obligations with respect to subsequent losses of the covered fund and
such undistributed profit of the entity (or employee or former employee
thereof) does not share in the subsequent investment gains of the
covered fund;
    (3) Any amounts invested in the covered fund, including any amounts
paid by the entity in connection with obtaining the restricted profit
interest, are within the limits of Sec.  351.12 of this subpart; and
    (4) The interest is not transferable by the entity (or employee or
former employee thereof) except to an affiliate thereof (or an employee
of the banking entity or affiliate), to immediate family members, or
through the intestacy, of the employee or former employee, or in
connection with a sale of the business that gave rise to the restricted
profit interest by the entity (or employee or former employee thereof)
to an unaffiliated party that provides investment management,
investment advisory, commodity trading advisory, or other services to
the fund.
    (B) Any senior loan or senior debt interest that has the following
characteristics:
    (1) Under the terms of the interest the holders of such interest do
not have the right to receive a share of the income, gains, or profits
of the covered fund, but are entitled to receive only:
    (i) Interest at a stated interest rate, as well as commitment fees
or other fees, which are not determined by reference to the performance
of the underlying assets of the covered fund; and
    (ii) Repayment of a fixed principal amount, on or before a maturity
date, in a contractually-determined manner (which may include
prepayment premiums intended solely to reflect, and compensate holders
of the interest for, forgone income resulting from an early
prepayment);
    (2) The entitlement to payments under the terms of the interest are
absolute and could not be reduced based on losses arising from the
underlying assets of the covered fund, such as allocation of losses,
write-downs or charge-offs of the outstanding principal balance, or
reductions in the

amount of interest due and payable on the interest; and
    (3) The holders of the interest are not entitled to receive the
underlying assets of the covered fund after all other interests have
been redeemed or paid in full (excluding the rights of a creditor to
exercise remedies upon the occurrence of an event of default or an
acceleration event).
* * * * *
    (11) Riskless principal transaction. Riskless principal transaction
means a transaction in which a banking entity, after receiving an order
from a customer to buy (or sell) a security, purchases (or sells) the
security in the secondary market for its own account to offset a
contemporaneous sale to (or purchase from) the customer.

0
18. Amend Sec.  351.12 by:
0
a. Revising paragraph (b)(1)(ii);
0
b. Revising paragraph (b)(4);
0
c. Adding paragraph (b)(5);
0
d. Revising paragraph (c)(1); and
0
e. Revising paragraphs (d) and (e).
    The revisions and addition read as follows:

Sec.  351.12   Permitted investment in a covered fund.

* * * * *
    (b) * * *
    (1) * * *
    (ii) Treatment of registered investment companies, SEC-regulated
business development companies, and foreign public funds. For purposes
of paragraph (b)(1)(i) of this section, a registered investment
company, SEC-regulated business development companies, or foreign
public fund as described in Sec.  351.10(c)(1) will not be considered
to be an affiliate of the banking entity so long as:
    (A) The banking entity, together with its affiliates, does not own,
control, or hold with the power to vote 25 percent or more of the
voting shares of the company or fund; and
    (B) The banking entity, or an affiliate of the banking entity,
provides investment advisory, commodity trading advisory,
administrative, and other services to the company or fund in compliance
with the limitations under applicable regulation, order, or other
authority.
* * * * *
    (4) Multi-tier fund investments. (i) Master-feeder fund
investments. If the principal investment strategy of a covered fund
(the ``feeder fund'') is to invest substantially all of its assets in
another single covered fund (the ``master fund''), then for purposes of
the investment limitations in paragraphs (a)(2)(i)(B) and (a)(2)(ii) of
this section, the banking entity's permitted investment in such funds
shall be measured only by reference to the value of the master fund.
The banking entity's permitted investment in the master fund shall
include any investment by the banking entity in the master fund, as
well as the banking entity's pro-rata share of any ownership interest
in the master fund that is held through the feeder fund; and
    (ii) Fund-of-funds investments. If a banking entity organizes and
offers a covered fund pursuant to Sec.  351.11 for the purpose of
investing in other covered funds (a ``fund of funds'') and that fund of
funds itself invests in another covered fund that the banking entity is
permitted to own, then the banking entity's permitted investment in
that other fund shall include any investment by the banking entity in
that other fund, as well as the banking entity's pro-rata share of any
ownership interest in the fund that is held through the fund of funds.
The investment of the banking entity may not represent more than 3
percent of the amount or value of any single covered fund.
    (5) Parallel Investments and Co-Investments. (i) A banking entity
shall not be required to include in the calculation of the investment
limits under paragraph (a)(2) of this section any investment the
banking entity makes alongside a covered fund as long as the investment
is made in compliance with applicable laws and regulations, including
applicable safety and soundness standards.
    (ii) A banking entity shall not be restricted under this section in
the amount of any investment the banking entity makes alongside a
covered fund as long as the investment is made in compliance with
applicable laws and regulations, including applicable safety and
soundness standards.
    (c) * * *
    (1)(i) For purposes of paragraph (a)(2)(iii) of this section, the
aggregate value of all ownership interests held by a banking entity
shall be the sum of all amounts paid or contributed by the banking
entity in connection with acquiring or retaining an ownership interest
in covered funds (together with any amounts paid by the entity in
connection with obtaining a restricted profit interest under Sec.
351.10(d)(6)(ii)), on a historical cost basis;
    (ii) Treatment of employee and director restricted profit interests
financed by the banking entity. For purposes of paragraph (c)(1)(i) of
this section, an investment by a director or employee of a banking
entity who acquires a restricted profit interest in his or her personal
capacity in a covered fund sponsored by the banking entity will be
attributed to the banking entity if the banking entity, directly or
indirectly, extends financing for the purpose of enabling the director
or employee to acquire the restricted profit interest in the fund and
the financing is used to acquire such ownership interest in the covered
fund.
* * * * *
    (d) Capital treatment for a permitted investment in a covered fund.
For purposes of calculating compliance with the applicable regulatory
capital requirements, a banking entity shall deduct from the banking
entity's tier 1 capital (as determined under paragraph (c)(2) of this
section) the greater of:
    (1)(i) The sum of all amounts paid or contributed by the banking
entity in connection with acquiring or retaining an ownership interest
(together with any amounts paid by the entity in connection with
obtaining a restricted profit interest under Sec.  351.10(d)(6)(ii) of
subpart C of this part), on a historical cost basis, plus any earnings
received; and
    (ii) The fair market value of the banking entity's ownership
interests in the covered fund as determined under paragraph (b)(2)(ii)
or (b)(3) of this section (together with any amounts paid by the entity
in connection with obtaining a restricted profit interest under Sec.
351.10(d)(6)(ii) of subpart C of this part), if the banking entity
accounts for the profits (or losses) of the fund investment in its
financial statements.
    (2) Treatment of employee and director restricted profit interests
financed by the banking entity. For purposes of paragraph (d)(1) of
this section, an investment by a director or employee of a banking
entity who acquires a restricted profit interest in his or her personal
capacity in a covered fund sponsored by the banking entity will be
attributed to the banking entity if the banking entity, directly or
indirectly, extends financing for the purpose of enabling the director
or employee to acquire the restricted profit interest in the fund and
the financing is used to acquire such ownership interest in the covered
fund.
    (e) Extension of time to divest an ownership interest. (1)
Extension period. Upon application by a banking entity, the Board may
extend the period under paragraph (a)(2)(i) of this section for up to 2
additional years if the Board finds that an extension would be
consistent with safety and soundness and not detrimental to the public
interest.
    (2) Application requirements. An application for extension must:

    (i) Be submitted to the Board at least 90 days prior to the
expiration of the applicable time period;
    (ii) Provide the reasons for application, including information
that addresses the factors in paragraph (e)(3) of this section; and
    (iii) Explain the banking entity's plan for reducing the permitted
investment in a covered fund through redemption, sale, dilution or
other methods as required in paragraph (a)(2) of this section.
    (3) Factors governing the Board determinations. In reviewing any
application under paragraph (e)(1) of this section, the Board may
consider all the facts and circumstances related to the permitted
investment in a covered fund, including:
    (i) Whether the investment would result, directly or indirectly, in
a material exposure by the banking entity to high-risk assets or high-
risk trading strategies;
    (ii) The contractual terms governing the banking entity's interest
in the covered fund;
    (iii) The date on which the covered fund is expected to have
attracted sufficient investments from investors unaffiliated with the
banking entity to enable the banking entity to comply with the
limitations in paragraph (a)(2)(i) of this section;
    (iv) The total exposure of the covered banking entity to the
investment and the risks that disposing of, or maintaining, the
investment in the covered fund may pose to the banking entity and the
financial stability of the United States;
    (v) The cost to the banking entity of divesting or disposing of the
investment within the applicable period;
    (vi) Whether the investment or the divestiture or conformance of
the investment would involve or result in a material conflict of
interest between the banking entity and unaffiliated parties, including
clients, customers, or counterparties to which it owes a duty;
    (vii) The banking entity's prior efforts to reduce through
redemption, sale, dilution, or other methods its ownership interests in
the covered fund, including activities related to the marketing of
interests in such covered fund;
    (viii) Market conditions; and
    (ix) Any other factor that the Board believes appropriate.
    (4) Authority to impose restrictions on activities or investment
during any extension period. The Board may impose such conditions on
any extension approved under paragraph (e)(1) of this section as the
Board determines are necessary or appropriate to protect the safety and
soundness of the banking entity or the financial stability of the
United States, address material conflicts of interest or other unsound
banking practices, or otherwise further the purposes of section 13 of
the BHC Act and this part.
    (5) Consultation. In the case of a banking entity that is primarily
regulated by another Federal banking agency, the SEC, or the CFTC, the
Board will consult with such agency prior to acting on an application
by the banking entity for an extension under paragraph (e)(1) of this
section.

0
19. Amend Sec.  351.13 by adding paragraph (d) to read as follows:

Sec.  351.13   Other permitted covered fund activities and investments.

* * * * *
    (d) Permitted covered fund activities and investments of qualifying
foreign excluded funds. (1) The prohibition contained in Sec.
351.10(a) does not apply to a qualifying foreign excluded fund.
    (2) For purposes of this paragraph (d), a qualifying foreign
excluded fund means a banking entity that:
    (i) Is organized or established outside the United States, and the
ownership interests of which are offered and sold solely outside the
United States;
    (ii)(A) Would be a covered fund if the entity were organized or
established in the United States, or
    (B) Is, or holds itself out as being, an entity or arrangement that
raises money from investors primarily for the purpose of investing in
financial instruments for resale or other disposition or otherwise
trading in financial instruments;
    (iii) Would not otherwise be a banking entity except by virtue of
the acquisition or retention of an ownership interest in, sponsorship
of, or relationship with the entity, by another banking entity that
meets the following:
    (A) The banking entity is not organized, or directly or indirectly
controlled by a banking entity that is organized, under the laws of the
United States or of any State; and
    (B) The banking entity's acquisition of an ownership interest in or
sponsorship of the fund by the foreign banking entity meets the
requirements for permitted covered fund activities and investments
solely outside the United States, as provided in Sec.  351.13(b);
    (iv) Is established and operated as part of a bona fide asset
management business; and
    (v) Is not operated in a manner that enables the banking entity
that sponsors or controls the qualifying foreign excluded fund, or any
of its affiliates, to evade the requirements of section 13 of the BHC
Act or this part.

0
20. Amend Sec.  351.14 by:
0
a. Revising paragraph (a)(2)(i);
0
b. Revising paragraph (a)(2)(ii)(C);
0
c. Adding paragraphs (a)(2)(iii), (iv), (v), and (3); and
0
d. Revising paragraph (c).
    The revisions and additions read as follows:

Sec.  351.14   Limitations on relationships with a covered fund.

    (a) * * *
    (2) * * *
    (i) Acquire and retain any ownership interest in a covered fund in
accordance with the requirements of Sec. Sec.  351.11, 351.12, or
351.13;
    (ii) * * *
    (C) The Board has not determined that such transaction is
inconsistent with the safe and sound operation and condition of the
banking entity; and
    (iii) Enter into a transaction with a covered fund that would be an
exempt covered transaction under 12 U.S.C. 371c(d) or Sec.  223.42 of
the Board's Regulation W (12 CFR 223.42) subject to the limitations
specified under 12 U.S.C. 371c(d) or Sec.  223.42 of the Board's
Regulation W (12 CFR 223.42), as applicable,
    (iv) Enter into a riskless principal transaction with a covered
fund; and
    (v) Extend credit to or purchase assets from a covered fund,
provided:
    (A) Each extension of credit or purchase of assets is in the
ordinary course of business in connection with payment transactions;
settlement services; or futures, derivatives, and securities clearing;
    (B) Each extension of credit is repaid, sold, or terminated by the
end of five business days; and
    (C) The banking entity making each extension of credit meets the
requirements of Sec.  223.42(l)(1)(i) and (ii) of the Board's
Regulation W (12 CFR 223.42(l)(1)(i) and(ii)), as if the extension of
credit was an intraday extension of credit, regardless of the duration
of the extension of credit.
    (3) Any transaction or activity permitted under paragraphs
(a)(2)(iii), (iv) or (v) must comply with the limitations in Sec.
351.15.
* * * * *
    (c) Restrictions on other permitted transactions. Any transaction
permitted under paragraphs (a)(2)(ii), (iii), or (iv) of this section
shall be subject to section 23B of the Federal Reserve Act (12 U.S.C.
371c-1) as if the counterparty were an affiliate of the banking entity
under section 23B.

