\134\ See Association for Corporate Growth and FI.
    \135\ See e.g., ABA; NVCA; AIC; CCMC; and Committee on Capital
Markets Regulation.
---------------------------------------------------------------------------

    As discussed in detail below, the agencies are proposing to exclude
from the definition of ``covered fund'' qualifying venture capital
funds. The proposal would define a qualifying venture capital fund as
an issuer that:
     Is a venture capital fund as defined in 17 CFR 275.203(l)-
1; and
     Does not engage in any activity that would constitute
proprietary trading, under Sec.  _.3(b)(1)(i), as if it were a banking
entity.
    With respect to any banking entity that acts as a sponsor,
investment adviser, or commodity trading advisor to the issuer, the
banking entity would be required to:
     Provide in writing to any prospective and actual investor
the disclosures required under Sec.  _.11(a)(8), as if the issuer were
a covered fund; and
     Ensure 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.
    In addition, a banking entity that relies on this exclusion would
not, directly or indirectly, be permitted to guarantee, assume, or
otherwise insure the obligations or performance of the issuer. Finally,
the proposed exclusion would require a banking entity's ownership
interest in or relationship with a qualifying venture capital fund to:
     Comply with the limitations imposed in Sec.  _.14 (except
the banking entity may acquire and retain any ownership interest in the
issuer) and Sec.  _.15 of the implementing regulations, as if the
issuer were a covered fund; and
     Be conducted in compliance with, and subject to,
applicable banking laws and regulations, including applicable safety
and soundness standards.
    These requirements are intended to ensure that banking entity
investments in qualifying venture capital funds are consistent with the
purposes of section 13 of the BHC Act. First, a qualifying venture
capital fund must be a venture capital fund as defined in 17 CFR
275.203(l)-1. The SEC has defined ``venture capital fund'' as any
private fund \136\ that:
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    \136\ For purposes of 17 CFR 275.203(l)-1, ``private fund'' is
defined as ``an issuer that would be an investment company, as
defined in section 3 of the Investment Company Act of 1940, but for
section 3(c)(1) or 3(c)(7) of that Act.'' 15 U.S.C. 80b-2(a)(29).
---------------------------------------------------------------------------

     Represents to investors and potential investors that it
pursues a venture capital strategy;
     Immediately after the acquisition of any asset, other than
qualifying investments or short-term holdings, holds no more than 20
percent of the amount of the fund's aggregate capital contributions and
uncalled committed capital in assets (other than short-term holdings)
that are not qualifying investments, valued at cost or fair value,
consistently applied by the fund;
     Does not borrow, issue debt obligations, provide
guarantees or otherwise incur leverage, in excess of 15 percent of the
private fund's aggregate capital contributions and uncalled committed
capital, and any such borrowing, indebtedness, guarantee or leverage is
for a non-renewable term of no longer than 120 calendar days, except
that any guarantee by the private fund of a qualifying portfolio
company's obligations up to the amount of the value of the private
fund's investment in the qualifying portfolio company is not subject to
the 120 calendar day limit;
     Only issues securities the terms of which do not provide a
holder with any right, except in extraordinary circumstances, to
withdraw, redeem or require the repurchase of such securities but may
entitle holders to receive distributions made to all holders pro rata;
and
     Is not registered under section 8 of the Investment
Company Act of 1940 . . . , and has not elected to be treated as a
business development company pursuant to section 54 of that Act . . .
.\137\
---------------------------------------------------------------------------

    \137\ 17 CFR 275.203(l)-1(a).
---------------------------------------------------------------------------

    ``Qualifying investment'' is defined in the SEC's regulation to be:
(1) An equity security issued by a qualifying portfolio company that
has been acquired directly by the private fund from the qualifying
portfolio company; (2) any equity security issued by a qualifying
portfolio company in exchange for an equity security issued by the
qualifying portfolio company described in (1); or (3) any equity
security issued by a company of which a qualifying portfolio company is
a majority-owned subsidiary, as defined in section 2(a)(24) of the
Investment Company Act, or a predecessor, and is acquired by the
private fund in exchange for an equity security described in (1) or
(2).\138\
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    \138\ 17 CFR 275.203(l)-1(c)(3).
---------------------------------------------------------------------------

    ``Qualifying portfolio company,'' in turn, is defined in the SEC's
regulation to be a company that: (1) At the time of any investment by
the private fund, is not reporting or foreign traded and does not
control, is not controlled by or under common control with another
company, directly or indirectly, that is reporting or foreign traded;
(2) does not borrow or issue debt obligations in connection with the
private fund's investment in such company and distribute to the private
fund the proceeds of such borrowing or issuance in exchange for the
private fund's investment; and (3) is not an investment company, a
private fund, an issuer that would be an investment company but for the
exemption provided by 17 CFR 270.3a-7, or a commodity pool.\139\ The
SEC explained that the definitions of ``qualifying investment'' and
``qualifying portfolio company'' reflect the typical characteristics of
investments made by venture capital funds and that these

definitions work together to cabin the definition of venture capital
fund to only the funds that Congress understood to be venture capital
funds during the passage of the Dodd-Frank Act.\140\
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    \139\ 17 CFR 275.203(l)-1(c)(4).
    \140\ See Exemptions for Advisers to Venture Capital Funds,
Private Fund Advisers With Less Than $150 Million in Assets Under
Management, and Foreign Private Advisers, 76 FR 39646, 39657 (Jul.
6, 2011).
---------------------------------------------------------------------------

    In the preamble to the regulations adopting this definition of
venture capital fund, the SEC explained that the definition's criteria
distinguish venture capital funds from other types of funds, including
private equity funds and hedge funds. For example, the SEC explained
that it understood the criteria for ``qualifying portfolio companies''
to be characteristic of issuers of portfolio securities held by venture
capital funds and, taken together, would operate to exclude most
private equity funds and hedge funds from the venture capital fund
definition.\141\ The SEC also explained that the criteria for
``qualifying investments'' under the SEC's regulation would help to
differentiate venture capital funds from other types of private funds,
such as leveraged buyout funds.\142\ Moreover, the SEC explained that
these criteria reflect the Congressional understanding that venture
capital funds are less connected with the public markets and therefore
may have less potential for systemic risk.\143\ The SEC further
explained that its regulation's restriction on the amount of borrowing,
debt obligations, guarantees or other incurrence of leverage was
appropriate to differentiate venture capital funds from other types of
private funds that may engage in trading strategies that use financial
leverage and may contribute to systemic risk.\144\
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    \141\ 76 FR 39656.
    \142\ See, e.g., 76 FR 39653 (explaining that a limitation on
secondary market purchases of a qualifying portfolio company's
shares would recognize ``the critical role this condition played in
differentiating venture capital funds from other types of private
funds'').
    \143\ 76 FR 39648 (``[T]he proposed definition of venture
capital fund was designed to . . . address concerns expressed by
Congress regarding the potential for systemic risk.''); 76 FR 39656
(``Congressional testimony asserted that these funds may be less
connected with the public markets and may involve less potential for
systemic risk. This appears to be a key consideration by Congress
that led to the enactment of the venture capital exemption. As we
discussed in the Proposing Release, the rule we proposed sought to
incorporate this Congressional understanding of the nature of
investments of a venture capital fund, and these principles guided
our consideration of the proposed venture capital fund
definition.'').
    \144\ 76 FR 39662. See also 76 FR 39657 (``We proposed these
elements of the qualifying portfolio company definition because of
the focus on leverage in the Dodd-Frank Act as a potential
contributor to systemic risk as discussed by the Senate Committee
report, and the testimony before Congress that stressed the lack of
leverage in venture capital investing.'').
---------------------------------------------------------------------------

    The agencies believe the SEC's rationale for adopting this
definition of venture capital fund could also support using this
definition as the foundation for an exclusion from the definition of
``covered fund.'' First, this definition helps to distinguish the
investment activities of venture capital funds from those of hedge
funds and private equity funds, which was one of the agencies' primary
concerns in declining to adopt an exclusion for venture capital funds
in the 2013 rule. Second, this definition includes criteria reflecting
the characteristics of venture capital funds that the agencies believe
may pose less potential risk to a banking entity sponsoring or
investing in venture capital funds and to the financial system--
specifically, the smaller role of leverage financing and a lesser
degree of interconnectedness with public markets.\145\ These
characteristics would help to address the concern expressed in the
preamble to the 2013 rule that the activities and risk profiles for
banking entities regarding sponsorship of, and investment in, venture
capital fund activities are not readily distinguishable from those
funds that section 13 of the BHC Act was intended to capture.
---------------------------------------------------------------------------

