined as ``each organizational unit that is used to structure
and control the aggregate risk-taking activities and employees that
are engaged in the coordinated implementation of a customer-facing
revenue generation strategy and that participate in the execution of
any covered trading activity''); SIFMA et al. (Prop. Trading) (Feb.
2012). One of these commenters discussed its suggested definition of
``trading unit'' in the context of the proposed requirement to
record and report certain quantitative measurements, but it is
unclear that the commenter was also suggesting that this definition
be used for purposes of the market-making exemption. For example,
this commenter expressed support for a multi-level approach to
defining ``trading unit,'' and it is not clear how a definition that
captures multiple organizational levels across a banking
organization would work in the context of the market-making
exemption. See SIFMA et al. (Prop. Trading) (Feb. 2012) (suggested
that ``trading unit'' be defined ``at a level that presents its
activities in the context of the whole'' and noting that the
appropriate level may differ depending on the structure of the
banking entity).
---------------------------------------------------------------------------

    Several commenters suggested alternative or additive means of
implementing the statutory exemption for market making-related
activity.\529\ Commenters' recommended approaches varied, but a number
of commenters requested approaches involving one or more of the
following elements: (i) Safe harbors,\530\ bright lines,\531\ or
presumptions of compliance with the exemption based on the existence of
certain factors (e.g., compliance program, metrics, general customer
focus or orientation, providing liquidity, and/or exchange registration
as a market maker); \532\ (ii) a focus on metrics or other objective
factors; \533\ (iii) guidance on permitted market making-related
activity, rather than rule requirements; \534\ (iv) risk management
structures and/or risk limits; \535\ (v) adding a new customer-facing
criterion or focusing on client-related activities; \536\ (vi) capital
and liquidity requirements; \537\ (vii) development of individualized
plans for each banking entity, in coordination with regulators; \538\
(viii) ring fencing affiliates engaged in market making-related
activity; \539\ (ix) margin requirements; \540\ (x) a compensation-
focused approach; \541\ (xi) permitting all swap dealing activity;
\542\ (xii) additional provisions regarding material conflicts of
interest and high-risk assets and trading strategies; \543\ and/or
(xiii) making the exemption as broad as possible under the
statute.\544\
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    \529\ See, e.g., Wellington; Japanese Bankers Ass'n.; Prof.
Duffie; IR&M G2 FinTech; MetLife; NYSE Euronext; Anthony Flynn and
Koral Fusselman; IIF; CalPERS; SIFMA et al. (Prop. Trading) (Feb.
2012); Sens. Merkley & Levin (Feb. 2012); Shadow Fin. Regulatory
Comm.; John Reed; Prof. Richardson; Credit Suisse (Seidel); JPMC;
Morgan Stanley; Barclays; Goldman (Prop. Trading); BoA; Citigroup
(Feb. 2012); STANY; ICE; BlackRock; Johnson & Prof. Stiglitz; Fixed
Income Forum/Credit Roundtable; ACLI (Feb. 2012); Wells Fargo (Prop.
Trading); WR Hambrecht; Vanguard; Capital Group; PUC Texas; SSgA
(Feb. 2012); PNC et al.; Fidelity; Occupy; AFR et al. (Feb. 2012);
Invesco; ISDA (Feb. 2012); Stephen Roach; Oliver Wyman (Feb. 2012).
The Agencies respond to these comments in Part IV.A.3.b.3., infra.