Subpart D--Compliance Program Requirements; Violations

0
21. Amend Sec.  351.20 by:
0
a. Revising paragraph (a);

0
b. Revising the heading of paragraph (d) and revising paragraph (d)(1);
and
0
c. Revising the introductory text of paragraph (e).
    The revisions and addition read as follows:

Sec.  351.20  Program for compliance; reporting.

    (a) Program requirement. Each banking entity (other than a banking
entity with limited trading assets and liabilities or a qualifying
foreign excluded fund under section 351.6(f) or 351.13(d)) shall
develop and provide for the continued administration of a compliance
program reasonably designed to ensure and monitor compliance with the
prohibitions and restrictions on proprietary trading and covered fund
activities and investments set forth in section 13 of the BHC Act and
this part. The terms, scope, and detail of the compliance program shall
be appropriate for the types, size, scope, and complexity of activities
and business structure of the banking entity.
* * * * *
    (d) Reporting requirements under appendix A to this part. (1) A
banking entity (other than a qualifying foreign excluded fund under
section 351.6(f) or 351.13(d)) engaged in proprietary trading activity
permitted under subpart B shall comply with the reporting requirements
described in appendix A to this part, if:
* * * * *
    (e) Additional documentation for covered funds. A banking entity
with significant trading assets and liabilities (other than a
qualifying foreign excluded fund under section 351.6(f) or 351.13(d))
shall maintain records that include:
* * * * *

COMMODITY FUTURES TRADING COMMISSION

17 CFR Chapter I

Authority and Issuance

    For the reasons set forth in the Common Preamble, the Commodity
Futures Trading Commission amends part 75 to chapter I of title 17 of
the Code of Federal Regulations as follows:

PART 75--PROPRIETARY TRADING AND CERTAIN INTERESTS IN AND
RELATIONSHIPS WITH COVERED FUNDS

0
22. The authority citation for part 75 continues to read as follows:

    Authority:  12 U.S.C. 1851.

Subpart B--Proprietary Trading

0
23. Amend Sec.  75.6 by adding paragraph (f) to read as follows:

Sec.  75.6   Other permitted proprietary trading activities.

* * * * *
    (f) Permitted trading activities of qualifying foreign excluded
funds. The prohibition contained in Sec.  75.3(a) does not apply to the
purchase or sale of a financial instrument by a qualifying foreign
excluded fund. For purposes of this paragraph (f), a qualifying foreign
excluded fund means a banking entity that:
    (1) Is organized or established outside the United States, and the
ownership interests of which are offered and sold solely outside the
United States;
    (2)(i) Would be a covered fund if the entity were organized or
established in the United States, or
    (ii) Is, or holds itself out as being, an entity or arrangement
that raises money from investors primarily for the purpose of investing
in financial instruments for resale or other disposition or otherwise
trading in financial instruments;
    (3) Would not otherwise be a banking entity except by virtue of the
acquisition or retention of an ownership interest in, sponsorship of,
or relationship with the entity, by another banking entity that meets
the following:
    (i) The banking entity is not organized, or directly or indirectly
controlled by a banking entity that is organized, under the laws of the
United States or of any State; and
    (ii) The banking entity's acquisition or retention of an ownership
interest in or sponsorship of the fund meets the requirements for
permitted covered fund activities and investments solely outside the
United States, as provided in Sec.  75.13(b);
    (4) Is established and operated as part of a bona fide asset
management business; and
    (5) Is not operated in a manner that enables the banking entity
that sponsors or controls the qualifying foreign excluded fund, or any
of its affiliates, to evade the requirements of section 13 of the BHC
Act or this part.

Subpart C--Covered Funds Activities and Investments

0
24. Amend Sec.  75.10 by:
0
a. Revising paragraph (c)(1);
0
b. Revising paragraph (c)(3)(i);
0
c. Revising paragraph (c)(8);
0
d. Revising the heading of paragraph (c)(10) and revising paragraph
(c)(10)(i);
0
e. Revising paragraph (c)(11);
0
f. Adding paragraphs (c)(15), (16), (17), and (18);
0
g. Revising paragraph (d)(6); and
0
h. Adding paragraph (d)(11).
    The revisions and additions read as follows:

Sec.  75.10   Prohibition on acquiring or retaining an ownership
interest in and having certain relationships with a covered fund.

* * * * *
    (c) * * *
    (1) Foreign public funds. (i) Subject to paragraphs (c)(1)(ii) and
(iii) of this section, an issuer that:
    (A) Is organized or established outside of the United States; and
    (B) Is authorized to offer and sell ownership interests, and such
interests are offered and sold, through one or more public offerings.
    (ii) With respect to a banking entity that is, or is controlled
directly or indirectly by a banking entity that is, located in or
organized under the laws of the United States or of any State and any
issuer for which such banking entity acts as sponsor, the sponsoring
banking entity may not rely on the exemption in paragraph (c)(1)(i) of
this section for such issuer unless more than 75 percent of the
ownership interests in the issuer are sold to persons other than:
    (A) Such sponsoring banking entity;
    (B) Such issuer;
    (C) Affiliates of such sponsoring banking entity or such issuer;
and
    (D) Directors and senior executive officers as defined in Sec.
225.71(c) of the Board's Regulation Y (12 CFR 225.71(c)) of such
entities.
    (iii) For purposes of paragraph (c)(1)(i)(B) of this section, the
term ``public offering'' means a distribution (as defined in Sec.
75.4(a)(3)) of securities in any jurisdiction outside the United States
to investors, including retail investors, provided that:
    (A) The distribution is subject to substantive disclosure and
retail investor protection laws or regulations;
    (B) With respect to an issuer for which the banking entity serves
as the investment manager, investment adviser, commodity trading
advisor, commodity pool operator, or sponsor, the distribution complies
with all applicable requirements in the jurisdiction in which such
distribution is being made;
    (C) The distribution does not restrict availability to investors
having a minimum level of net worth or net investment assets; and
    (D) The issuer has filed or submitted, with the appropriate
regulatory authority in such jurisdiction, offering disclosure
documents that are publicly available.
* * * * *

    (3) * * *
    (i) Is composed of no more than 10 unaffiliated co-venturers;
* * * * *
    (8) Loan securitizations. (i) Scope. An issuing entity for asset-
backed securities that satisfies all the conditions of this paragraph
(c)(8) and the assets or holdings of which are composed solely of:
    (A) Loans as defined in Sec.  75.2(t);
    (B) Rights or other assets designed to assure the servicing or
timely distribution of proceeds to holders of such securities and
rights or other assets that are related or incidental to purchasing or
otherwise acquiring and holding the loans, provided that each asset
that is a security (other than special units of beneficial interest and
collateral certificates meeting the requirements of paragraph (c)(8)(v)
of this section) meets the requirements of paragraph (c)(8)(iii) of
this section;
    (C) Interest rate or foreign exchange derivatives that meet the
requirements of paragraph (c)(8)(iv) of this section;
    (D) Special units of beneficial interest and collateral
certificates that meet the requirements of paragraph (c)(8)(v) of this
section; and
    (E) Debt securities, other than asset-backed securities and
convertible securities, provided that:
    (1) The aggregate value of such debt securities does not exceed
five percent of the aggregate value of loans held under paragraph
(c)(8)(i)(A) of this section, cash and cash equivalents held under
paragraph (c)(8)(iii)(A) of this section, and debt securities held
under this paragraph (c)(8)(i)(E); and
    (2) The aggregate value of the loans, cash and cash equivalents,
and debt securities for purposes of this paragraph is calculated at par
value at the most recent time any such debt security is acquired,
except that the issuing entity may instead determine the value of any
such loan, cash equivalent, or debt security based on its fair market
value if:
    (i) The issuing entity is required to use the fair market value of
such assets for purposes of calculating compliance with concentration
limitations or other similar calculations under its transaction
agreements, and
    (ii) The issuing entity's valuation methodology values similarly
situated assets consistently.
    (ii) Impermissible assets. For purposes of this paragraph (c)(8),
except as permitted under paragraph (c)(8)(i)(E) of this section, the
assets or holdings of the issuing entity shall not include any of the
following:
    (A) A security, including an asset-backed security, or an interest
in an equity or debt security other than as permitted in paragraphs
(c)(8)(iii), (iv), or (v) of this section;
    (B) A derivative, other than a derivative that meets the
requirements of paragraph (c)(8)(iv) of this section; or
    (C) A commodity forward contract.
    (iii) Permitted securities. Notwithstanding paragraph (c)(8)(ii)(A)
of this section, the issuing entity may hold securities, other than
debt securities permitted under paragraph (c)(8)(i)(E) of this section,
if those securities are:
    (A) Cash equivalents--which, for the purposes of this paragraph,
means high quality, highly liquid investments whose maturity
corresponds to the securitization's expected or potential need for
funds and whose currency corresponds to either the underlying loans or
the asset-backed securities--for purposes of the rights and assets in
paragraph (c)(8)(i)(B) of this section; or
    (B) Securities received in lieu of debts previously contracted with
respect to the loans supporting the asset-backed securities.
    (iv) Derivatives. The holdings of derivatives by the issuing entity
shall be limited to interest rate or foreign exchange derivatives that
satisfy all of the following conditions:
    (A) The written terms of the derivatives directly relate to the
loans, the asset-backed securities, the contractual rights or other
assets described in paragraph (c)(8)(i)(B) of this section, or the debt
securities described in paragraph (c)(8)(i)(E) of this section; and
    (B) The derivatives reduce the interest rate and/or foreign
exchange risks related to the loans, the asset-backed securities, the
contractual rights or other assets described in paragraph (c)(8)(i)(B)
of this section, or the debt securities described in paragraph
(c)(8)(i)(E) of this section.
    (v) Special units of beneficial interest and collateral
certificates. The assets or holdings of the issuing entity may include
collateral certificates and special units of beneficial interest issued
by a special purpose vehicle, provided that:
    (A) The special purpose vehicle that issues the special unit of
beneficial interest or collateral certificate meets the requirements in
this paragraph (c)(8);
    (B) The special unit of beneficial interest or collateral
certificate is used for the sole purpose of transferring to the issuing
entity for the loan securitization the economic risks and benefits of
the assets that are permissible for loan securitizations under this
paragraph (c)(8) and does not directly or indirectly transfer any
interest in any other economic or financial exposure;
    (C) The special unit of beneficial interest or collateral
certificate is created solely to satisfy legal requirements or
otherwise facilitate the structuring of the loan securitization; and
    (D) The special purpose vehicle that issues the special unit of
beneficial interest or collateral certificate and the issuing entity
are established under the direction of the same entity that initiated
the loan securitization.
* * * * *
    (10) Qualifying covered bonds. (i) Scope. An entity owning or
holding a dynamic or fixed pool of loans or other assets as provided in
paragraph (c)(8) of this section for the benefit of the holders of
covered bonds, provided that the assets in the pool are composed solely
of assets that meet the conditions in paragraph (c)(8)(i) of this
section.
* * * * *
    (11) * * *
    (i) That is a small business investment company, as defined in
section 103(3) of the Small Business Investment Act of 1958 (15 U.S.C.
662), or that has received from the Small Business Administration
notice to proceed to qualify for a license as a small business
investment company, which notice or license has not been revoked, or
that has voluntarily surrendered its license to operate as a small
business investment company in accordance with 13 CFR 107.1900 and does
not make any new investments (other than investments in cash
equivalents, which, for the purposes of this paragraph, means high
quality, highly liquid investments whose maturity corresponds to the
issuer's expected or potential need for funds and whose currency
corresponds to the issuer's assets) after such voluntary surrender;
    (ii) The business of which is to make investments that are:
    (A) Designed primarily to promote the public welfare, of the type
permitted under paragraph (11) of section 5136 of the Revised Statutes
of the United States (12 U.S.C. 24), including the welfare of low- and
moderate-income communities or families (such as providing housing,
services, or jobs) and including investments that qualify for
consideration under the regulations implementing the Community
Reinvestment Act (12 U.S.C. 2901 et seq.); or
    (B) Qualified rehabilitation expenditures with respect to a
qualified rehabilitated building or certified historic structure, as
such terms are