    \145\ See supra notes 106 and 107.
---------------------------------------------------------------------------

    While the SEC's regulatory definition in 17 CFR 275.203(l)-1 would
form the base of the proposed exclusion for qualifying venture capital
funds, the proposed exclusion includes additional criteria that would
help promote the specific purposes of section 13 of the BHC Act. In
particular, a qualifying venture capital fund would not be permitted to
engage in any activity that would constitute proprietary trading under
Sec.  _.3(b)(1)(i) as if the fund were a banking entity. This
requirement would promote one of the purposes of the covered fund
provisions in section 13 of the BHC Act, which was to prevent banking
entities from circumventing the proprietary trading prohibition through
fund investments.\146\ Under this requirement, a qualifying venture
capital fund could not engage in any activities that are principally
for the purpose of short-term resale, benefitting from actual or
expected short-term price movements, realizing short-term arbitrage
profits, or hedging one or more of the positions resulting from such
purchases or sales.
---------------------------------------------------------------------------

    \146\ See, e.g., Treasury Report at 77 and FSOC Report at 6.
---------------------------------------------------------------------------

    The agencies are considering an additional restriction for which
they are seeking specific comment. Under this additional restriction,
and notwithstanding 17 CFR 275.203(l)-1(a)(2), the venture capital fund
exclusion would be limited to funds that do not invest in companies
that, at the time of the investment, have more than a limited dollar
amount of total annual revenue, calculated as of the last day of the
calendar year. The agencies are considering what specific threshold
would be appropriate. For example, the agencies are considering whether
a limit of $50 million in annual revenue would be appropriate, or
whether a higher or lower limit would help to appropriately
differentiate venture capital funds from the types of funds that
section 13 of the BHC Act was intended to address.
    A banking entity that serves as a sponsor, investment adviser, or
commodity trading advisor to a qualifying venture capital fund would be
required to provide the disclosures required under Sec.  _.11 (a)(8) to
prospective and actual investors in the fund. In addition, any banking
entity that relies on the exclusion would not be permitted to, directly
or indirectly, guarantee, assume or otherwise insure the obligations or
performance of the qualifying venture capital fund. These requirements
would promote yet another goal of section 13 of the BHC Act, which was
to prevent banking entities from bailing out funds that they sponsor or
advise.\147\
---------------------------------------------------------------------------

    \147\ See Treasury Report at 77 and FSOC Report at 6.
---------------------------------------------------------------------------

    A banking entity that serves as a sponsor, investment adviser, or
commodity trading advisor to a qualifying venture capital fund also
must ensure the fund's activities 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.
Therefore, a banking entity could not rely on this exclusion to sponsor
an investment fund that exposes the banking entity to the type of high-
risk trading and investment activities that the covered fund provisions
of section 13 of the BHC Act were intended to restrict. Further, a
banking entity's investment in or relationship with a qualifying
venture capital fund would be subject to Sec.  _14 (except the banking
entity may acquire and retain any ownership interest in the fund in
accordance with the terms of the exclusion) and Sec.  _.15 of the
implementing regulations, as if the fund were a covered fund. These
limitations would help to ensure that the risk a banking entity takes
on as a result of its investment in or relationship with a qualifying
venture capital fund remains appropriately limited. Like the

restrictions on guarantees described above, applying the requirements
in Sec.  _.14 would restrict a banking entity that sponsors or advises
the fund from providing additional support or bailing out the fund.
Applying the requirements in Sec.  _.15 would ensure that the fund does
not expose the banking entity to high-risk assets or high-risk trading
strategies. In particular, to the extent a fund would expose a banking
entity to a high-risk asset or high-risk trading strategy (or otherwise
engage in proprietary trading), the fund would not be a qualifying
venture capital fund. Therefore, prior to making an investment in a
qualifying venture capital fund, a banking entity would need to ensure
that the fund's investment mandate and strategy would satisfy the
requirements of Sec.  _.15. In addition, a banking entity would need to
monitor the activities of a qualifying venture capital fund to ensure
it satisfies these requirements on an ongoing basis.
    The agencies believe that qualifying venture capital funds meeting
each of these requirements would not raise the type of concerns that
were the target of section 13 of the BHC Act. The proposed exclusion,
including incorporation of the SEC's regulatory venture capital fund
definition in 17 CFR 275.203(l)-1, should also address the concerns the
agencies expressed in the preamble to the 2013 rule that the activities
and risk profiles for banking entities regarding sponsorship of, and
investment in, venture capital funds are not readily distinguishable
from those of funds that section 13 of the BHC Act was intended to
capture. Accordingly, the agencies believe the foregoing requirements
could give effect to the language and purpose of section 13 of the BHC
Act without allowing banking entities to evade the requirements of
section 13. The agencies further believe that permitting banking
entities to invest in and have certain relationships with qualifying
venture capital funds would be consistent with statements by Members of
Congress that were made contemporaneously with passage of the Dodd-
Frank Act.\148\
---------------------------------------------------------------------------

    \148\ See supra note 110.
---------------------------------------------------------------------------

    The agencies believe that properly-conducted activities involving
these types of venture capital funds could promote and protect the
safety and soundness of banking entities and the financial stability of
the United States. Qualifying venture capital funds could allow banking
entities to diversify their permissible investment activities, and like
other exclusions provided in the 2013 rule, allow banking entities to
share the costs and risks of their permissible investment activities
with third-party investors.\149\ Investments in qualifying venture
capital funds could allow banking entities to allocate available
resources to a more diverse array of long-term investments in a broader
range of geographic areas, industries and sectors than the banking
entity may be able to access directly.
---------------------------------------------------------------------------

    \149\ 79 FR 5681.
---------------------------------------------------------------------------

    Banking entity investments in qualifying venture capital funds may
benefit the broader financial system by improving the flow of financing
to small businesses and start-ups and thus may promote and protect the
financial stability of the United States. Permitting these types of
investments would be consistent with the Treasury Department's June
2017 report, which said such fund investments ``can greatly assist in
the formation of venture and other capital that is critical to fund
economic growth opportunities.'' \150\ Similarly, the agencies
recognized the economic benefits of allowing banking entities to make
venture capital-style investments in the preamble to the 2013 rule,
despite not adopting an exclusion for such funds.\151\ Further, it is
possible that permitting banking entities to extend financing to
businesses through qualifying venture capital funds would allow banking
entities to compete more effectively with non-banking entities that are
not subject to the same prudential regulation or supervision as banking
entities subject to section 13 of the BHC Act. In this respect, the
proposal could allow a larger volume of permissible banking and
financial activities to occur in the regulated banking system.
---------------------------------------------------------------------------

    \150\ Treasury Report at 77.
    \151\ 79 FR 5704 (``While the final rule does not provide a
separate exclusion for venture capital funds from the definition of
covered fund, the [a]gencies recognize that certain venture capital
investments by banking entities provide capital and funding to
nascent or early-stage companies and small businesses and also may
provide these companies expertise and services. Other provisions of
the final rule or the statute may facilitate, or at least not
impede, other forms of investing that may provide the same or
similar benefits.'') (emphasis added).
---------------------------------------------------------------------------

    In addition, it is widely noted that the availability of venture
and other financing from funds is not uniform throughout the United
States. In particular, it is noted that such funding is generally
available on a competitive basis for companies with a significant
presence in certain geographic regions (e.g., the New York metropolitan
area, the Boston metropolitan area and ``Silicon Valley'' and
surrounding areas).\152\ In this respect, the proposal could allow
banking entities with a presence in and knowledge of the areas where
venture capital and other types of financing are less readily available
to businesses to provide this type of financing in those areas.
---------------------------------------------------------------------------

    \152\ See, e.g., Richard Florida, Venture Capital Remains Highly
Concentrated in Just a Few Cities, CityLab (Oct. 3, 2017), available
at https://www.citylab.com/life/2017/10/venture-capital-concentration/539775/; PricewaterhouseCoopers & CB Insights,
MoneyTree Report (Q3 2019), available at: https://www.pwc.com/us/en/moneytree-report/assets/moneytree-report-q3-2019.pdf.
---------------------------------------------------------------------------