defined in section 47 of the Internal Revenue Code of 1986 or a similar
State historic tax credit program;
    (iii) That has elected to be regulated or is regulated as a rural
business investment company, as described in 15 U.S.C. 80b-3(b)(8)(A)
or (B), or that has terminated its participation as a rural business
investment company in accordance with 7 CFR 4290.1900 and does not make
any new investments (other than investments in cash equivalents, which,
for the purposes of this paragraph, means high quality, highly liquid
investments whose maturity corresponds to the issuer's expected or
potential need for funds and whose currency corresponds to the issuer's
assets) after such termination; or
    (iv) That is a qualified opportunity fund, as defined in 26 U.S.C.
1400Z-2(d).
* * * * *
    (15) Credit funds. Subject to paragraphs (c)(15)(iii), (iv), and
(v) of this section, an issuer that satisfies the asset and activity
requirements of paragraphs (c)(15)(i) and (ii) of this section.
    (i) Asset requirements. The issuer's assets must be composed solely
of:
    (A) Loans as defined in Sec.  75.2(t);
    (B) Debt instruments, subject to paragraph (c)(15)(iv) of this
section;
    (C) Rights and other assets that are related or incidental to
acquiring, holding, servicing, or selling such loans or debt
instruments, provided that:
    (1) Each right or asset held under this paragraph (c)(15)(i)(C)
that is a security is either:
    (i) A cash equivalent (which, for the purposes of this paragraph,
means high quality, highly liquid investments whose maturity
corresponds to the issuer's expected or potential need for funds and
whose currency corresponds to either the underlying loans or the debt
instruments);
    (ii) A security received in lieu of debts previously contracted
with respect to such loans or debt instruments; or
    (iii) An equity security (or right to acquire an equity security)
received on customary terms in connection with such loans or debt
instruments; and
    (2) Rights or other assets held under this paragraph (c)(15)(i)(C)
of this section may not include commodity forward contracts or any
derivative; and
    (D) Interest rate or foreign exchange derivatives, if:
    (1) The written terms of the derivative directly relate to the
loans, debt instruments, or other rights or assets described in
paragraph (c)(15)(i)(C) of this section; and
    (2) The derivative reduces the interest rate and/or foreign
exchange risks related to the loans, debt instruments, or other rights
or assets described in paragraph (c)(15)(i)(C) of this section.
    (ii) Activity requirements. To be eligible for the exclusion of
paragraph (c)(15) of this section, an issuer must:
    (A) Not engage in any activity that would constitute proprietary
trading under Sec.  75.3(b)(l)(i), as if the issuer were a banking
entity; and
    (B) Not issue asset-backed securities.
    (iii) Requirements for a sponsor, investment adviser, or commodity
trading advisor. A banking entity that acts as a sponsor, investment
adviser, or commodity trading advisor to an issuer that meets the
conditions in paragraphs (c)(15)(i) and (ii) of this section may not
rely on this exclusion unless the banking entity:
    (A) Provides in writing to any prospective and actual investor in
the issuer the disclosures required under Sec.  75.11(a)(8) of this
subpart, as if the issuer were a covered fund;
    (B) Ensures that the activities of the issuer are consistent with
safety and soundness standards that are substantially similar to those
that would apply if the banking entity engaged in the activities
directly; and
    (C) Complies with the limitations imposed in Sec.  75.14, as if the
issuer were a covered fund, except the banking entity may acquire and
retain any ownership interest in the issuer.
    (iv) Additional Banking Entity Requirements. A banking entity may
not rely on this exclusion with respect to an issuer that meets the
conditions in paragraphs (c)(15)(i) and (ii) of this section unless:
    (A) The banking entity does not, directly or indirectly, guarantee,
assume, or otherwise insure the obligations or performance of the
issuer or of any entity to which such issuer extends credit or in which
such issuer invests; and
    (B) Any assets the issuer holds pursuant to paragraphs
(c)(15)(i)(B) or (i)(C)(l)(iii) of this section would be permissible
for the banking entity to acquire and hold directly under applicable
federal banking laws and regulations.
    (v) Investment and Relationship Limits. A banking entity's
investment in, and relationship with, the issuer must:
    (A) Comply with the limitations imposed in Sec.  75.15, as if the
issuer were a covered fund; and
    (B) Be conducted in compliance with, and subject to, applicable
banking laws and regulations, including applicable safety and soundness
standards.
    (16) Qualifying venture capital funds. (i) Subject to paragraphs
(c)(16)(ii) through (iv) of this section, an issuer that:
    (A) Is a venture capital fund as defined in 17 CFR 275.203(l)-1;
and
    (B) Does not engage in any activity that would constitute
proprietary trading under Sec.  75.3(b)(1)(i), as if the issuer were a
banking entity.
    (ii) A banking entity that acts as a sponsor, investment adviser,
or commodity trading advisor to an issuer that meets the conditions in
paragraph (c)(16)(i) of this section may not rely on this exclusion
unless the banking entity:
    (A) Provides in writing to any prospective and actual investor in
the issuer the disclosures required under Sec.  75.11(a)(8), as if the
issuer were a covered fund;
    (B) Ensures that the activities of the issuer are consistent with
safety and soundness standards that are substantially similar to those
that would apply if the banking entity engaged in the activities
directly; and
    (C) Complies with the restrictions in Sec.  75.14 as if the issuer
were a covered fund (except the banking entity may acquire and retain
any ownership interest in the issuer).
    (iii) The banking entity must not, directly or indirectly,
guarantee, assume, or otherwise insure the obligations or performance
of the issuer.
    (iv) A banking entity's ownership interest in or relationship with
the issuer must:
    (A) Comply with the limitations imposed in Sec.  75.15, as if the
issuer were a covered fund; and
    (B) Be conducted in compliance with, and subject to, applicable
banking laws and regulations, including applicable safety and soundness
standards.
    (17) Family wealth management vehicles. (i) Subject to paragraph
(c)(17)(ii) of this section, any entity that is not, and does not hold
itself out as being, an entity or arrangement that raises money from
investors primarily for the purpose of investing in securities for
resale or other disposition or otherwise trading in securities, and:
    (A) If the entity is a trust, the grantor(s) of the entity are all
family customers; and
    (B) If the entity is not a trust:
    (1) A majority of the voting interests in the entity are owned
(directly or indirectly) by family customers;
    (2) A majority of the interests in the entity are owned (directly
or indirectly) by family customers;
    (3) The entity is owned only by family customers and up to 5
closely related persons of the family customers; and
    (C) Notwithstanding paragraph (c)(17)(i)(A) and (B) of this
section, up to an aggregate 0.5 percent of the

entity's outstanding ownership interests may be acquired or retained by
one or more entities that are not family customers or closely related
persons if the ownership interest is acquired or retained by such
parties for the purpose of and to the extent necessary for establishing
corporate separateness or addressing bankruptcy, insolvency, or similar
concerns.
    (ii) A banking entity may rely on the exclusion in paragraph
(c)(17)(i) of this section with respect to an entity provided that the
banking entity (or an affiliate):
    (A) Provides bona fide trust, fiduciary, investment advisory, or
commodity trading advisory services to the entity;
    (B) Does not, directly or indirectly, guarantee, assume, or
otherwise insure the obligations or performance of such entity;
    (C) Complies with the disclosure obligations under Sec.
75.11(a)(8), as if such entity were a covered fund, provided that the
content may be modified to prevent the disclosure from being misleading
and the manner of disclosure may be modified to accommodate the
specific circumstances of the entity;
    (D) Does not acquire or retain, as principal, an ownership interest
in the entity, other than as described in paragraph (c)(17)(i)(C) of
this section;
    (E) Complies with the requirements of Sec. Sec.  75.14(b) and
75.15, as if such entity were a covered fund; and
    (F) Except for riskless principal transactions as defined in
paragraph (d)(11) of this section, complies with the requirements of 12
CFR 223.15(a), as if such banking entity and its affiliates were a
member bank and the entity were an affiliate thereof.
    (iii) For purposes of paragraph (c)(17) of this section, the
following definitions apply:
    (A) Closely related person means a natural person (including the
estate and estate planning vehicles of such person) who has
longstanding business or personal relationships with any family
customer.
    (B) Family customer means:
    (1) A family client, as defined in Rule 202(a)(11)(G)-1(d)(4) of
the Investment Advisers Act of 1940 (17 CFR 275.202(a)(11)(G)-1(d)(4));
or
    (2) Any natural person who is a father-in-law, mother-in-law,
brother-in-law, sister-in-law, son-in-law or daughter-in-law of a
family client, or a spouse or a spousal equivalent of any of the
foregoing.
    (18) Customer facilitation vehicles. (i) Subject to paragraph
(c)(18)(ii) of this section, an issuer that is formed by or at the
request of a customer of the banking entity for the purpose of
providing such customer (which may include one or more affiliates of
such customer) with exposure to a transaction, investment strategy, or
other service provided by the banking entity.
    (ii) A banking entity may rely on the exclusion in paragraph
(c)(18)(i) of this section with respect to an issuer provided that:
    (A) All of the ownership interests of the issuer are owned by the
customer (which may include one or more of its affiliates) for whom the
issuer was created;
    (B) Notwithstanding paragraph (c)(18)(ii)(A) of this section, up to
an aggregate 0.5 percent of the issuer's outstanding ownership
interests may be acquired or retained by one or more entities that are
not customers if the ownership interest is acquired or retained by such
parties for the purpose of and to the extent necessary for establishing
corporate separateness or addressing bankruptcy, insolvency, or similar
concerns; and
    (C) The banking entity and its affiliates:
    (1) Maintain documentation outlining how the banking entity intends
to facilitate the customer's exposure to such transaction, investment
strategy, or service;
    (2) Do not, directly or indirectly, guarantee, assume, or otherwise
insure the obligations or performance of such issuer;
    (3) Comply with the disclosure obligations under Sec.  75.11(a)(8),
as if such issuer were a covered fund, provided that the content may be
modified to prevent the disclosure from being misleading and the manner
of disclosure may be modified to accommodate the specific circumstances
of the issuer;
    (4) Do not acquire or retain, as principal, an ownership interest
in the issuer, other than as described in paragraph (c)(18)(ii)(B) of
this section;
    (5) Comply with the requirements of Sec. Sec.  75.14(b) and 75.15,
as if such issuer were a covered fund; and
    (6) Except for riskless principal transactions as defined in
paragraph (d)(11) of this section, comply with the requirements of 12
CFR 223.15(a), as if such banking entity and its affiliates were a
member bank and the issuer were an affiliate thereof.
* * * * *
    (d) * * *
    (6) Ownership interest. (i) Ownership interest means any equity,
partnership, or other similar interest. An ``other similar interest''
means an interest that:
    (A) Has the right to participate in the selection or removal of a
general partner, managing member, member of the board of directors or
trustees, investment manager, investment adviser, or commodity trading
advisor of the covered fund, excluding:
    (1) The rights of a creditor to exercise remedies upon the
occurrence of an event of default or an acceleration event; and
    (2) The right to participate in the removal of an investment
manager for ``cause'' or participate in the selection of a replacement
manager upon an investment manager's resignation or removal. For
purposes of this paragraph (d)(6)(i)(A)(2), ``cause'' for removal of an
investment manager means one or more of the following events:
    (i) The bankruptcy, insolvency, conservatorship or receivership of
the investment manager;
    (ii) The breach by the investment manager of any material provision
of the covered fund's transaction agreements applicable to the
investment manager;
    (iii) The breach by the investment manager of material
representations or warranties;
    (iv) The occurrence of an act that constitutes fraud or criminal
activity in the performance of the investment manager's obligations
under the covered fund's transaction agreements;
    (v) The indictment of the investment manager for a criminal
offense, or the indictment of any officer, member, partner or other
principal of the investment manager for a criminal offense materially
related to his or her investment management activities;
    (vi) A change in control with respect to the investment manager;
    (vii) The loss, separation or incapacitation of an individual
critical to the operation of the investment manager or primarily
responsible for the management of the covered fund's assets; or
    (viii) Other similar events that constitute ``cause'' for removal
of an investment manager, provided that such events are not solely
related to the performance of the covered fund or the investment
manager's exercise of investment discretion under the covered fund's
transaction agreements;
    (B) Has the right under the terms of the interest to receive a
share of the income, gains or profits of the covered fund;
    (C) Has the right to receive the underlying assets of the covered
fund after all other interests have been redeemed and/or paid in full
(excluding the rights of a creditor to exercise remedies upon the
occurrence of an