    For all of these reasons, the agencies believe the proposal could
promote the benefits of long-term investment that the agencies and
Members of Congress have previously recognized, while also addressing
the concerns that were the target of the funds prohibition in section
13 of the BHC Act. The agencies are seeking comment on whether to
exclude other types of funds that, like qualifying venture capital
funds, provide important capital to businesses through long-term
investments and do not engage in proprietary trading and other
activities that section 13 of the BHC Act was intended to prohibit.
    The agencies are requesting comment on the proposal to exclude
qualifying venture capital funds from the covered fund definition, in
particular:
    Question 39. Is the proposed exclusion for qualifying venture
capital funds appropriate? Why or why not?
    Question 40. Does the proposed exclusion for qualifying venture
capital funds include the appropriate vehicles? Why or why not? If not,
how should the agencies expand or narrow the vehicles for which banking
entities would be permitted to make use of the exclusion? What
modifications to the proposed exclusion would be appropriate and why?
    Question 41. Are the proposed conditions on the proposed exclusion
for qualifying venture capital funds appropriate? Why or why not? If
not appropriate, how should the agencies modify the conditions, and
why?
    Question 42. Would permitting banking entities to invest in or
sponsor a qualifying venture capital fund promote and protect the
safety and soundness of banking entities and the financial stability of
the United States? What data is available to support an argument that
venture capital funds would or would not promote and protect the safety
and soundness of banking entities and the financial stability of the
United States?
    Question 43. Are the requirements for a qualifying venture capital
fund sufficient to distinguish these types of funds from covered funds?
Are there any additional standards or requirements that should apply to
a

qualifying venture capital fund? If so, what are they and why should
they apply?
    Question 44. Should the additional proposed revenue requirement be
added to the venture capital fund exclusion to help ensure that the
investments made by excluded venture capital funds are truly made in
small and early-stage companies? Why or why not? If the additional
restriction is added, is $50 million an appropriate annual revenue
limit? If not, what would be an appropriate revenue limit? Is there a
metric other than annual gross revenue, such as amount of time in
operation, that would serve as a better indicator of whether an
investment in a company should allow a venture capital fund to qualify
for the exclusion?
    Question 45. Should the proposed venture capital fund exclusion
require that 100 percent of the fund's holdings, other than short-term
holdings, be in qualifying investments instead of the 80 percent that
is required under 17 CFR 275.203(l)-1(a)(2)? Why or why not?
    Question 46. Are there provisions or conditions of the definition
under rule 203(l)-1 under the Advisers Act that are inappropriate for
purposes of determining an exclusion from the ``covered fund''
definition in Sec.  _.10? If so, please explain why the purposes of an
exclusion from the ``covered fund'' definition should lead the agencies
to exclude a provision or condition, such as paragraph (a)(2), of the
definition under rule 203(l)-1 under the Advisers Act.
    Question 47. How would a banking entity ensure the activities of a
qualifying venture capital fund are consistent with the safety and
soundness standards that apply to the banking entity? Are the standards
and requirements for a banking entity that acts as a sponsor,
investment adviser, or commodity trading advisor to a qualifying
venture capital fund appropriate to apply to a qualifying venture
capital fund? Are there any additional standards or requirements that
should apply to a banking entity that acts as a sponsor, investment
adviser, or commodity trading advisor to a qualifying venture capital
fund? If so, what are they, and why should they apply?
    Question 48. A banking entity that sponsors or advises a qualifying
venture capital fund would be required to comply with the limitations
imposed by Sec. Sec.  _.14 (except the banking entity may acquire and
retain any ownership interest in the issuer) and _.15 of the 2013 rule,
as if the qualifying venture capital fund were a covered fund. Is the
application of these sections to the proposed venture capital fund
exclusion appropriate? Why or why not?
    Question 49. Is it sufficiently clear what kind of assets or
investments would result in a conflict of interest or an exposure to a
high-risk asset or high-risk trading strategy in the context of a
qualifying venture capital fund? Should the agencies provide additional
parameters regarding the types of assets and strategies that could
result in such exposure in this context?
    Question 50. Should the agencies exclude from the definition of
covered fund, or otherwise permit the activities of, certain long-term
investment funds that would not be qualifying venture capital funds?
For example, should the agencies provide an exclusion for issuers (1)
that make long-term investments that a banking entity could make
directly, (2) that hold themselves out as entities or arrangements that
make investments that they intend to hold for a set minimum time
period, such as two years, (3) whose relevant offering and governing
documents reflect a long-term investment strategy, and (4) that meet
all other requirements of the proposed qualifying venture capital fund
exclusion (other than that the issuers would be venture capital funds
as defined in 17 CFR 275.203(l)-1)? Would the rationale for excluding
qualifying venture capital funds also extend to such long-term
investment funds? Why or why not? If the agencies were to adopt an
exclusion for long-term investment funds, should the agencies impose
safeguards on such an exclusion? If so, what safeguards should the
agencies impose, and why? Would such an exclusion promote and protect
the safety and soundness of the banking entity and the financial
stability of the United States? If so, how?
    Question 51. Is there evidence that the covered fund provisions
have caused banking entities to make more standalone direct balance
sheet investments? If so, have these investments increased or decreased
risk to banking entities?
    Question 52. Is there evidence that the covered fund provisions
have negatively impacted the provision of financing? If so, is this
impact non-uniform? For example, are effects more acute in certain
geographic areas or in certain industries? To the extent negative
effects are asymmetric by geography or otherwise, would the proposal
effectively address these asymmetries? Is there evidence that the
covered fund provisions have caused end-users to seek financing from
non-banking entities? If so, would the proposed exclusion for
qualifying venture capital funds help to address these impacts?
3. Family Wealth Management Vehicles
    The agencies are proposing to exclude from the definition of
``covered fund'' under Sec.  _.10(b) of the rule any entity that acts
as a ``family wealth management vehicle.'' The proposed family wealth
management vehicle exclusion would be available to an entity that: (1)
If organized as a trust, the grantor(s) of the entity are all family
customers and, (2) if not organized as a trust, a majority of the
voting interests in the entity are owned (directly or indirectly) by
family customers; and the entity is owned only by family customers and
up to 3 closely related persons of the family customers.\153\ In
response to the 2018 proposal, commenters raised concerns that family
wealth management vehicles were not specifically excluded from the
covered fund definition following the adoption of the 2013 rule or in
the 2018 proposed rule.\154\ Commenters stated that family wealth
management vehicles are typically designed to facilitate family wealth
management, estate planning, and other similar objectives and may take
a variety of legal forms, including trusts, limited liability
companies, limited partnerships, and other pooled investment
vehicles.\155\ Commenters further stated that absent an exclusion from
the covered fund definition, family wealth management vehicles could be
restricted from obtaining various types of ordinary course banking and
asset management services from a banking entity simply because they
would receive those services through a family wealth management
vehicle.\156\ Commenters provided examples of these services, including
investment advice, brokerage execution, financing, and clearance and
settlement services.\157\ A commenter also stated that family wealth
management vehicles structured as trusts for the benefit of family
members also often appoint banking entities, acting in a fiduciary
capacity, as trustees for the trusts.\158\
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    \153\ Under Sec.  _.10(c)(17)(iii)(A) of the proposed rule,
``closely related person'' would mean ``a natural person (including
the estate and estate planning vehicles of such person) who has a
longstanding business or personal relationship with any family
customer.''
    \154\ See e.g., ABA; BPI; IAA; and SIFMA. These commenters
stated that many family wealth management vehicles rely on the
exclusions provided by sections 3(c)(1) or 3(c)(7) of the Investment
Company Act and would therefore be covered funds unless they satisfy
the conditions for one of the 2013 rule's exclusions from the
covered fund definition.
    \155\ See e.g., IAA and SIFMA.
    \156\ See e.g., BPI; IAA; and SIFMA.
    \157\ See e.g., BPI and SIFMA.
    \158\ See SIFMA.

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

    In the 2018 proposal, the agencies requested comment regarding
whether the agencies should address the application of Super 23A in the
context of family wealth management vehicles. One commenter responded
that the agencies should incorporate the exemptions under Section 23A
and Regulation W into the definition of ``covered transaction.'' \159\
However, commenters also stated that incorporating the exemptions under
Section 23A and Regulation W would still not permit banking entities to
engage in the full range of transactions and services sought by family
wealth management vehicles, including ordinary extensions of credit,
and therefore the regulations would continue to unnecessarily impede
traditional banking and asset management services.\160\ Commenters
further stated that incorporation of the exemptions would not eliminate
the uncertainty and the associated burden for banking entities
resulting from an analysis of the status of a family wealth management
vehicle as a covered fund. The proposal is intended to allow banking
entities to provide the full range of traditional customer-facing
banking and asset management services to family wealth management
vehicles and recognizes that a specific exclusion for family wealth
management vehicles--rather than merely addressing the application of
Super 23A--is necessary to address the issues related family wealth
management vehicles more completely and effectively.
---------------------------------------------------------------------------

    \159\ See id.
    \160\ See e.g., BPI and SIFMA.
---------------------------------------------------------------------------

    Similar to the customer facilitation vehicles discussed below, the
agencies believe that the proposed exclusion for family wealth
management vehicles would appropriately allow banking entities to
structure services or transactions for customers, or to otherwise
provide traditional customer-facing banking and asset management
services, through a vehicle, even though such a vehicle may rely on
section 3(c)(1) or 3(c)(7) of the Investment Company Act or would
otherwise be a covered fund under the implementing regulations. The
agencies have previously indicated their intent to avoid unintended
results that might follow from a definition of ``covered fund'' that is
inappropriately imprecise,\161\ and believe that these commenters have
identified such unintended results. The agencies believe that an
exclusion for family wealth management vehicles would effectively
tailor the definition of covered fund by permitting banking entities to
continue to provide traditional banking and asset management services
that do not involve the types of risks section 13 was designed to
address. As the agencies noted in the preamble to the 2013 rule,
section 13 and the implementing regulations were designed to permit
banking entities to continue to provide client-oriented financial
services, including asset management services.\162\ In addition, the
agencies believe that an exclusion for family wealth management
vehicles is consistent with section 13(d)(1)(D), which permits banking
entities to engage in transactions on behalf of customers, when those
transactions would otherwise be prohibited under section 13. The
proposed exclusion would similarly allow banking entities to provide
traditional services to customers through vehicles used to manage the
wealth and other assets of those customers and their families.
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    \161\ See 83 FR 33471; 79 FR 5670-71.
    \162\ See 79 FR 5541 (describing the 2013 rule as ``permitting
banking entities to continue to provide, and to manage and limit the
risks associated with providing, client-oriented financial services
that are critical to capital generation for businesses of all sizes,
households and individuals, and that facilitate liquid markets.
These client-oriented financial services, which include
underwriting, market making, and asset management services, are
important to the U.S. financial markets and the participants in
those markets.'').
---------------------------------------------------------------------------

    Under the proposed exclusion, a family wealth management vehicle
would include 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, provided that:
(1) If the entity is a trust, the grantor(s) of the entity are all
family customers and, (2) if the entity is not a trust, a majority of
the voting interests are owned (directly or indirectly) by family
customers and the entity is owned only by family customers and up to 3
closely related persons of the family customers. Under the proposed
exclusion, a family customer would mean a family client, as defined in
Rule 202(a)(11)(G)-1(d)(4) of the Advisers Act (17 CFR
275.202(a)(11)(G)-1(d)(4)); or 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, spouse or spousal equivalent of any
of the foregoing.\163\
---------------------------------------------------------------------------

    \163\ All terms defined in Rule 202(a)(11)(G)-1 of the Advisers
Act (17 CFR 275.202(a)(11)(G)-1) have the same meaning in the
proposed family wealth management exclusion.
---------------------------------------------------------------------------

    In addition, a banking entity would rely on the proposed exclusion
only if the banking entity (or an affiliate): (1) Provides bona fide
trust, fiduciary, investment advisory, or commodity trading advisory
services to the entity; (2) does not, directly or indirectly,
guarantee, assume, or otherwise insure the obligations or performance
of such entity; (3) complies with the disclosure obligations under
Sec.  _.11(a)(8), as if such entity were a covered fund; \164\ (4) does
not acquire or retain, as principal, an ownership interest in the
entity, other than up to 0.5 percent of the entity's outstanding
ownership interests that may be held by the banking entity and its
affiliates for the purpose of and to the extent necessary for
establishing corporate separateness or addressing bankruptcy,
insolvency, or similar concerns; (5) complies with the requirements of
Sec. Sec.  _.14(b) and _.15, as if such issuer were a covered fund; and
(6) complies 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. The agencies believe that, collectively, the
conditions on the proposed exclusion should help to ensure that family
wealth management vehicles are used for customer oriented financial
services provided on arms-length, market terms, and to prevent evasion
of the requirements of section 13 of the BHC Act and the implementing
regulations. In addition, these proposed conditions are based on
existing conditions in other provisions of the implementing
regulations,\165\ which the

agencies believe should facilitate banking entities' compliance.
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    \164\ The obligations under Sec.  _.11(a)(8) of the proposed
rule would apply in connection with the exemption for organizing and
offering covered funds, which would typically require the
preparation and distribution of offering documents. The agencies
understand that offering documents may not be necessary in
connection with most family wealth management vehicles given the
vehicles' purpose and the requirement that interests in such
vehicles be limited to family customers and up to 3 closely related
persons of the family customers. Accordingly, the agencies believe
that for purposes of the proposed exclusion, a banking entity could
satisfy these written disclosure obligations in a number of ways,
such as including them in the family wealth management vehicle's
governing documents, in account opening materials or in
supplementary materials. The condition reflects the agencies'
interest in providing family customers with the substance of the
disclosures, rather than a concern with the document in which they
are provided. Similarly, the agencies expect the specific wording of
the disclosures in Sec.  _.11(a)(8) of the proposed rule may need to
be modified to accurately reflect the specific circumstances of the
family wealth management vehicle.
    \165\ See implementing regulations Sec.  _.11(a)(5) (imposing,
as a condition of the exemption for organizing and offering a
covered fund, that a banking entity and its affiliates do not,
directly or indirectly, guarantee, assume, or otherwise insure the
obligations or performance of the covered fund or of any covered
fund in which such covered fund invests); Sec.  _.11(a)(8)
(imposing, as a condition of the exemption for organizing and
offering a covered fund, that the banking entity provide certain
disclosures to any prospective and actual investor in the covered
fund); Sec.  _.10(c)(2)(ii) (allowing, as a condition of the
exclusion from the covered fund definition for wholly-owned
subsidiaries, for the holding of up to 0.5 percent of outstanding
ownership interests by a third party for limited purposes); and
Sec.  _.14(b) (subjecting certain transactions with covered funds to
section 23B of the Federal Reserve Act).
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    The agencies are not proposing to apply Super 23A to family wealth
management vehicles because, as discussed above, the agencies
understand that the application of Super 23A to family wealth
management vehicles would prohibit banking entities from providing the
full range of banking and asset management services to customers using
these vehicles. However, the agencies are proposing to apply the
prohibition on purchases of low-quality assets under the Board's
regulations implementing section 23A of the Federal Reserve Act (12 CFR
223.15(a)) to help ensure that the exclusion for family wealth
management vehicles does not allow banking entities to ``bail out'' the
vehicle.
    The agencies believe that the proposed definition of a family
wealth management vehicle appropriately distinguishes it from the type
of entity that section 13 of the BHC Act intended to capture. The
proposed definition would require that a family wealth management
vehicle not raise money from investors primarily for the purpose of
investing in securities for resale or other disposition or otherwise
trading in securities. This aspect of the definition would help to
differentiate family wealth management vehicles from covered funds,
which raise money from investors for this purpose. Defining ``family
customer'' by building off of the definition of ``family client'' from
rule 202(a)(11)(G)-1(d)(4) of Advisers Act (family office rule) may
facilitate compliance by using a definition known in the financial
services industry. At the same time, the agencies recognize that the
purpose of the family wealth management exclusion differs from the
purpose of the family office rule, and should be designed to capture
the types of persons and entities to which banking entities have
traditionally provided banking and asset management services, as these
services do not expose banking entities to the types of risks that
section 13 was intended to restrict and would facilitate banking
entities' customer-facing financial services. Accordingly, the agencies
believe it appropriate to include as ``family customers'' certain in-
laws of the family clients as well as a limited number of persons
closely related to the family customers.
    Question 53. Should the agencies exclude family wealth management
vehicles from the definition of ``covered fund'' as proposed? Does the
agencies' proposed definition of ``family wealth management vehicle''
include the appropriate vehicles? What, if any, modifications to the
scope, definitions or conditions prescribed in the proposed exclusion
should be made? Should the agencies provide any additional guidance or
requirements regarding the conditions? For example, should the agencies
provide additional guidance or requirements regarding the timing of the
disclosures required by Sec.  _.11(a)(8)?
    Question 54. Would an exclusion for family wealth management
vehicles create any opportunities for evasion, for example, by allowing
a banking entity to structure investment vehicles to evade the
restrictions of section 13 on covered fund activities? Why or why not?
If so, how could such concerns be addressed? Please explain.
    Question 55. Are there alternative approaches the agencies should
take to enable banking entities to provide family wealth management
vehicles with banking and asset management services?
    Question 56. The proposed exclusion would require the banking
entity and its affiliates to 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. Should the agencies
adopt this proposed requirement? Why or why not? Would this proposed
requirement address the agencies' concerns about banking entities or
their affiliates bailing out a family wealth management vehicle? Why or
why not?
    Question 57. The proposed exclusion permits ownership of the family
wealth management vehicle by 3 closely related persons of the family
customer owners. Should the exclusion permit closely related persons to
invest in family wealth management vehicles? What, if any,
modifications should the agencies make to the proposed definition of
``closely related person''? Why or why not? For example, should the
definition of ``closely related person'' include individuals with
longstanding personal relationships with family customers, but exclude
individuals with only longstanding business relationships with family
customers, or vice versa? Should the number of closely related persons
permitted to invest in the family wealth management vehicle be
increased, decreased, or remain at 3 such persons? Should, for example,
the agencies consider raising the number of closely related persons to
10 to parallel the number of permitted unaffiliated co-venturers
permitted under the Sec.  _.10(c) exclusion for joint ventures? Why or
why not? What if any other or additional qualitative or quantitative
limits on the ownership interest of closely related persons in family
wealth management vehicles? Would the inclusion of closely related
persons that are not family customers in the family wealth management
vehicle exclusion raise concerns about these vehicles being used to
evade the prohibitions in section 13 of the BHC Act? Why or why not?
Commenters should offer specific examples detailing when it would be
appropriate for a family wealth management vehicle to include persons
that are not family customers.
    Question 58. The proposed family wealth management vehicle
exclusion would permit a banking entity or its affiliates to hold up to
0.5 percent of the issuer's outstanding ownership interests only to the
extent necessary for establishing corporate separateness or addressing
bankruptcy, insolvency, or similar concerns. Instead of permitting such
an ownership interest to be held by a banking entity or its affiliates,
should the agencies permit such an ownership interest to be held by a
third party that is unaffiliated with either the banking entity or the
family customer? Why or why not?
    Question 59. The proposed family wealth management vehicle
exclusion would require the banking entity and its affiliates to comply
with the requirements of Sec.  _.14(b) and Sec.  _.15, as if the family
wealth management vehicle were a covered fund. Should the exclusion
require also that the banking entity and its affiliates comply with the
requirements of all of Sec.  _.14? Why or why not?
4. Customer Facilitation
    The agencies are proposing to exclude from the definition of
``covered fund'' under Sec.  _.10(b) of the rule any issuer that acts
as a ``customer facilitation vehicle.'' The proposed customer
facilitation vehicle exclusion would be available for any 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. In response
to the 2018 proposal, a number of commenters indicated that