event of default or an acceleration event);
    (D) Has the right to receive all or a portion of excess spread (the
positive difference, if any, between the aggregate interest payments
received from the underlying assets of the covered fund and the
aggregate interest paid to the holders of other outstanding interests);
    (E) Provides under the terms of the interest that the amounts
payable by the covered fund with respect to the interest could be
reduced based on losses arising from the underlying assets of the
covered fund, such as allocation of losses, write-downs or charge-offs
of the outstanding principal balance, or reductions in the amount of
interest due and payable on the interest;
    (F) Receives income on a pass-through basis from the covered fund,
or has a rate of return that is determined by reference to the
performance of the underlying assets of the covered fund; or
    (G) Any synthetic right to have, receive, or be allocated any of
the rights in paragraphs (d)(6)(i)(A) through (F) of this section.
    (ii) Ownership interest does not include:
    (A) Restricted profit interest, which is an interest held by an
entity (or an employee or former employee thereof) in a covered fund
for which the entity (or employee thereof) serves as investment
manager, investment adviser, commodity trading advisor, or other
service provider, so long as:
    (1) The sole purpose and effect of the interest is to allow the
entity (or employee or former employee thereof) to share in the profits
of the covered fund as performance compensation for the investment
management, investment advisory, commodity trading advisory, or other
services provided to the covered fund by the entity (or employee or
former employee thereof), provided that the entity (or employee or
former employee thereof) may be obligated under the terms of such
interest to return profits previously received;
    (2) All such profit, once allocated, is distributed to the entity
(or employee or former employee thereof) promptly after being earned
or, if not so distributed, is retained by the covered fund for the sole
purpose of establishing a reserve amount to satisfy contractual
obligations with respect to subsequent losses of the covered fund and
such undistributed profit of the entity (or employee or former employee
thereof) does not share in the subsequent investment gains of the
covered fund;
    (3) Any amounts invested in the covered fund, including any amounts
paid by the entity in connection with obtaining the restricted profit
interest, are within the limits of Sec.  75.12 of this subpart; and
    (4) The interest is not transferable by the entity (or employee or
former employee thereof) except to an affiliate thereof (or an employee
of the banking entity or affiliate), to immediate family members, or
through the intestacy, of the employee or former employee, or in
connection with a sale of the business that gave rise to the restricted
profit interest by the entity (or employee or former employee thereof)
to an unaffiliated party that provides investment management,
investment advisory, commodity trading advisory, or other services to
the fund.
    (B) Any senior loan or senior debt interest that has the following
characteristics:
    (1) Under the terms of the interest the holders of such interest do
not have the right to receive a share of the income, gains, or profits
of the covered fund, but are entitled to receive only:
    (i) Interest at a stated interest rate, as well as commitment fees
or other fees, which are not determined by reference to the performance
of the underlying assets of the covered fund; and
    (ii) Repayment of a fixed principal amount, on or before a maturity
date, in a contractually-determined manner (which may include
prepayment premiums intended solely to reflect, and compensate holders
of the interest for, forgone income resulting from an early
prepayment);
    (2) The entitlement to payments under the terms of the interest are
absolute and could not be reduced based on losses arising from the
underlying assets of the covered fund, such as allocation of losses,
write-downs or charge-offs of the outstanding principal balance, or
reductions in the amount of interest due and payable on the interest;
and
    (3) The holders of the interest are not entitled to receive the
underlying assets of the covered fund after all other interests have
been redeemed or paid in full (excluding the rights of a creditor to
exercise remedies upon the occurrence of an event of default or an
acceleration event).
* * * * *
    (11) Riskless principal transaction. Riskless principal transaction
means a transaction in which a banking entity, after receiving an order
from a customer to buy (or sell) a security, purchases (or sells) the
security in the secondary market for its own account to offset a
contemporaneous sale to (or purchase from) the customer.

0
26. Amend Sec.  75.12 by:
0
a. Revising paragraph (b)(1)(ii);
0
b. Revising paragraph (b)(4);
0
c. Adding paragraph (b)(5);
0
d. Revising paragraph (c)(1); and
0
e. Revising paragraphs (d) and (e).
    The revisions and addition read as follows:

Sec.  75.12  Permitted investment in a covered fund.

* * * * *
    (b) * * *
    (1) * * *
    (ii) Treatment of registered investment companies, SEC-regulated
business development companies, and foreign public funds. For purposes
of paragraph (b)(1)(i) of this section, a registered investment
company, SEC-regulated business development companies, or foreign
public fund as described in Sec.  75.10(c)(1) will not be considered to
be an affiliate of the banking entity so long as:
    (A) The banking entity, together with its affiliates, does not own,
control, or hold with the power to vote 25 percent or more of the
voting shares of the company or fund; and
    (B) The banking entity, or an affiliate of the banking entity,
provides investment advisory, commodity trading advisory,
administrative, and other services to the company or fund in compliance
with the limitations under applicable regulation, order, or other
authority.
* * * * *
    (4) Multi-tier fund investments. (i) Master-feeder fund
investments. If the principal investment strategy of a covered fund
(the ``feeder fund'') is to invest substantially all of its assets in
another single covered fund (the ``master fund''), then for purposes of
the investment limitations in paragraphs (a)(2)(i)(B) and (a)(2)(ii) of
this section, the banking entity's permitted investment in such funds
shall be measured only by reference to the value of the master fund.
The banking entity's permitted investment in the master fund shall
include any investment by the banking entity in the master fund, as
well as the banking entity's pro-rata share of any ownership interest
in the master fund that is held through the feeder fund; and
    (ii) Fund-of-funds investments. If a banking entity organizes and
offers a covered fund pursuant to Sec.  75.11 for the purpose of
investing in other covered funds (a ``fund of funds'') and that fund of
funds itself invests in another covered fund that the banking entity is
permitted to own, then the banking entity's permitted investment in
that other fund shall include any investment by the banking entity in
that other fund,

as well as the banking entity's pro-rata share of any ownership
interest in the fund that is held through the fund of funds. The
investment of the banking entity may not represent more than 3 percent
of the amount or value of any single covered fund.
    (5) Parallel Investments and Co-Investments. (i) A banking entity
shall not be required to include in the calculation of the investment
limits under paragraph (a)(2) of this section any investment the
banking entity makes alongside a covered fund as long as the investment
is made in compliance with applicable laws and regulations, including
applicable safety and soundness standards.
    (ii) A banking entity shall not be restricted under this section in
the amount of any investment the banking entity makes alongside a
covered fund as long as the investment is made in compliance with
applicable laws and regulations, including applicable safety and
soundness standards.
    (c) * * *
    (1)(i) For purposes of paragraph (a)(2)(iii) of this section, the
aggregate value of all ownership interests held by a banking entity
shall be the sum of all amounts paid or contributed by the banking
entity in connection with acquiring or retaining an ownership interest
in covered funds (together with any amounts paid by the entity in
connection with obtaining a restricted profit interest under Sec.
75.10(d)(6)(ii)), on a historical cost basis;
    (ii) Treatment of employee and director restricted profit interests
financed by the banking entity. For purposes of paragraph (c)(1)(i) of
this section, an investment by a director or employee of a banking
entity who acquires a restricted profit interest in his or her personal
capacity in a covered fund sponsored by the banking entity will be
attributed to the banking entity if the banking entity, directly or
indirectly, extends financing for the purpose of enabling the director
or employee to acquire the restricted profit interest in the fund and
the financing is used to acquire such ownership interest in the covered
fund.
* * * * *
    (d) Capital treatment for a permitted investment in a covered fund.
For purposes of calculating compliance with the applicable regulatory
capital requirements, a banking entity shall deduct from the banking
entity's tier 1 capital (as determined under paragraph (c)(2) of this
section) the greater of:
    (1)(i) The sum of all amounts paid or contributed by the banking
entity in connection with acquiring or retaining an ownership interest
(together with any amounts paid by the entity in connection with
obtaining a restricted profit interest under Sec.  75.10(d)(6)(ii) of
subpart C of this part), on a historical cost basis, plus any earnings
received; and
    (ii) The fair market value of the banking entity's ownership
interests in the covered fund as determined under paragraph (b)(2)(ii)
or (b)(3) of this section (together with any amounts paid by the entity
in connection with obtaining a restricted profit interest under Sec.
75.10(d)(6)(ii) of subpart C of this part), if the banking entity
accounts for the profits (or losses) of the fund investment in its
financial statements.
    (2) Treatment of employee and director restricted profit interests
financed by the banking entity. For purposes of paragraph (d)(1) of
this section, an investment by a director or employee of a banking
entity who acquires a restricted profit interest in his or her personal
capacity in a covered fund sponsored by the banking entity will be
attributed to the banking entity if the banking entity, directly or
indirectly, extends financing for the purpose of enabling the director
or employee to acquire the restricted profit interest in the fund and
the financing is used to acquire such ownership interest in the covered
fund.
    (e) Extension of time to divest an ownership interest. (1)
Extension period. Upon application by a banking entity, the Board may
extend the period under paragraph (a)(2)(i) of this section for up to 2
additional years if the Board finds that an extension would be
consistent with safety and soundness and not detrimental to the public
interest.
    (2) Application requirements. An application for extension must:
    (i) Be submitted to the Board at least 90 days prior to the
expiration of the applicable time period;
    (ii) Provide the reasons for application, including information
that addresses the factors in paragraph (e)(3) of this section; and
    (iii) Explain the banking entity's plan for reducing the permitted
investment in a covered fund through redemption, sale, dilution or
other methods as required in paragraph (a)(2) of this section.
    (3) Factors governing the Board determinations. In reviewing any
application under paragraph (e)(1) of this section, the Board may
consider all the facts and circumstances related to the permitted
investment in a covered fund, including:
    (i) Whether the investment would result, directly or indirectly, in
a material exposure by the banking entity to high-risk assets or high-
risk trading strategies;
    (ii) The contractual terms governing the banking entity's interest
in the covered fund;
    (iii) The date on which the covered fund is expected to have
attracted sufficient investments from investors unaffiliated with the
banking entity to enable the banking entity to comply with the
limitations in paragraph (a)(2)(i) of this section;
    (iv) The total exposure of the covered banking entity to the
investment and the risks that disposing of, or maintaining, the
investment in the covered fund may pose to the banking entity and the
financial stability of the United States;
    (v) The cost to the banking entity of divesting or disposing of the
investment within the applicable period;
    (vi) Whether the investment or the divestiture or conformance of
the investment would involve or result in a material conflict of
interest between the banking entity and unaffiliated parties, including
clients, customers, or counterparties to which it owes a duty;
    (vii) The banking entity's prior efforts to reduce through
redemption, sale, dilution, or other methods its ownership interests in
the covered fund, including activities related to the marketing of
interests in such covered fund;
    (viii) Market conditions; and
    (ix) Any other factor that the Board believes appropriate.
    (4) Authority to impose restrictions on activities or investment
during any extension period. The Board may impose such conditions on
any extension approved under paragraph (e)(1) of this section as the
Board determines are necessary or appropriate to protect the safety and
soundness of the banking entity or the financial stability of the
United States, address material conflicts of interest or other unsound
banking practices, or otherwise further the purposes of section 13 of
the BHC Act and this part.
    (5) Consultation. In the case of a banking entity that is primarily
regulated by another Federal banking agency, the SEC, or the CFTC, the
Board will consult with such agency prior to acting on an application
by the banking entity for an extension under paragraph (e)(1) of this
section.

0
26. Amend Sec.  75.13 by adding paragraph (d) to read as follows:

Sec.  75.13  Other permitted covered fund activities and investments.

* * * * *
    (d) Permitted covered fund activities and investments of qualifying
foreign excluded funds. (1) The prohibition

contained in Sec.  75.10(a) does not apply to a qualifying foreign
excluded fund.
    (2) For purposes of this paragraph (d), a qualifying foreign
excluded fund means a banking entity that:
    (i) Is organized or established outside the United States, and the
ownership interests of which are offered and sold solely outside the
United States;
    (ii)(A) Would be a covered fund if the entity were organized or
established in the United States, or
    (B) Is, or holds itself out as being, an entity or arrangement that
raises money from investors primarily for the purpose of investing in
financial instruments for resale or other disposition or otherwise
trading in financial instruments;
    (iii) Would not otherwise be a banking entity except by virtue of
the acquisition or retention of an ownership interest in, sponsorship
of, or relationship with the entity, by another banking entity that
meets the following:
    (A) The banking entity is not organized, or directly or indirectly
controlled by a banking entity that is organized, under the laws of the
United States or of any State; and
    (B) The banking entity's acquisition of an ownership interest in or
sponsorship of the fund by the foreign banking entity meets the
requirements for permitted covered fund activities and investments
solely outside the United States, as provided in Sec.  75.13(b);
    (iv) Is established and operated as part of a bona fide asset
management business; and
    (v) Is not operated in a manner that enables the banking entity
that sponsors or controls the qualifying foreign excluded fund, or any
of its affiliates, to evade the requirements of section 13 of the BHC
Act or this part.

0
27. Amend Sec.  75.14 by:
0
a. Revising paragraph (a)(2)(i);
0
b. Revising paragraph (a)(2)(ii)(C);
0
c. Adding paragraphs (a)(2)(iii), (iv), (v), and (3); and
0
d. Revising paragraph (c).
    The revisions and additions read as follows:

Sec.  75.14  Limitations on relationships with a covered fund.

    (a) * * *
    (2) * * *
    (i) Acquire and retain any ownership interest in a covered fund in
accordance with the requirements of Sec. Sec.  75.11, 75.12, or 75.13;
    (ii) * * *
    (C) The Board has not determined that such transaction is
inconsistent with the safe and sound operation and condition of the
banking entity; and
    (iii) Enter into a transaction with a covered fund that would be an
exempt covered transaction under 12 U.S.C. 371c(d) or Sec.  223.42 of
the Board's Regulation W (12 CFR 223.42) subject to the limitations
specified under 12 U.S.C. 371c(d) or Sec.  223.42 of the Board's
Regulation W (12 CFR 223.42), as applicable,
    (iv) Enter into a riskless principal transaction with a covered
fund; and
    (v) Extend credit to or purchase assets from a covered fund,
provided:
    (A) Each extension of credit or purchase of assets is in the
ordinary course of business in connection with payment transactions;
settlement services; or futures, derivatives, and securities clearing;
    (B) Each extension of credit is repaid, sold, or terminated by the
end of five business days; and
    (C) The banking entity making each extension of credit meets the
requirements of Sec.  223.42(l)(1)(i) and (ii) of the Board's
Regulation W (12 CFR 223.42(l)(1)(i) and(ii)), as if the extension of
credit was an intraday extension of credit, regardless of the duration
of the extension of credit.
    (3) Any transaction or activity permitted under paragraphs
(a)(2)(iii), (iv) or (v) must comply with the limitations in Sec.
75.15.
* * * * *
    (c) Restrictions on other permitted transactions. Any transaction
permitted under paragraphs (a)(2)(ii), (iii), or (iv) of this section
shall be subject to section 23B of the Federal Reserve Act (12 U.S.C.
371c-1) as if the counterparty were an affiliate of the banking entity
under section 23B.