the 2013 rule has restricted their ability to provide banking and asset
management services to customers and requested an exclusion for
vehicles or structures created to accommodate customer exposure to
securities, transactions, or other services that banking entities can
provide directly to the customers.\166\ Commenters provided examples of
services or transactions that customers (or a group of affiliated
customers) might prefer to receive from a banking entity through a
vehicle formed to facilitate those services or transactions rather than
directly. For example, a customer might wish to purchase structured
notes issued by a vehicle rather than a banking entity for certain
legal, counterparty risk management, or accounting reasons specific to
the customer.\167\ Similarly, a customer might seek financing or
exposure to a particular, customer-specified investment through a
special purpose vehicle to structure the transaction for the customer's
business needs or objectives.\168\ Another commenter stated that many
clients, in particular non-U.S. clients, prefer to face an entity
structure rather than a banking entity to facilitate their trading and
lending transactions for a variety of legal, counterparty risk
management and accounting reasons.\169\
---------------------------------------------------------------------------

    \166\ See SIFMA; FSF; and ABA.
    \167\ See SIFMA and FSF.
    \168\ See ABA.
    \169\ See BPI.
---------------------------------------------------------------------------

    The agencies believe that the proposed exclusion for customer
facilitation vehicles would appropriately allow banking entities to
structure these types of services or transactions for customers, or to
otherwise provide traditional customer-facing banking and asset
management services, through a vehicle, even though such a vehicle may
rely on section 3(c)(1) or 3(c)(7) of the Investment Company Act or
would otherwise be a covered fund under the implementing regulations.
While neither section 13 nor the implementing regulations would
restrict a banking entity from providing these services to a customer
directly, commenters have indicated that the broad definition of
``covered fund'' in the 2013 rule has prevented or otherwise impeded
banking entities from providing such services to a customer through
vehicles owned or formed by that customer. The agencies have previously
indicated their intent to avoid unintended results that might follow
from a definition of ``covered fund'' that is inappropriately
imprecise,\170\ and believe that these commenters have identified such
unintended results. In particular, the agencies do not believe that
section 13 was intended to interfere unnecessarily with the ability of
banking entities to provide services to their customers simply because
the customer may prefer to receive those services through a vehicle or
through a transaction with a vehicle instead of directly with the
banking entity. As the agencies noted in the preamble of the 2013 rule,
section 13 and the implementing regulations were designed to permit
banking entities to continue to provide client-oriented financial
services, which the agencies believe would include asset management
services provided through customer facilitation vehicles.\171\
---------------------------------------------------------------------------

    \170\ See 83 FR 33471; 79 FR 5670-71.
    \171\ See 79 FR 5541 (describing the 2013 rule as ``permitting
banking entities to continue to provide, and to manage and limit the
risks associated with providing, client-oriented financial services
that are critical to capital generation for businesses of all sizes,
households and individuals, and that facilitate liquid markets.
These client-oriented financial services, which include
underwriting, market making, and asset management services, are
important to the U.S. financial markets and the participants in
those markets.'').
---------------------------------------------------------------------------

    The agencies have previously indicated that section 13 permits the
agencies to tailor the scope of the definition of covered fund to funds
that engage in the investment activities contemplated by section 13 (as
opposed, for example, to vehicles that merely serve to facilitate
corporate structures).\172\ In addition, the agencies believe that an
exclusion for customer facilitation vehicles is consistent with section
13(d)(1)(D), which permits banking entities to engage in transactions
on behalf of customers, when those transactions would otherwise be
prohibited under section 13. The agencies have elsewhere tailored the
2013 rule to allow banking entities to meet their customers'
needs.\173\ The proposed exclusion would similarly allow banking
entities to provide customer-oriented financial services through a
vehicle when that vehicle's purpose is to facilitate a customer's
exposure to those services.\174\ The agencies believe that these
vehicles do not expose banking entities to the types of risks that
section 13 was intended to restrict and would facilitate banking
entities' customer-facing financial services.
---------------------------------------------------------------------------

    \172\ See 83 FR 33471 (citing 79 FR 5666).
    \173\ For example, the agencies in 2019 amended the exemption
for risk-mitigating hedging activities to allow banking entities to
acquire or retain an ownership interest in a covered fund as a risk-
mitigating hedge when acting as an intermediary on behalf of a
customer that is not itself a banking entity to facilitate the
exposure by the customer to the profits and losses of the covered
fund. See 2019 amendments Sec.  _.13(a)(1)(ii). See also 2019
amendments Sec.  _.3(d)(11) (excluding from the definition of
``proprietary trading'' the entering into of customer-driven swaps
or customer-driven security-based swaps and matched swaps or
security-based swaps under certain conditions).
    \174\ The proposed exclusion would not require that the customer
relationship be pre-existing. That is, the proposed exclusion could
be available for an issuer that is formed for the purpose of
facilitating the exposure of a customer of the banking entity where
the customer relationship begins only in connection with the
formation of that issuer. The agencies took a similar approach to
this question in describing the exemption for activities related to
organizing and offering a covered fund under Sec.  _.11(a) of the
2013 rule. See 79 FR 5716. The agencies indicated that section
13(d)(1)(G), under which the exemption under Sec.  _.11(a) was
adopted, did not explicitly require that the customer relationship
be pre-existing. Similarly, section 13(d)(1)(D) does not explicitly
require a pre-existing customer relationship.
---------------------------------------------------------------------------

    The proposed exclusion would require that the vehicle be formed by
or at the request of the customer. This requirement is intended to help
ensure that customer facilitation vehicles are formed to provide
customer-oriented financial services, and to differentiate customer
facilitation vehicles from covered funds that are organized and offered
by the banking entity. This condition would not preclude a banking
entity from marketing its services through the use of customer
facilitation vehicles or discussing with its customers prior to
formation of the customer facilitation vehicle the potential benefits
of structuring such services through a vehicle.
    A banking entity would be able to rely on the customer facilitation
vehicle exclusion only under certain conditions, including that all of
the ownership interests of the issuer are owned by the customer (which
may include one or more of the customer's affiliates) for whom the
issuer was created, other than a de minimis interest that may be held
by the banking entity or its affiliates for specified purposes (as
described below). The agencies believe that this condition would be
appropriate to prevent banking entities from using the proposed
exclusion for customer facilitation vehicles to evade the restrictions
of section 13. A banking entity and its affiliates would have to
maintain documentation outlining how the banking entity intends to
facilitate the customer's exposure to such transaction, investment
strategy, or service. The agencies believe that this condition would
support their ability to examine for, and make assessments regarding,
compliance with the proposed exclusion.
    Additional conditions for the customer facilitation vehicle
exclusion would include that the banking entity and its affiliates: (1)
Do not, directly or indirectly, guarantee, assume, or otherwise insure
the obligations or

performance of such issuer; (2) comply with the disclosure obligations
under Sec.  _.11(a)(8), as if such issuer were a covered fund; \175\
(3) do not acquire or retain, as principal, an ownership interest in
the issuer, other than up to 0.5 percent of the issuer's outstanding
ownership interests that may be held by the banking entity and its
affiliates for the purpose of and to the extent necessary for
establishing corporate separateness or addressing bankruptcy,
insolvency, or similar concerns; (4) comply with the requirements of
Sec.  _.14(b) and Sec.  _.15, as if such issuer were a covered fund;
and (5) 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.
---------------------------------------------------------------------------

    \175\ The obligations under Sec.  _.11(a)(8) apply in connection
with the exemption for organizing and offering covered funds, which
would typically require the preparation and distribution of offering
documents. The agencies understand that offering documents may not
be necessary in connection with most customer facilitation vehicles
given the vehicles' purpose and the requirement that interests in
such vehicles will be limited to a banking entity's customer or
group of affiliated customers. Accordingly, the agencies believe
that for purposes of the proposed exclusion, a banking entity could
satisfy these written disclosure obligations in a number of ways,
such as including them in the customer facilitation vehicle's
governing documents, in account opening materials, or in
supplementary materials. The condition reflects the agencies'
interest in providing customers with the substance of the
disclosures, rather than a concern with the document in which they
are provided. Similarly, the agencies expect that the specific
wording of the disclosures under Sec.  _.11(a)(8) may need to be
modified to reflect accurately the specific circumstances of the
customer facilitation vehicle.
---------------------------------------------------------------------------

    The agencies believe that, collectively, the conditions on the
proposed exclusion should help to ensure that customer facilitation
vehicles would be used for customer-oriented financial services
provided on arms-length, market terms, and should help to prevent
evasion of the requirements of section 13 and the implementing
regulations. The agencies also believe that the conditions would be
consistent with the purposes of section 13. In addition, these proposed
conditions are based on existing conditions in other provisions of the
implementing regulations,\176\ which the agencies believe should
facilitate banking entities' compliance.
---------------------------------------------------------------------------

    \176\ See implementing regulations Sec.  _.11(a)(5) (imposing,
as a condition of the exemption for organizing and offering a
covered fund, that a banking entity and its affiliates do not,
directly or indirectly, guarantee, assume, or otherwise insure the
obligations or performance of the covered fund or of any covered
fund in which such covered fund invests); Sec.  _.11(a)(8)
(imposing, as a condition of the exemption for organizing and
offering a covered fund, that the banking entity provide certain
disclosures to any prospective and actual investor in the covered
fund); Sec.  _.10(c)(2)(ii) (allowing, as a condition of the
exclusion from the covered fund definition for wholly-owned
subsidiaries, for the holding of up to 0.5 percent of outstanding
ownership interests by a third party for limited purposes); and
Sec.  _.14(b) (subjecting certain transactions with covered funds to
section 23B of the Federal Reserve Act).
---------------------------------------------------------------------------

    The agencies are not proposing to apply Super 23A to customer
facilitation vehicles because the agencies understand that the
application of Super 23A to customer facilitation vehicles would
prohibit banking entities from providing the full range of banking and
asset management services to customers using these vehicles. However,
the agencies are proposing to apply the prohibition on purchases of
low-quality assets under the Board's regulations implementing section
23A of the Federal Reserve Act (12 CFR 223.15(a)) to help ensure that
the exclusion for customer facilitation vehicles does not allow banking
entities to ``bail out'' the vehicle.
    Question 60. Is the proposed exclusion for customer facilitation
vehicles appropriate? Why or why not?
    Question 61. Does the proposed exclusion for customer facilitation
vehicles include the appropriate vehicles? Why or why not? If not, how
should the agencies expand or narrow the vehicles for which banking
entities would be permitted to make use of the exclusion? What
modifications to the proposed exclusion would be appropriate and why?
    Question 62. Are the proposed conditions on the proposed exclusion
for customer facilitation vehicles appropriate? Why or why not? If not
appropriate, how should the agencies modify the conditions, and why?
    Question 63. Should the agencies require, as a condition for
satisfying the proposed exclusion, that the customer facilitation
vehicle be formed at the request of the customer? Why or why not?
    Question 64. Should the agencies specify to which types of
transaction, investment strategy, or other service such a customer
facilitation vehicle could be formed to facilitate exposure? Why or why
not?
    Question 65. The proposed exclusion would permit a banking entity
or its affiliates to hold up to 0.5 percent of the issuer's outstanding
ownership interests only to the extent necessary for establishing
corporate separateness or addressing bankruptcy, insolvency, or similar
concerns. Instead of permitting such an ownership interest to be held
by a banking entity or its affiliates, should the agencies permit such
an ownership interest to be held by a third party that is unaffiliated
with either the banking entity or the customer? Why or why not?
    Question 66. The proposed exclusion would require the banking
entity and its affiliates to comply with the requirements of Sec.
_.14(b) and Sec.  _.15, as if the customer facilitation vehicle were a
covered fund. Should the exclusion require also that the banking entity
and its affiliates comply with the requirements of all of Sec.  _.14?
Why or why not?
    Question 67. The proposed exclusion would require the banking
entity and its affiliates to 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. Should the agencies
adopt this proposed requirement? Why or why not? Would this proposed
requirement address the agencies' concerns about banking entities or
their affiliates bailing out a customer facilitation vehicle? Why or
why not?
    Question 68. Would the proposed exclusion for customer facilitation
vehicles create any opportunities for evasion, for example, by allowing
a banking entity to structure such vehicles in a manner to evade the
restrictions of section 13 on covered fund activities? Why or why not?
If so, what conditions could be imposed to address such concerns? For
example, should the agencies impose a restriction that a customer
facilitation vehicle only be able to serve customers who initiate or
request a given transaction, investment strategy, or other service? Do
the conditions that would be imposed on the proposed exclusion address
those concerns? Please explain.
    Question 69. Should the agencies take a different approach to
enable banking entities to provide customers with exposure to a
transaction, investment strategy, or other service provided by the
banking entity? For example, would modifications to Sec.  _.14 of the
implementing regulations, whether as proposed below or otherwise, allow
banking entities to provide customers with this exposure? Please
explain.
    Question 70. For banking entities with significant trading assets
and liabilities that sponsor funds relying on the proposed exclusion
for customer facilitation vehicles, would it be appropriate to require
additional documentation requirements pursuant to Sec.  _.20(e)(2)
consistent with other sponsored funds relying on certain exclusions
from the definition of covered fund? Why or why not? Similarly, should
the documentation requirements of Sec.  _.20(e)(2) also be applied to
sponsored funds relying on

the other new proposed exclusions for credit funds, venture capital
funds, and family wealth management vehicles? Why or why not?