Subpart D--Compliance Program Requirements; Violations

0
28. Amend Sec.  75.20 by:
0
a. Revising paragraph (a);
0
b. Revising the heading of paragraph (d) and revising paragraph (d)(1);
and
0
c. Revising the introductory text of paragraph (e).
    The revisions and addition read as follows:

Sec.  75.20   Program for compliance; reporting.

    (a) Program requirement. Each banking entity (other than a banking
entity with limited trading assets and liabilities or a qualifying
foreign excluded fund under section 75.6(f) or 75.13(d)) shall develop
and provide for the continued administration of a compliance program
reasonably designed to ensure and monitor compliance with the
prohibitions and restrictions on proprietary trading and covered fund
activities and investments set forth in section 13 of the BHC Act and
this part. The terms, scope, and detail of the compliance program shall
be appropriate for the types, size, scope, and complexity of activities
and business structure of the banking entity.
* * * * *
    (d) Reporting requirements under appendix A to this part. (1) A
banking entity (other than a qualifying foreign excluded fund under
section 75.6(f) or 75.13(d)) engaged in proprietary trading activity
permitted under subpart B shall comply with the reporting requirements
described in appendix A to this part, if:
* * * * *
    (e) Additional documentation for covered funds. A banking entity
with significant trading assets and liabilities (other than a
qualifying foreign excluded fund under section 75.6(f) or 75.13(d))
shall maintain records that include:
* * * * *

SECURITIES AND EXCHANGE COMMISSION

17 CFR Chapter II

Authority and Issuance

    For the reasons set forth in the Common Preamble, the Securities
and Exchange Commission amends part 255 to chapter II of title 17 of
the Code of Federal Regulations as follows:

PART 255--PROPRIETARY TRADING AND CERTAIN INTERESTS IN AND
RELATIONSHIPS WITH COVERED FUNDS

0
29. The authority citation for part 255 continues to read as follows:

    Authority:  12 U.S.C. 1851.

Subpart B--Proprietary Trading

0
30. Amend Sec.  255.6 by adding paragraph (f) to read as follows:

Sec.  255.6   Other permitted proprietary trading activities.

* * * * *
    (f) Permitted trading activities of qualifying foreign excluded
funds. The prohibition contained in Sec.  255.3(a) does not apply to
the purchase or sale of a financial instrument by a qualifying foreign
excluded fund. For purposes of this paragraph (f), a qualifying foreign
excluded fund means a banking entity that:
    (1) Is organized or established outside the United States, and the
ownership interests of which are offered and sold solely outside the
United States;
    (2)(i) Would be a covered fund if the entity were organized or
established in the United States, or
    (ii) Is, or holds itself out as being, an entity or arrangement
that raises money

from investors primarily for the purpose of investing in financial
instruments for resale or other disposition or otherwise trading in
financial instruments;
    (3) Would not otherwise be a banking entity except by virtue of the
acquisition or retention of an ownership interest in, sponsorship of,
or relationship with the entity, by another banking entity that meets
the following:
    (i) The banking entity is not organized, or directly or indirectly
controlled by a banking entity that is organized, under the laws of the
United States or of any State; and
    (ii) The banking entity's acquisition or retention of an ownership
interest in or sponsorship of the fund meets the requirements for
permitted covered fund activities and investments solely outside the
United States, as provided in Sec.  255.13(b);
    (4) Is established and operated as part of a bona fide asset
management business; and
    (5) Is not operated in a manner that enables the banking entity
that sponsors or controls the qualifying foreign excluded fund, or any
of its affiliates, to evade the requirements of section 13 of the BHC
Act or this part.

Subpart C--Covered Funds Activities and Investments

0
31. Amend Sec.  255.10 by:
0
a. Revising paragraph (c)(1);
0
b. Revising paragraph (c)(3)(i);
0
c. Revising paragraph (c)(8);
0
d. Revising the heading of paragraph (c)(10) and revising paragraph
(c)(10)(i);
0
e. Revising paragraph (c)(11);
0
f. Adding paragraphs (c)(15), (16), (17), and (18);
0
g. Revising paragraph (d)(6); and
0
h. Adding paragraph (d)(11).
    The revisions and additions read as follows:

Sec.  255.10   Prohibition on acquiring or retaining an ownership
interest in and having certain relationships with a covered fund.

* * * * *
    (c) * * *
    (1) Foreign public funds. (i) Subject to paragraphs (c)(1)(ii) and
(iii) of this section, an issuer that:
    (A) Is organized or established outside of the United States; and
    (B) Is authorized to offer and sell ownership interests, and such
interests are offered and sold, through one or more public offerings.
    (ii) With respect to a banking entity that is, or is controlled
directly or indirectly by a banking entity that is, located in or
organized under the laws of the United States or of any State and any
issuer for which such banking entity acts as sponsor, the sponsoring
banking entity may not rely on the exemption in paragraph (c)(1)(i) of
this section for such issuer unless more than 75 percent of the
ownership interests in the issuer are sold to persons other than:
    (A) Such sponsoring banking entity;
    (B) Such issuer;
    (C) Affiliates of such sponsoring banking entity or such issuer;
and
    (D) Directors and senior executive officers as defined in Sec.
225.71(c) of the Board's Regulation Y (12 CFR 225.71(c)) of such
entities.
    (iii) For purposes of paragraph (c)(1)(i)(B) of this section, the
term ``public offering'' means a distribution (as defined in Sec.
255.4(a)(3)) of securities in any jurisdiction outside the United
States to investors, including retail investors, provided that:
    (A) The distribution is subject to substantive disclosure and
retail investor protection laws or regulations;
    (B) With respect to an issuer for which the banking entity serves
as the investment manager, investment adviser, commodity trading
advisor, commodity pool operator, or sponsor, the distribution complies
with all applicable requirements in the jurisdiction in which such
distribution is being made;
    (C) The distribution does not restrict availability to investors
having a minimum level of net worth or net investment assets; and
    (D) The issuer has filed or submitted, with the appropriate
regulatory authority in such jurisdiction, offering disclosure
documents that are publicly available.
* * * * *
    (3) * * *
    (i) Is composed of no more than 10 unaffiliated co-venturers;
* * * * *
    (8) Loan securitizations. (i) Scope. An issuing entity for asset-
backed securities that satisfies all the conditions of this paragraph
(c)(8) and the assets or holdings of which are composed solely of:
    (A) Loans as defined in Sec.  255.2(t);
    (B) Rights or other assets designed to assure the servicing or
timely distribution of proceeds to holders of such securities and
rights or other assets that are related or incidental to purchasing or
otherwise acquiring and holding the loans, provided that each asset
that is a security (other than special units of beneficial interest and
collateral certificates meeting the requirements of paragraph (c)(8)(v)
of this section) meets the requirements of paragraph (c)(8)(iii) of
this section;
    (C) Interest rate or foreign exchange derivatives that meet the
requirements of paragraph (c)(8)(iv) of this section;
    (D) Special units of beneficial interest and collateral
certificates that meet the requirements of paragraph (c)(8)(v) of this
section; and
    (E) Debt securities, other than asset-backed securities and
convertible securities, provided that:
    (1) The aggregate value of such debt securities does not exceed
five percent of the aggregate value of loans held under paragraph
(c)(8)(i)(A) of this section, cash and cash equivalents held under
paragraph (c)(8)(iii)(A) of this section, and debt securities held
under this paragraph (c)(8)(i)(E); and
    (2) The aggregate value of the loans, cash and cash equivalents,
and debt securities for purposes of this paragraph is calculated at par
value at the most recent time any such debt security is acquired,
except that the issuing entity may instead determine the value of any
such loan, cash equivalent, or debt security based on its fair market
value if:
    (i) The issuing entity is required to use the fair market value of
such assets for purposes of calculating compliance with concentration
limitations or other similar calculations under its transaction
agreements, and
    (ii) The issuing entity's valuation methodology values similarly
situated assets consistently.
    (ii) Impermissible assets. For purposes of this paragraph (c)(8),
except as permitted under paragraph (c)(8)(i)(E) of this section, the
assets or holdings of the issuing entity shall not include any of the
following:
    (A) A security, including an asset-backed security, or an interest
in an equity or debt security other than as permitted in paragraphs
(c)(8)(iii), (iv), or (v) of this section;
    (B) A derivative, other than a derivative that meets the
requirements of paragraph (c)(8)(iv) of this section; or
    (C) A commodity forward contract.
    (iii) Permitted securities. Notwithstanding paragraph (c)(8)(ii)(A)
of this section, the issuing entity may hold securities, other than
debt securities permitted under paragraph (c)(8)(i)(E) of this section,
if those securities are:
    (A) Cash equivalents--which, for the purposes of this paragraph,
means high quality, highly liquid investments whose maturity
corresponds to the securitization's expected or potential need for
funds and whose currency corresponds to either the underlying loans or
the asset-backed securities--for purposes of the rights and assets in
paragraph (c)(8)(i)(B) of this section; or

    (B) Securities received in lieu of debts previously contracted with
respect to the loans supporting the asset-backed securities.
    (iv) Derivatives. The holdings of derivatives by the issuing entity
shall be limited to interest rate or foreign exchange derivatives that
satisfy all of the following conditions:
    (A) The written terms of the derivatives directly relate to the
loans, the asset-backed securities, the contractual rights or other
assets described in paragraph (c)(8)(i)(B) of this section, or the debt
securities described in paragraph (c)(8)(i)(E) of this section; and
    (B) The derivatives reduce the interest rate and/or foreign
exchange risks related to the loans, the asset-backed securities, the
contractual rights or other assets described in paragraph (c)(8)(i)(B)
of this section, or the debt securities described in paragraph
(c)(8)(i)(E) of this section.
    (v) Special units of beneficial interest and collateral
certificates. The assets or holdings of the issuing entity may include
collateral certificates and special units of beneficial interest issued
by a special purpose vehicle, provided that:
    (A) The special purpose vehicle that issues the special unit of
beneficial interest or collateral certificate meets the requirements in
this paragraph (c)(8);
    (B) The special unit of beneficial interest or collateral
certificate is used for the sole purpose of transferring to the issuing
entity for the loan securitization the economic risks and benefits of
the assets that are permissible for loan securitizations under this
paragraph (c)(8) and does not directly or indirectly transfer any
interest in any other economic or financial exposure;
    (C) The special unit of beneficial interest or collateral
certificate is created solely to satisfy legal requirements or
otherwise facilitate the structuring of the loan securitization; and
    (D) The special purpose vehicle that issues the special unit of
beneficial interest or collateral certificate and the issuing entity
are established under the direction of the same entity that initiated
the loan securitization.
* * * * *
    (10) Qualifying covered bonds. (i) Scope. An entity owning or
holding a dynamic or fixed pool of loans or other assets as provided in
paragraph (c)(8) of this section for the benefit of the holders of
covered bonds, provided that the assets in the pool are composed solely
of assets that meet the conditions in paragraph (c)(8)(i) of this
section.
* * * * *
    (11) * * *
    (i) That is a small business investment company, as defined in
section 103(3) of the Small Business Investment Act of 1958 (15 U.S.C.
662), or that has received from the Small Business Administration
notice to proceed to qualify for a license as a small business
investment company, which notice or license has not been revoked, or
that has voluntarily surrendered its license to operate as a small
business investment company in accordance with 13 CFR 107.1900 and does
not make any new investments (other than investments in cash
equivalents, which, for the purposes of this paragraph, means high
quality, highly liquid investments whose maturity corresponds to the
issuer's expected or potential need for funds and whose currency
corresponds to the issuer's assets) after such voluntary surrender;
    (ii) The business of which is to make investments that are:
    (A) Designed primarily to promote the public welfare, of the type
permitted under paragraph (11) of section 5136 of the Revised Statutes
of the United States (12 U.S.C. 24), including the welfare of low- and
moderate-income communities or families (such as providing housing,
services, or jobs) and including investments that qualify for
consideration under the regulations implementing the Community
Reinvestment Act (12 U.S.C. 2901 et seq.); or
    (B) Qualified rehabilitation expenditures with respect to a
qualified rehabilitated building or certified historic structure, as
such terms are defined in section 47 of the Internal Revenue Code of
1986 or a similar State historic tax credit program;
    (iii) That has elected to be regulated or is regulated as a rural
business investment company, as described in 15 U.S.C. 80b-3(b)(8)(A)
or (B), or that has terminated its participation as a rural business
investment company in accordance with 7 CFR 4290.1900 and does not make
any new investments (other than investments in cash equivalents, which,
for the purposes of this paragraph, means high quality, highly liquid
investments whose maturity corresponds to the issuer's expected or
potential need for funds and whose currency corresponds to the issuer's
assets) after such termination; or
    (iv) That is a qualified opportunity fund, as defined in 26 U.S.C.
1400Z-2(d).
* * * * *
    (15) Credit funds. Subject to paragraphs (c)(15)(iii), (iv), and
(v) of this section, an issuer that satisfies the asset and activity
requirements of paragraphs (c)(15)(i) and (ii) of this section.
    (i) Asset requirements. The issuer's assets must be composed solely
of:
    (A) Loans as defined in Sec.  255.2(t);
    (B) Debt instruments, subject to paragraph (c)(15)(iv) of this
section;
    (C) Rights and other assets that are related or incidental to
acquiring, holding, servicing, or selling such loans or debt
instruments, provided that:
    (1) Each right or asset held under this paragraph (c)(15)(i)(C)
that is a security is either:
    (i) A cash equivalent (which, for the purposes of this paragraph,
means high quality, highly liquid investments whose maturity
corresponds to the issuer's expected or potential need for funds and
whose currency corresponds to either the underlying loans or the debt
instruments);
    (ii) A security received in lieu of debts previously contracted
with respect to such loans or debt instruments; or
    (iii) An equity security (or right to acquire an equity security)
received on customary terms in connection with such loans or debt
instruments; and
    (2) Rights or other assets held under this paragraph (c)(15)(i)(C)
of this section may not include commodity forward contracts or any
derivative; and
    (D) Interest rate or foreign exchange derivatives, if:
    (1) The written terms of the derivative directly relate to the
loans, debt instruments, or other rights or assets described in
paragraph (c)(15)(i)(C) of this section; and
    (2) The derivative reduces the interest rate and/or foreign
exchange risks related to the loans, debt instruments, or other rights
or assets described in paragraph (c)(15)(i)(C) of this section.
    (ii) Activity requirements. To be eligible for the exclusion of
paragraph (c)(15) of this section, an issuer must:
    (A) Not engage in any activity that would constitute proprietary
trading under Sec.  255.3(b)(l)(i), as if the issuer were a banking
entity; and
    (B) Not issue asset-backed securities.
    (iii) Requirements for a sponsor, investment adviser, or commodity
trading advisor. A banking entity that acts as a sponsor, investment
adviser, or commodity trading advisor to an issuer that meets the
conditions in paragraphs (c)(15)(i) and (ii) of this section may not
rely on this exclusion unless the banking entity:
    (A) Provides in writing to any prospective and actual investor in
the issuer the disclosures required under