D. Limitations on Relationships With a Covered Fund

    The agencies are proposing to modify the regulations implementing
section 13(f)(1) of the BHC Act to permit banking entities to engage in
a limited set of covered transactions with covered funds for which the
banking entity directly or indirectly serves as investment manager,
investment adviser, or sponsor, or that the banking entity organizes
and offers pursuant to section 13(d)(1)(G) of the BHC Act (such funds,
related covered funds). Specifically, as described below, the proposal
would allow a banking entity to enter into covered transactions with a
related covered fund that would be permissible without limit for a
state member bank to enter into with an affiliate under section 23A of
the Federal Reserve Act. This would include, for example, intraday
extensions of credit. The proposal would also allow a banking entity to
enter into short-term extensions of credit with, and purchase assets
from, a related covered fund in connection with payment, clearing, and
settlement activities. These proposed amendments would address certain
concerns raised by regulated banking entities and commenters with
respect to the impact of section 13(f)(1) on the practical ability of
banking entities to organize and offer covered funds as permitted by
section 13(d)(1)(G).
    Section 13(f)(1) of the BHC Act generally prohibits a banking
entity from entering into a transaction with a related covered fund
that would be a covered transaction as defined in section 23A of the
Federal Reserve Act.\177\
---------------------------------------------------------------------------

    \177\ 12 U.S.C. 1851(f)(1); see 12 U.S.C. 371c. Section 13(f)(3)
of the BHC Act also provides an exemption for prime brokerage
transactions between a banking entity and a covered fund in which a
covered fund managed, sponsored, or advised by that banking entity
has taken an ownership interest. 12 U.S.C. 1851(f)(3). In addition,
section 13(f)(2) subjects any transaction permitted under section
13(f) (including a permitted prime brokerage transaction) between a
banking entity and covered fund to section 23B of the Federal
Reserve Act. 12 U.S.C. 1851(f)(2); see 12 U.S.C. 371c-1.
---------------------------------------------------------------------------

    Section 23A of the Federal Reserve Act limits the aggregate amount
of covered transactions by a member bank to no more than (1) 10 percent
of the capital stock and surplus of the member bank in the case of any
one affiliate, and (2) 20 percent of the capital stock and surplus of
the member bank in the aggregate with respect to all affiliates.\178\
By contrast, section 13(f)(1) of the BHC Act generally prohibits
covered transactions between a banking entity and a related covered
fund, with no minimum amount of permissible covered transactions.\179\
Despite this general prohibition, another part of section 13 authorizes
a banking entity to own an interest in a related covered fund, which
would be a ``covered transaction'' for purposes of section 23A of the
Federal Reserve Act.\180\ In addition to this apparent conflict between
paragraphs 13(d) and (f) with respect to covered fund ownership, there
are other elements of these paragraphs that introduce ambiguity about
the interpretation of the term ``covered transaction'' as used in
section 13(f) of the BHC Act. The statute prohibits a banking entity
that organizes or offers a hedge fund or private equity fund from
directly or indirectly guaranteeing, assuming, or otherwise insuring
the obligations or performance of the fund (or of any hedge fund or
private equity fund in which such hedge fund or private equity fund
invests).\181\ To the extent that section 13(f) prohibits all covered
transactions between a banking entity and a related covered fund,
however, the independent prohibition on guarantees in section
13(d)(1)(G)(v) would seem to be unnecessary and redundant.\182\
---------------------------------------------------------------------------

    \178\ 12 U.S.C. 371c. The term ``covered transaction'' is
defined in section 23A of the Federal Reserve Act to mean, with
respect to an affiliate of a member bank, (1) a loan or extension of
credit to the affiliate, including a purchase of assets subject to
an agreement to repurchase; (2) a purchase of or an investment in
securities issued by the affiliate; (3) a purchase of assets from
the affiliate, except such purchase of real and personal property as
may be specifically exempted by the Board by order or regulation;
(4) the acceptance of securities or other debt obligations issued by
the affiliate as collateral security for a loan or extension of
credit to any person or company; (5) the issuance of a guarantee,
acceptance, or letter of credit, including an endorsement or standby
letter of credit, on behalf of an affiliate; (6) a transaction with
an affiliate that involves the borrowing or lending of securities,
to the extent that the transaction causes a member bank or a
subsidiary to have credit exposure to the affiliate; or (7) a
derivative transaction, as defined in paragraph (3) of section
5200(b) of the Revised Statutes of the United States (12 U.S.C.
84(b)), with an affiliate, to the extent that the transaction causes
a member bank or a subsidiary to have credit exposure to the
affiliate. See 12 U.S.C. 371c(b)(7), as amended by Public Law
111.203, section 608 (July 21, 2010). Section 13(f) of the BHC Act
does not alter the applicability of section 23A of the Federal
Reserve Act and the Board's Regulation W to covered transactions
between insured depository institutions and their affiliates.
    \179\ 12 U.S.C. 1851(f)(1).
    \180\ 12 U.S.C. 1851(d)(1)(G); (d)(4).
    \181\ 12 U.S.C. 1851(d)(1)(G)(v).
    \182\ See 12 U.S.C. 371c(b)(7)(E); 12 CFR 223.3(h)(4).
---------------------------------------------------------------------------

    The agencies addressed the apparent conflict between section
13(f)(1) and particular provisions in section 13(d)(1) of the BHC Act
in the 2013 rule by interpreting the statutory language to permit a
banking entity ``to acquire or retain an ownership interest in a
covered fund in accordance with the requirements of section 13.'' \183\
In doing so, the agencies noted that a contrary interpretation would
make the specific language that permits covered transactions between a
banking entity and a related covered fund ``mere surplusage.'' \184\
---------------------------------------------------------------------------

    \183\ 79 FR 5746.
    \184\ 79 FR 5746.
---------------------------------------------------------------------------

    In adopting the regulations to reconcile the conflict between
paragraphs (d) and (f) of section 13 of the BHC Act, the agencies did
not use their rulemaking authority pursuant to section (d)(1)(J).\185\
Instead, the agencies used their general rulemaking authority to
interpret section 13 of the BHC Act. Although the agencies previously
expressed doubt about their ability to permit banking entities to enter
into covered transactions with related covered funds pursuant to their
authority under section 13(d)(1)(J) of the BHC Act,\186\ the activities
permitted pursuant to paragraph (d) specifically contemplate allowing a
banking entity to enter into certain covered transactions with related
funds.\187\ The exceptions in section 13(f)(1) are also expressly
incorporated into the statutory list of permitted activities,
specifically in section 13(d)(1)(G)(iv).\188\ By virtue of the conflict
between paragraphs (d) and (f) of section 13, and the inclusion of
specific covered transactions within the permitted activities in
paragraph (d) of section 13, the agencies believe that the authority
granted pursuant to paragraph (d)(1)(J) to determine that other
activities are not prohibited by the statute authorizes the agencies to
exercise rulemaking authority to determine that banking entities may
enter into covered transactions with related covered funds that would
otherwise be prohibited by section 13(f)(1) of the BHC Act, provided
that the rulemaking complies with applicable statutory
requirements.\189\
---------------------------------------------------------------------------

    \185\ Id.
    \186\ See 76 FR 68912 n.313.
    \187\ 12 U.S.C. 1851(d)(1)(G); (d)(4).
    \188\ 12 U.S.C. 1851(d)(1)(G)(iv).
    \189\ 12 U.S.C. 1851(b)(2), (d)(1)(J), (d)(2).
---------------------------------------------------------------------------

    In the 2018 proposal, the agencies invited comment from the public
on the agencies' 2013 interpretation of section 13(f)(1) of the BHC
Act,\190\ and whether

that interpretation should be amended.\191\ Among other things, the
agencies invited comment on whether to incorporate some or all of the
exemptions or quantitative limits in section 23A of the Federal Reserve
Act and the Board's Regulation W, and if so, whether these transactions
should be subject to any additional limitations.\192\ However, the
agencies did not propose specific amendments addressing the
interpretation of section 13(f)(1) of the BHC Act.\193\
---------------------------------------------------------------------------

    \190\ In the preamble to the 2013 rule, the agencies noted that
``[s]ection 13(f) of the BHC Act does not incorporate or reference
the exemptions contained in section 23A of the FR Act or the Board's
Regulation W.'' 79 FR 5746.
    \191\ 83 FR 33486-487.
    \192\ Id. at 33487.
    \193\ On March 29, 2017, the CFTC's Division of Swap Dealer and
Intermediary Oversight (DSIO) issued a letter to a futures
commission merchant (FCM) stating that the DSIO would not recommend
that an enforcement action against the FCM be initiated in
connection with Sec.  _.14(a) of the 2013 rule. Although no specific
amendments were provided in the 2018 proposal, the proposal would
permit FCMs that are banking entities to enter into certain covered
transactions with covered funds in connection with futures, options
and swaps clearing services to covered funds pursuant to Sec.
_.14(a).
---------------------------------------------------------------------------

    Several commenters addressed the interpretation of section 13(f)(1)
of the BHC Act, and the specific questions asked by the agencies.
Several commenters recommended that the agencies interpret section
13(f)(1) to include the exemptions provided under section 23A of the
Federal Reserve Act.\194\ Some commenters also encouraged the agencies
to permit banking entities to engage in a quantitatively limited amount
of covered transactions with related covered funds.\195\ Conversely,
one commenter opposed revising the regulations to incorporate the
Federal Reserve Act's section 23A exemptions or quantitative
limits.\196\
---------------------------------------------------------------------------