Sec.  255.11(a)(8) of this subpart, as if the issuer were a covered
fund;
    (B) Ensures that the activities of the issuer are consistent with
safety and soundness standards that are substantially similar to those
that would apply if the banking entity engaged in the activities
directly; and
    (C) Complies with the limitations imposed in Sec.  255.14, as if
the issuer were a covered fund, except the banking entity may acquire
and retain any ownership interest in the issuer.
    (iv) Additional Banking Entity Requirements. A banking entity may
not rely on this exclusion with respect to an issuer that meets the
conditions in paragraphs (c)(15)(i) and (ii) of this section unless:
    (A) The banking entity does not, directly or indirectly, guarantee,
assume, or otherwise insure the obligations or performance of the
issuer or of any entity to which such issuer extends credit or in which
such issuer invests; and
    (B) Any assets the issuer holds pursuant to paragraphs
(c)(15)(i)(B) or (i)(C)(1)(iii) of this section would be permissible
for the banking entity to acquire and hold directly under applicable
federal banking laws and regulations.
    (v) Investment and Relationship Limits. A banking entity's
investment in, and relationship with, the issuer must:
    (A) Comply with the limitations imposed in Sec.  255.15, as if the
issuer were a covered fund; and
    (B) Be conducted in compliance with, and subject to, applicable
banking laws and regulations, including applicable safety and soundness
standards.
    (16) Qualifying venture capital funds. (i) Subject to paragraphs
(c)(16)(ii) through (iv) of this section, an issuer that:
    (A) Is a venture capital fund as defined in 17 CFR 275.203(l)-1;
and
    (B) Does not engage in any activity that would constitute
proprietary trading under Sec.  255.3(b)(1)(i), as if the issuer were a
banking entity.
    (ii) A banking entity that acts as a sponsor, investment adviser,
or commodity trading advisor to an issuer that meets the conditions in
paragraph (c)(16)(i) of this section may not rely on this exclusion
unless the banking entity:
    (A) Provides in writing to any prospective and actual investor in
the issuer the disclosures required under Sec.  255.11(a)(8), as if the
issuer were a covered fund;
    (B) Ensures that the activities of the issuer are consistent with
safety and soundness standards that are substantially similar to those
that would apply if the banking entity engaged in the activities
directly; and
    (C) Complies with the restrictions in Sec.  255.14 as if the issuer
were a covered fund (except the banking entity may acquire and retain
any ownership interest in the issuer).
    (iii) The banking entity must not, directly or indirectly,
guarantee, assume, or otherwise insure the obligations or performance
of the issuer.
    (iv) A banking entity's ownership interest in or relationship with
the issuer must:
    (A) Comply with the limitations imposed in Sec.  255.15, as if the
issuer were a covered fund; and
    (B) Be conducted in compliance with, and subject to, applicable
banking laws and regulations, including applicable safety and soundness
standards.
    (17) Family wealth management vehicles. (i) Subject to paragraph
(c)(17)(ii) of this section, any entity that is not, and does not hold
itself out as being, an entity or arrangement that raises money from
investors primarily for the purpose of investing in securities for
resale or other disposition or otherwise trading in securities, and:
    (A) If the entity is a trust, the grantor(s) of the entity are all
family customers; and
    (B) If the entity is not a trust:
    (1) A majority of the voting interests in the entity are owned
(directly or indirectly) by family customers;
    (2) A majority of the interests in the entity are owned (directly
or indirectly) by family customers;
    (3) The entity is owned only by family customers and up to 5
closely related persons of the family customers; and
    (C) Notwithstanding paragraph (c)(17)(i)(A) and (B) of this
section, up to an aggregate 0.5 percent of the entity's outstanding
ownership interests may be acquired or retained by one or more entities
that are not family customers or closely related persons if the
ownership interest is acquired or retained by such parties for the
purpose of and to the extent necessary for establishing corporate
separateness or addressing bankruptcy, insolvency, or similar concerns.
    (ii) A banking entity may rely on the exclusion in paragraph
(c)(17)(i) of this section with respect to an entity provided that the
banking entity (or an affiliate):
    (A) Provides bona fide trust, fiduciary, investment advisory, or
commodity trading advisory services to the entity;
    (B) Does not, directly or indirectly, guarantee, assume, or
otherwise insure the obligations or performance of such entity;
    (C) Complies with the disclosure obligations under Sec.
255.11(a)(8), as if such entity were a covered fund, provided that the
content may be modified to prevent the disclosure from being misleading
and the manner of disclosure may be modified to accommodate the
specific circumstances of the entity;
    (D) Does not acquire or retain, as principal, an ownership interest
in the entity, other than as described in paragraph (c)(17)(i)(C) of
this section;
    (E) Complies with the requirements of Sec. Sec.  255.14(b) and
255.15, as if such entity were a covered fund; and
    (F) Except for riskless principal transactions as defined in
paragraph (d)(11) of this section, complies with the requirements of 12
CFR 223.15(a), as if such banking entity and its affiliates were a
member bank and the entity were an affiliate thereof.
    (iii) For purposes of paragraph (c)(17) of this section, the
following definitions apply:
    (A) Closely related person means a natural person (including the
estate and estate planning vehicles of such person) who has
longstanding business or personal relationships with any family
customer.
    (B) Family customer means:
    (1) A family client, as defined in Rule 202(a)(11)(G)-1(d)(4) of
the Investment Advisers Act of 1940 (17 CFR 275.202(a)(11)(G)-1(d)(4));
or
    (2) Any natural person who is a father-in-law, mother-in-law,
brother-in-law, sister-in-law, son-in-law or daughter-in-law of a
family client, or a spouse or a spousal equivalent of any of the
foregoing.
    (18) Customer facilitation vehicles. (i) Subject to paragraph
(c)(18)(ii) of this section, an issuer that is formed by or at the
request of a customer of the banking entity for the purpose of
providing such customer (which may include one or more affiliates of
such customer) with exposure to a transaction, investment strategy, or
other service provided by the banking entity.
    (ii) A banking entity may rely on the exclusion in paragraph
(c)(18)(i) of this section with respect to an issuer provided that:
    (A) All of the ownership interests of the issuer are owned by the
customer (which may include one or more of its affiliates) for whom the
issuer was created;
    (B) Notwithstanding paragraph (c)(18)(ii)(A) of this section, up to
an aggregate 0.5 percent of the issuer's outstanding ownership
interests may be acquired or retained by one or more entities that are
not customers if the ownership interest is acquired or retained by such
parties for the purpose

of and to the extent necessary for establishing corporate separateness
or addressing bankruptcy, insolvency, or similar concerns; and
    (C) The banking entity and its affiliates:
    (1) Maintain documentation outlining how the banking entity intends
to facilitate the customer's exposure to such transaction, investment
strategy, or service;
    (2) Do not, directly or indirectly, guarantee, assume, or otherwise
insure the obligations or performance of such issuer;
    (3) Comply with the disclosure obligations under Sec.
255.11(a)(8), as if such issuer were a covered fund, provided that the
content may be modified to prevent the disclosure from being misleading
and the manner of disclosure may be modified to accommodate the
specific circumstances of the issuer;
    (4) Do not acquire or retain, as principal, an ownership interest
in the issuer, other than as described in paragraph (c)(18)(ii)(B) of
this section;
    (5) Comply with the requirements of Sec. Sec.  255.14(b) and
255.15, as if such issuer were a covered fund; and
    (6) Except for riskless principal transactions as defined in
paragraph (d)(11) of this section, comply with the requirements of 12
CFR 223.15(a), as if such banking entity and its affiliates were a
member bank and the issuer were an affiliate thereof.
* * * * *
    (d) * * *
    (6) Ownership interest. (i) Ownership interest means any equity,
partnership, or other similar interest. An ``other similar interest''
means an interest that:
    (A) Has the right to participate in the selection or removal of a
general partner, managing member, member of the board of directors or
trustees, investment manager, investment adviser, or commodity trading
advisor of the covered fund, excluding:
    (1) The rights of a creditor to exercise remedies upon the
occurrence of an event of default or an acceleration event; and
    (2) The right to participate in the removal of an investment
manager for ``cause'' or participate in the selection of a replacement
manager upon an investment manager's resignation or removal. For
purposes of this paragraph (d)(6)(i)(A)(2), ``cause'' for removal of an
investment manager means one or more of the following events:
    (i) The bankruptcy, insolvency, conservatorship or receivership of
the investment manager;
    (ii) The breach by the investment manager of any material provision
of the covered fund's transaction agreements applicable to the
investment manager;
    (iii) The breach by the investment manager of material
representations or warranties;
    (iv) The occurrence of an act that constitutes fraud or criminal
activity in the performance of the investment manager's obligations
under the covered fund's transaction agreements;
    (v) The indictment of the investment manager for a criminal
offense, or the indictment of any officer, member, partner or other
principal of the investment manager for a criminal offense materially
related to his or her investment management activities;
    (vi) A change in control with respect to the investment manager;
    (vii) The loss, separation or incapacitation of an individual
critical to the operation of the investment manager or primarily
responsible for the management of the covered fund's assets; or
    (viii) Other similar events that constitute ``cause'' for removal
of an investment manager, provided that such events are not solely
related to the performance of the covered fund or the investment
manager's exercise of investment discretion under the covered fund's
transaction agreements;
    (B) Has the right under the terms of the interest to receive a
share of the income, gains or profits of the covered fund;
    (C) Has the right to receive the underlying assets of the covered
fund after all other interests have been redeemed and/or paid in full
(excluding the rights of a creditor to exercise remedies upon the
occurrence of an event of default or an acceleration event);
    (D) Has the right to receive all or a portion of excess spread (the
positive difference, if any, between the aggregate interest payments
received from the underlying assets of the covered fund and the
aggregate interest paid to the holders of other outstanding interests);
    (E) Provides under the terms of the interest that the amounts
payable by the covered fund with respect to the interest could be
reduced based on losses arising from the underlying assets of the
covered fund, such as allocation of losses, write-downs or charge-offs
of the outstanding principal balance, or reductions in the amount of
interest due and payable on the interest;
    (F) Receives income on a pass-through basis from the covered fund,
or has a rate of return that is determined by reference to the
performance of the underlying assets of the covered fund; or
    (G) Any synthetic right to have, receive, or be allocated any of
the rights in paragraphs (d)(6)(i)(A) through (F) of this section.
    (ii) Ownership interest does not include:
    (A) Restricted profit interest, which is an interest held by an
entity (or an employee or former employee thereof) in a covered fund
for which the entity (or employee thereof) serves as investment
manager, investment adviser, commodity trading advisor, or other
service provider, so long as:
    (1) The sole purpose and effect of the interest is to allow the
entity (or employee or former employee thereof) to share in the profits
of the covered fund as performance compensation for the investment
management, investment advisory, commodity trading advisory, or other
services provided to the covered fund by the entity (or employee or
former employee thereof), provided that the entity (or employee or
former employee thereof) may be obligated under the terms of such
interest to return profits previously received;
    (2) All such profit, once allocated, is distributed to the entity
(or employee or former employee thereof) promptly after being earned
or, if not so distributed, is retained by the covered fund for the sole
purpose of establishing a reserve amount to satisfy contractual
obligations with respect to subsequent losses of the covered fund and
such undistributed profit of the entity (or employee or former employee
thereof) does not share in the subsequent investment gains of the
covered fund;
    (3) Any amounts invested in the covered fund, including any amounts
paid by the entity in connection with obtaining the restricted profit
interest, are within the limits of Sec.  255.12 of this subpart; and
    (4) The interest is not transferable by the entity (or employee or
former employee thereof) except to an affiliate thereof (or an employee
of the banking entity or affiliate), to immediate family members, or
through the intestacy, of the employee or former employee, or in
connection with a sale of the business that gave rise to the restricted
profit interest by the entity (or employee or former employee thereof)
to an unaffiliated party that provides investment management,
investment advisory, commodity trading advisory, or other services to
the fund.
    (B) Any senior loan or senior debt interest that has the following
characteristics:
    (1) Under the terms of the interest the holders of such interest do
not have the right to receive a share of the income,

gains, or profits of the covered fund, but are entitled to receive
only:
    (i) Interest at a stated interest rate, as well as commitment fees
or other fees, which are not determined by reference to the performance
of the underlying assets of the covered fund; and
    (ii) Repayment of a fixed principal amount, on or before a maturity
date, in a contractually-determined manner (which may include
prepayment premiums intended solely to reflect, and compensate holders
of the interest for, forgone income resulting from an early
prepayment);
    (2) The entitlement to payments under the terms of the interest are
absolute and could not be reduced based on losses arising from the
underlying assets of the covered fund, such as allocation of losses,
write-downs or charge-offs of the outstanding principal balance, or
reductions in the amount of interest due and payable on the interest;
and
    (3) The holders of the interest are not entitled to receive the
underlying assets of the covered fund after all other interests have
been redeemed or paid in full (excluding the rights of a creditor to
exercise remedies upon the occurrence of an event of default or an
acceleration event).
* * * * *
    (11) Riskless principal transaction. Riskless principal transaction
means a transaction in which a banking entity, after receiving an order
from a customer to buy (or sell) a security, purchases (or sells) the
security in the secondary market for its own account to offset a
contemporaneous sale to (or purchase from) the customer.

0
32. Amend Sec.  255.12 by:
0
a. Revising paragraph (b)(1)(ii);
0
b. Revising paragraph (b)(4);
0
c. Adding paragraph (b)(5);
0
d. Revising paragraph (c)(1); and
0
e. Revising paragraphs (d) and (e).
    The revisions and addition read as follows:

Sec.  255.12   Permitted investment in a covered fund.

* * * * *
    (b) * * *
    (1) * * *
    (ii) Treatment of registered investment companies, SEC-regulated
business development companies, and foreign public funds. For purposes
of paragraph (b)(1)(i) of this section, a registered investment
company, SEC-regulated business development companies, or foreign
public fund as described in Sec.  255.10(c)(1) will not be considered
to be an affiliate of the banking entity so long as:
    (A) The banking entity, together with its affiliates, does not own,
control, or hold with the power to vote 25 percent or more of the
voting shares of the company or fund; and
    (B) The banking entity, or an affiliate of the banking entity,
provides investment advisory, commodity trading advisory,
administrative, and other services to the company or fund in compliance
with the limitations under applicable regulation, order, or other
authority.
* * * * *
    (4) Multi-tier fund investments. (i) Master-feeder fund
investments. If the principal investment strategy of a covered fund
(the ``feeder fund'') is to invest substantially all of its assets in
another single covered fund (the ``master fund''), then for purposes of
the investment limitations in paragraphs (a)(2)(i)(B) and (a)(2)(ii) of
this section, the banking entity's permitted investment in such funds
shall be measured only by reference to the value of the master fund.
The banking entity's permitted investment in the master fund shall
include any investment by the banking entity in the master fund, as
well as the banking entity's pro-rata share of any ownership interest
in the master fund that is held through the feeder fund; and
    (ii) Fund-of-funds investments. If a banking entity organizes and
offers a covered fund pursuant to Sec.  255.11 for the purpose of
investing in other covered funds (a ``fund of funds'') and that fund of
funds itself invests in another covered fund that the banking entity is
permitted to own, then the banking entity's permitted investment in
that other fund shall include any investment by the banking entity in
that other fund, as well as the banking entity's pro-rata share of any
ownership interest in the fund that is held through the fund of funds.
The investment of the banking entity may not represent more than 3
percent of the amount or value of any single covered fund.
    (5) Parallel Investments and Co-Investments. (i) A banking entity
shall not be required to include in the calculation of the investment
limits under paragraph (a)(2) of this section any investment the
banking entity makes alongside a covered fund as long as the investment
is made in compliance with applicable laws and regulations, including
applicable safety and soundness standards.
    (ii) A banking entity shall not be restricted under this section in
the amount of any investment the banking entity makes alongside a
covered fund as long as the investment is made in compliance with
applicable laws and regulations, including applicable safety and
soundness standards.
    (c) * * *
    (1)(i) For purposes of paragraph (a)(2)(iii) of this section, the
aggregate value of all ownership interests held by a banking entity
shall be the sum of all amounts paid or contributed by the banking
entity in connection with acquiring or retaining an ownership interest
in covered funds (together with any amounts paid by the entity in
connection with obtaining a restricted profit interest under Sec.
255.10(d)(6)(ii)), on a historical cost basis;
    (ii) Treatment of employee and director restricted profit interests
financed by the banking entity. For purposes of paragraph (c)(1)(i) of
this section, an investment by a director or employee of a banking
entity who acquires a restricted profit interest in his or her personal
capacity in a covered fund sponsored by the banking entity will be
attributed to the banking entity if the banking entity, directly or
indirectly, extends financing for the purpose of enabling the director
or employee to acquire the restricted profit interest in the fund and
the financing is used to acquire such ownership interest in the covered
fund.
* * * * *
    (d) Capital treatment for a permitted investment in a covered fund.
For purposes of calculating compliance with the applicable regulatory
capital requirements, a banking entity shall deduct from the banking
entity's tier 1 capital (as determined under paragraph (c)(2) of this
section) the greater of:
    (1)(i) The sum of all amounts paid or contributed by the banking
entity in connection with acquiring or retaining an ownership interest
(together with any amounts paid by the entity in connection with
obtaining a restricted profit interest under Sec.  255.10(d)(6)(ii) of
subpart C of this part), on a historical cost basis, plus any earnings
received; and
    (ii) The fair market value of the banking entity's ownership
interests in the covered fund as determined under paragraph (b)(2)(ii)
or (b)(3) of this section (together with any amounts paid by the entity
in connection with obtaining a restricted profit interest under Sec.
255.10(d)(6)(ii) of subpart C of this part), if the banking entity
accounts for the profits (or losses) of the fund investment in its
financial statements.
    (2) Treatment of employee and director restricted profit interests
financed by the banking entity. For purposes of paragraph (d)(1) of
this section, an investment by a director or

employee of a banking entity who acquires a restricted profit interest
in his or her personal capacity in a covered fund sponsored by the
banking entity will be attributed to the banking entity if the banking
entity, directly or indirectly, extends financing for the purpose of
enabling the director or employee to acquire the restricted profit
interest in the fund and the financing is used to acquire such
ownership interest in the covered fund.
    (e) Extension of time to divest an ownership interest. (1)
Extension period. Upon application by a banking entity, the Board may
extend the period under paragraph (a)(2)(i) of this section for up to 2
additional years if the Board finds that an extension would be
consistent with safety and soundness and not detrimental to the public
interest.
    (2) Application requirements. An application for extension must:
    (i) Be submitted to the Board at least 90 days prior to the
expiration of the applicable time period;
    (ii) Provide the reasons for application, including information
that addresses the factors in paragraph (e)(3) of this section; and
    (iii) Explain the banking entity's plan for reducing the permitted
investment in a covered fund through redemption, sale, dilution or
other methods as required in paragraph (a)(2) of this section.
    (3) Factors governing the Board determinations. In reviewing any
application under paragraph (e)(1) of this section, the Board may
consider all the facts and circumstances related to the permitted
investment in a covered fund, including:
    (i) Whether the investment would result, directly or indirectly, in
a material exposure by the banking entity to high-risk assets or high-
risk trading strategies;
    (ii) The contractual terms governing the banking entity's interest
in the covered fund;
    (iii) The date on which the covered fund is expected to have
attracted sufficient investments from investors unaffiliated with the
banking entity to enable the banking entity to comply with the
limitations in paragraph (a)(2)(i) of this section;
    (iv) The total exposure of the covered banking entity to the
investment and the risks that disposing of, or maintaining, the
investment in the covered fund may pose to the banking entity and the
financial stability of the United States;
    (v) The cost to the banking entity of divesting or disposing of the
investment within the applicable period;
    (vi) Whether the investment or the divestiture or conformance of
the investment would involve or result in a material conflict of
interest between the banking entity and unaffiliated parties, including
clients, customers, or counterparties to which it owes a duty;
    (vii) The banking entity's prior efforts to reduce through
redemption, sale, dilution, or other methods its ownership interests in
the covered fund, including activities related to the marketing of
interests in such covered fund;
    (viii) Market conditions; and
    (ix) Any other factor that the Board believes appropriate.
    (4) Authority to impose restrictions on activities or investment
during any extension period. The Board may impose such conditions on
any extension approved under paragraph (e)(1) of this section as the
Board determines are necessary or appropriate to protect the safety and
soundness of the banking entity or the financial stability of the
United States, address material conflicts of interest or other unsound
banking practices, or otherwise further the purposes of section 13 of
the BHC Act and this part.
    (5) Consultation. In the case of a banking entity that is primarily
regulated by another Federal banking agency, the SEC, or the CFTC, the
Board will consult with such agency prior to acting on an application
by the banking entity for an extension under paragraph (e)(1) of this
section.

0
33. Amend Sec.  255.13 by adding paragraph (d) to read as follows:

Sec.  255.13   Other permitted covered fund activities and investments.

* * * * *
    (d) Permitted covered fund activities and investments of qualifying
foreign excluded funds. (1) The prohibition contained in Sec.
255.10(a) does not apply to a qualifying foreign excluded fund.
    (2) For purposes of this paragraph (d), a qualifying foreign
excluded fund means a banking entity that:
    (i) Is organized or established outside the United States, and the
ownership interests of which are offered and sold solely outside the
United States;
    (ii)(A) Would be a covered fund if the entity were organized or
established in the United States, or
    (B) Is, or holds itself out as being, an entity or arrangement that
raises money from investors primarily for the purpose of investing in
financial instruments for resale or other disposition or otherwise
trading in financial instruments;
    (iii) Would not otherwise be a banking entity except by virtue of
the acquisition or retention of an ownership interest in, sponsorship
of, or relationship with the entity, by another banking entity that
meets the following:
    (A) The banking entity is not organized, or directly or indirectly
controlled by a banking entity that is organized, under the laws of the
United States or of any State; and
    (B) The banking entity's acquisition of an ownership interest in or
sponsorship of the fund by the foreign banking entity meets the
requirements for permitted covered fund activities and investments
solely outside the United States, as provided in Sec.  255.13(b);
    (iv) Is established and operated as part of a bona fide asset
management business; and
    (v) Is not operated in a manner that enables the banking entity
that sponsors or controls the qualifying foreign excluded fund, or any
of its affiliates, to evade the requirements of section 13 of the BHC
Act or this part.

0
34. Amend Sec.  255.14 by:
0
a. Revising paragraph (a)(2)(i);
0
b. Revising paragraph (a)(2)(ii)(C);
0
c. Adding paragraphs (a)(2)(iii), (iv), (v), and (3); and
0
d. Revising paragraph (c).
    The revisions and additions read as follows:

Sec.  255.14   Limitations on relationships with a covered fund.

    (a) * * *
    (2) * * *
    (i) Acquire and retain any ownership interest in a covered fund in
accordance with the requirements of Sec. Sec.  255.11, 255.12, or
255.13;
    (ii) * * *
    (C) The Board has not determined that such transaction is
inconsistent with the safe and sound operation and condition of the
banking entity; and
    (iii) Enter into a transaction with a covered fund that would be an
exempt covered transaction under 12 U.S.C. 371c(d) or Sec.  223.42 of
the Board's Regulation W (12 CFR 223.42) subject to the limitations
specified under 12 U.S.C. 371c(d) or Sec.  223.42 of the Board's
Regulation W (12 CFR 223.42), as applicable,
    (iv) Enter into a riskless principal transaction with a covered
fund; and
    (v) Extend credit to or purchase assets from a covered fund,
provided:
    (A) Each extension of credit or purchase of assets is in the
ordinary course of business in connection with payment transactions;
settlement services; or futures, derivatives, and securities clearing;
    (B) Each extension of credit is repaid, sold, or terminated by the
end of five business days; and
    (C) The banking entity making each extension of credit meets the
requirements of Sec.  223.42(l)(1)(i) and (ii) of the Board's
Regulation W (12 CFR

223.42(l)(1)(i) and(ii)), as if the extension of credit was an intraday
extension of credit, regardless of the duration of the extension of
credit.
    (3) Any transaction or activity permitted under paragraphs
(a)(2)(iii), (iv) or (v) must comply with the limitations in Sec.
255.15.
* * * * *
    (c) Restrictions on other permitted transactions. Any transaction
permitted under paragraphs (a)(2)(ii), (iii), or (iv) of this section
shall be subject to section 23B of the Federal Reserve Act (12 U.S.C.
371c-1) as if the counterparty were an affiliate of the banking entity
under section 23B.

Subpart D--Compliance Program Requirements; Violations

0
35. Amend Sec.  255.20 by:
0
a. Revising paragraph (a);
0
b. Revising the heading of paragraph (d) and revising paragraph (d)(1);
and
0
c. Revising the introductory text of paragraph (e).
    The revisions and addition read as follows:

Sec.  255.20   Program for compliance; reporting.

    (a) Program requirement. Each banking entity (other than a banking
entity with limited trading assets and liabilities or a qualifying
foreign excluded fund under section 255.6(f) or 255.13(d)) shall
develop and provide for the continued administration of a compliance
program reasonably designed to ensure and monitor compliance with the
prohibitions and restrictions on proprietary trading and covered fund
activities and investments set forth in section 13 of the BHC Act and
this part. The terms, scope, and detail of the compliance program shall
be appropriate for the types, size, scope, and complexity of activities
and business structure of the banking entity.
* * * * *
    (d) Reporting requirements under appendix A to this part. (1) A
banking entity (other than a qualifying foreign excluded fund under
section 255.6(f) or 255.13(d)) engaged in proprietary trading activity
permitted under subpart B shall comply with the reporting requirements
described in appendix A to this part, if:
* * * * *
    (e) Additional documentation for covered funds. A banking entity
with significant trading assets and liabilities (other than a
qualifying foreign excluded fund under section 255.6(f) or 255.13(d))
shall maintain records that include:
* * * * *

Brian P. Brooks,
Acting Comptroller of the Currency.

    By order of the Board of Governors of the Federal Reserve
System.
Ann E. Misback,
Secretary of the Board.

Federal Deposit Insurance Corporation.

    By order of the Board of Directors.

    Dated at Washington, DC, on or about June 25, 2020.
James P. Sheesley,
Acting Assistant Executive Secretary.

    Issued in Washington, DC, on June 25, 2020 by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.

    By the Securities and Exchange Commission.

Vanessa A. Countryman,
Secretary.

    Note:  The following appendices will not appear in the Code of
Federal Regulations.

Appendices to Prohibitions and Restrictions on Proprietary Trading and
Certain Interests in, and Relationships With, Hedge Funds and Private
Equity Funds--CFTC Voting Summary and CFTC Commissioners' Statements

Appendix 1--CFTC Voting Summary

    On this matter, CFTC Chairman Tarbert and Commissioners Quintenz
and Stump voted in the affirmative. CFTC Commissioners Behnam and
Berkovitz voted in the negative. The document submitted to the CFTC
Commissioners for a vote did not include Section V.F. SEC Economic
Analysis.

Appendix 2--Supporting Statement of CFTC Chairman Heath P. Tarbert

    As I have previously remarked, the Volcker Rule is ``among the
most well-intentioned but poorly designed regulations in the history
of American finance.'' \1\ While today's final rule does not fix the
fundamental flaws of the Volcker Rule \2\--only congressional action
can do that--it at least represents a more accurate reading of the
law Congress actually passed and brings us a step closer to a
reasonable implementation of the rule.\3\
---------------------------------------------------------------------------

    \1\ See Statement of Chairman Heath P. Tarbert in Support of
Revisions to the Volcker Rule (Sept. 16, 2019), https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement091619.
    \2\ See, e.g., Economic Growth, Regulatory Relief, and Consumer
Protection Act, Public Law No: 115-174 (May 24, 2018) (amending
section 13 of the Bank Holding Company Act by narrowing the
definition of ``banking entity'' in the Volcker Rule to exclude
certain community banks).
    \3\ See Statement of Chairman Heath P. Tarbert in Support of
Further Revisions to the Volcker Rule (Jan. 30, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement013020b.
---------------------------------------------------------------------------

    Specifically, the Volcker Rule will now no longer be applied to
investments Congress never intended to be included in the first
place, such as credit funds, venture capital funds, customer
facilitation vehicles, and family wealth management vehicles. The
final rule also contains important modifications to several existing
exclusions from the prohibition on activities related to private
equity and hedge funds (the ``covered funds'' provisions)--for
foreign public funds, loan securitizations, and small business
investment companies. In these ways, the final rule begins to
address the over-breadth of the covered funds definition and related
requirements.
    I am therefore pleased to support adoption of the proposed
revisions to the Volcker Rule's covered funds provisions. While only
a modest step forward, these refinements will nonetheless enhance
the regulatory experience and provide clarity for market
participants who have struggled to comply with the Volcker Rule.

Appendix 3--Dissenting Statement of CFTC Commissioner Rostin Behnam

    I respectfully dissent as to the Commission's decision to
finalize additional revisions to the Volcker Rule. As we approach
the ten year anniversary of the Dodd-Frank Act,\1\ and cautiously
begin mapping a path out of the current pandemic, I believe it is a
good time to reflect on the lessons learned from the 2008 financial
crisis, the efficacy of our responses, and whether our objectives
have changed, or just our perspective. One of the many critically
important provisions of the Dodd-Frank Act is the Volcker Rule. The
Volcker Rule, in simple terms, contains two basic prohibitions: (1)
Banking entities may not engage in proprietary trading; and (2)
banking entities cannot have an ownership interest in, sponsor, or
have certain relationships with a covered fund.
---------------------------------------------------------------------------

    \1\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010).
---------------------------------------------------------------------------

    Last September, the Commission, along with other Federal
agencies (the ``Agencies''),\2\ approved changes that significantly
weakened the prohibition on propriety trading by narrowing the scope
of financial instruments subject to the Volcker Rule.\3\ I did not
support those changes.\4\ Today, the Commission, again in tandem
with the Agencies, completes the dismantling that began in 2018,\5\
and votes to significantly weaken the prohibition on ownership of

covered funds. Again, I cannot support these changes.
---------------------------------------------------------------------------

    \2\ The Office of the Comptroller of the Currency, Treasury; the
Board of Governors of the Federal Reserve System; the Federal
Deposit Insurance Corporation; and the Securities and Exchange
Commission.
    \3\ Prohibitions and Restrictions on Proprietary Trading and
Certain Interests in, and Relationships With, Hedge Funds and
Private Equity Funds, 84 FR 61974 (Nov. 14, 2019).
    \4\ Id. at 62275.
    \5\ See Prohibitions and Restrictions on Proprietary Trading and
Certain Interests in, and Relationships With, Hedge Funds and
Private Equity Funds, 83 FR 33432 (proposed July 17, 2018).
---------------------------------------------------------------------------

    I voted against the 2018 proposal, and earlier this year, voted
against the proposal that strikes the final blow today.\6\ In voting
against the 2020 proposal, I quoted the late Paul Volcker's letter
to the Chairman of the Federal Reserve, which he penned last
September, when the Agencies approved the changes breaking down the
proprietary trading prohibition.\7\ Mr. Volcker warned that the
amended rule ``amplifies risk in the financial system, increases
moral hazard and erodes protections against conflicts of interest
that were so glaringly on display during the last crisis.'' \8\ Mr.
Volcker's words apply equally well to the changes that the
Commission finalizes today regarding covered funds--particularly the
erosion of the existing protections regarding conflicts of interest.
---------------------------------------------------------------------------

    \6\ Prohibitions and Restrictions on Proprietary Trading and
Certain Interests in, and Relationships With, Hedge Funds and
Private Equity Funds, 85 FR 12120, 12204 (proposed Feb. 28, 2020).
    \7\ Id.
    \8\ Jesse Hamilton and Yalman Onaran, ``Volcker the Man Blasts
Volcker the Rule in Letter to Fed Chair,'' Bloomberg (Sep. 10,
2019), https://www.bloomberg.com/news/articles/2019-09-10/volcker-the-man-blasts-volcker-the-rule-in-letter-to-fed-chair.
---------------------------------------------------------------------------

    As the tenth anniversary of the Dodd-Frank Act sadly coincides
with a different kind of crisis, I think it is critical to take a
hard look at how far we have come in ten years, and how well markets
have adapted to carefully crafted policy intended to create a more
resilient financial system. Chipping away, particularly at a time of
great uncertainty, risks a reversion to the past, when in fact, we
should only be looking forward.

Appendix 4--Dissenting Statement of CFTC Commissioner Dan M. Berkovitz

    The Volcker covered funds final release (``Covered Funds Rule'')
adopts with only minor changes the rule amendments as proposed by
the agencies in January of this year (``the Proposal''). I voted
against \1\ the Proposal because the agencies had only superficially
considered the additional risks that banks would incur under the
loosened regulations. Nothing in the Covered Funds Rule final
release dispels this concern. Therefore I dissent from the final
release.
---------------------------------------------------------------------------

    \1\ Dissenting Statement of Commissioner Dan M. Berkovitz
Regarding Volcker Covered Funds Proposal (Jan. 30, 2020), available
at: https://www.cftc.gov/PressRoom/SpeechesTestimony/berkovitzstatement013020.
---------------------------------------------------------------------------

    Congress enacted the original Volcker rule after the 2008
financial crisis to protect American taxpayers from again having to
bailout banks that are insured by the FDIC or have access to Federal
Reserve Bank financial support. This goal was to be achieved by
preventing the government-supported banks from undertaking risky
proprietary trading activities and from owning hedge funds or
private equity funds. The new Covered Funds Rule, together with the
rollbacks in the Volcker proprietary trading regulations adopted in
2019,\2\ will undermine many of the risk-reducing benefits of the
original Volcker rule.
---------------------------------------------------------------------------

    \2\ Prohibitions and Restrictions on Proprietary Trading and
Certain Interests in, and Relationships with, Hedge Funds and
Private Equity Funds, 84 FR 61974 (Nov. 14, 2019).
---------------------------------------------------------------------------

    The original Volcker covered funds regulations were not perfect.
The foreign public funds exception and the so called ``super 23A''
provisions governing activities banks can undertake with covered
funds needed careful adjustments. However, the Covered Funds Rule
goes much, much further. It creates broad new exclusions from the
covered funds definition with inadequate analysis as to whether
these activities were intended to be permitted under the statute or
pose serious risk to the banks and the United States financial
system.
    I addressed some of these new exclusions in more detail in my
dissenting statement on the Proposal.\3\ Of these, the new ``venture
capital funds'' exclusion perhaps best illustrates the extent to
which the Covered Funds Rule undermines the very purpose of the
Volcker rule. Venture capital serves an important function in our
financial markets by providing needed capital to startup companies.
But venture capital investing is very risky. One study found that
about 75% of venture capital-backed firms in the United States did
not return capital to investors.\4\ Another article on venture
capital noted that ``VC funds haven't significantly outperformed the
public markets since the late 1990s, and since 1997 less cash has
been returned to VC investors than they have invested.'' \5\ This is
exactly the type of risky private equity fund \6\ investing by
government-supported banks that Congress intended the Volcker rule
to curtail.
---------------------------------------------------------------------------

    \3\ Supra footnote 1.
    \4\ Deborah Gage, The Venture Capital Secret: 3 out of 4 Start-
Ups Fail, Wall Street Journal (Sept. 20, 2012) (citing research by
Shikhar Ghosh, a senior lecturer at Harvard Business School),
available at https://www.wsj.com/articles/SB10000872396390443720204578004980476429190.
    \5\ Diane Mulcahy, Six Myths About Venture Capitalists, Harvard
Business Review (May 2013), available at https://hbr.org/2013/05/six-myths-about-venture-capitalists.
    \6\ Interestingly, while the Proposal acknowledged that venture
capital funds are a subset of private equity funds for purposes of
Volcker, in the preamble to the Covered Funds Rule, the agencies
provide a tortured, speculative analysis of statutory construction
trying to explain that Congress ``may'' have meant to exclude
venture capital funds, despite no real evidence to that effect. To
the contrary, three of the four statements from members of Congress
in the legislative record cited in the Covered Funds Rule clearly
show that they assumed that venture capital funds are private equity
funds under the Volcker rule. See Covered Funds Rule, section
IV.C.2.i.
---------------------------------------------------------------------------

    In adopting the Covered Funds Rule, the agencies failed to
analyze any data or other information that lays out the risks of
venture capital investing. The agencies simply exclude venture
capital funds from Volcker regulation. The Covered Funds Rule makes,
at best, a weak case that venture capital investments promote and
protect the safety and soundness of banking entities and the United
States financial system by allowing banks to diversify investments.
The weakness of that assertion is clear when one considers that
allowing any investments in hedge funds and private equity funds
would do the same, and yet that risk taking activity is precisely
what Congress prohibited.
    The banking industry does not need to take on the additional
risks permitted by the Covered Funds Rule to be successful. U.S.
banks have performed well in recent years. Recent Global League
Tables ranking global banks by amount of banking business activity
shows that three or four U.S. banks are ranked among the top five
banks in the world in almost every table, including the tables for
foreign markets banking.\7\ While many factors impact banking
success, the relative strength of U.S. banks internationally belies
suggestions that the new laws and regulations adopted in the wake of
the 2008 financial crisis are hurting the competitiveness of U.S.
banks. We should recognize, rather than undermine, the success of
U.S. banks since the 2008 financial crisis and adoption of the Dodd-
Frank Act in 2010.
---------------------------------------------------------------------------