    \194\ See, e.g., ABA; BPI; and FSF.
    \195\ See, e.g., BPI and FSF.
    \196\ See Public Citizen.
---------------------------------------------------------------------------

    Banking entities that sponsor or serve as the investment adviser to
covered funds and groups representing such banking entities have argued
that the inability to engage in any covered transactions with such
funds, particularly those types of transactions that are expressly
exempted under section 23A of the Federal Reserve Act and the Board's
Regulation W, has limited the services that they or their affiliates
can provide.\197\ Some of these commenters have argued that amending
the regulations to permit limited covered transactions with related
covered funds would not create any new incentives for the banking
entity to financially support the related covered fund in times of
stress and would not otherwise permit the banking entity to indirectly
engage in proprietary trading through the related covered fund.\198\
For example, when a banking entity that sponsors or advises a covered
fund also serves as a broker-dealer to the covered fund, the
prohibition on covered transactions between the banking entity (and its
affiliates) and the covered fund may limit the ability of the banking
entity and its affiliates to provide other services, such as trade
settlement services, to the covered fund. A broker-dealer providing
trade settlement services may extend intraday credit to the fund, or
purchase assets from the fund, in connection with trading activities in
the ordinary course of business. One group representing banking
entities also noted that extensions of credit in connection with
payment, clearing, and settlement services that were intended to be
intraday may become overnight extensions of credit, for example due to
time zone differences in local settlement markets.\199\ Under the
interpretation provided in the preamble to the 2013 rule,\200\ both
intraday extensions of credit and overnight extensions of credit are
``covered transactions'' for purposes of section 13(f)(1) of the BHC
Act, and therefore would be impermissible for a banking entity with
respect to a related covered fund.
---------------------------------------------------------------------------

    \197\ See, e.g., BPI; CS; and IAA.
    \198\ Id.
    \199\ See, e.g., SIFMA.
    \200\ See 79 FR 5746.
---------------------------------------------------------------------------

    The agencies believe that, under certain circumstances, it would be
appropriate to permit banking entities to enter into certain covered
transactions with related covered funds, and therefore are proposing to
amend Sec.  _.14 of the implementing regulations as described below.
The proposed amendments would not modify the definition of ``covered
transaction'' but instead would authorize banking entities to engage in
limited activities with related covered funds. Any transactions or
activities permitted by these revisions would be required to comply
with certain conflict of interest, high-risk, and safety and soundness
restrictions.
Exempt Transactions Under Section 23A and the Board's Regulation W
    The proposal would permit a banking entity to engage in covered
transactions with a related covered fund that would be exempt from the
quantitative limits, collateral requirements, and low-quality asset
prohibition under section 23A of the Federal Reserve Act, including
transactions that would be exempt pursuant to section 223.42 of the
Board's Regulation W.\201\ Section 23A of the Federal Reserve Act is
designed to protect against a depository institution suffering losses
in transactions with affiliates, and to limit the ability of a
depository institution to transfer to its affiliates the ``subsidy''
arising from the depository institution's access to the Federal safety
net.\202\
---------------------------------------------------------------------------

    \201\ See 12 U.S.C. 371c(d); 12 CFR 223.42.
    \202\ For a brief background on section 23A of the Federal
Reserve Act, see Transactions Between Member Banks and Their
Affiliates, 67 FR 76560-765561 (December 12, 2002).
---------------------------------------------------------------------------

    Notwithstanding the statutory objectives of section 23A of the
Federal Reserve Act, however, a member bank may enter into certain
``exempt'' covered transactions set forth in section 23A of the Federal
Reserve Act and the Board's Regulation W, without regard to the
quantitative limits, collateral requirements, and low-quality asset
prohibition of section 23A and the Board's Regulation W.\203\ These
exempt transactions do not raise the same concerns that they could
cause the depository institution to suffer losses or transfer the
subsidy arising from the depository institution's access to the Federal
safety net. The agencies believe that the same rationales that support
the exemptions in section 23A of the Federal Reserve Act and the
Board's Regulation W also support exempting such transactions from the
prohibition on covered transactions between a banking entity and
related covered funds under section 13(f)(1) of the BHC Act. In
particular, the agencies note that these exemptions generally do not
present significant risks of loss, and serve important public policy
objectives.\204\
---------------------------------------------------------------------------

    \203\ See 12 U.S.C. 371c(d); 12 CFR 223.42.
    \204\ For example, intraday extensions of credit are exempt
covered transactions under section 23A of the Federal Reserve Act.
The Board previously has noted that ``[i]ntraday overdrafts and
other forms of intraday credit generally are not used as a means of
funding or otherwise providing financial support for an affiliate.
Rather, these credit extensions typically facilitate the settlement
of transactions between an affiliate and its customers when there
are mismatches between the timing of funds sent and received during
the business day.'' 67 FR 76596.
---------------------------------------------------------------------------

Short-Term Extensions of Credit and Acquisitions of Assets in
Connection With Payment, Clearing, and Settlement Services
    In addition, the proposal would permit a banking entity to provide
short-term extensions of credit to and purchase assets from a related
covered fund, subject to appropriate limits. First, each short-term
extension of credit or purchase of assets would have to be made in the
ordinary course of business

in connection with payment transactions; securities, derivatives, or
futures clearing; or settlement services. Second, each extension of
credit would be required to be repaid, sold, or terminated no later
than five business days after it was originated. The provision of
payment, clearing, and settlement services by a banking entity (or its
affiliates) to an affiliated covered fund generally requires the
ability to provide such short-term extensions of credit, and therefore
is a necessary corollary to the exempt covered transactions that would
allow banking entities to provide standard payment, clearing, and
settlement services to related covered funds. Additionally, the
proposed five business day criterion would be consistent with the
Federal banking agencies' capital rule and would generally require
banking entities to rely on transactions with normal settlement
periods, which have lower risk of delayed settlement or failure, when
providing short-term extensions of credit.\205\ Each short-term
extension of credit must also meet the same requirements applicable to
intraday extensions of credit under section 223.42(l)(1)(i) and (ii) of
the Board's Regulation W (as if the extension of credit was an intraday
extension of credit, regardless of the duration of the extension of
credit). In addition, each extension of credit or purchase of assets
permitted by these revisions would be required to comply with certain
conflict of interest, high-risk, and safety and soundness restrictions.
---------------------------------------------------------------------------

    \205\ See 78 FR 62110 (October 11, 2013). While the Federal
banking agencies require firms to track and monitor the credit risk
exposure for transactions involving securities, foreign exchange
instruments, and commodities that have a risk of delayed settlement,
this requirement does not apply to other types of transactions which
may be used in providing a short-term extension of credit (e.g.,
repo-style transactions). Additionally, banking entities typically
monitor credit extensions by counterparty, and not by transaction
type. Thus, the proposal would remain consistent with the approach
taken in the Federal banking agencies' capital rule, without
imposing an additional compliance burden without a corresponding
benefit.
---------------------------------------------------------------------------

Impact of the Proposed Amendments on Safety and Soundness and U.S.
Financial Stability
    The agencies expect that the proposed amendments described above
would generally promote and protect the safety and soundness of banking
entities and U.S. financial stability.
    First, allowing banking entities to engage in these limited covered
transactions with related covered funds may allow banking entities to
reduce operational risk. Currently, the restrictions under section
13(f)(1) of the BHC Act substantially limit the ability of a banking
entity to both (1) organize and offer a covered fund, or act as an
investment adviser to the covered fund, and (2) provide custody or
other services to the fund. As a result, a third party is required to
provide other necessary services for the fund's operation, including
payment, clearing, and settlement services that are generally provided
by the fund's custodian. This increases the potential for problems at
the third-party service provider (e.g., an operational failure or a
disruption to normal functioning) to affect the banking entity or the
fund, which were required to use the third-party service provider as a
result of the restrictions under section 13(f)(1). Those problems may
then spread among financial institutions or markets and thereby
threaten the stability of the U.S. financial system. By amending Sec.
_.14(a), therefore, the proposal may allow a banking entity to reduce
both operational risk and interconnectedness to other financial
institutions by directly providing a broader array of services to a
fund it organizes and offers, or advises. The agencies believe that
reducing these risks could promote and protect the safety and soundness
of banking entities.\206\
---------------------------------------------------------------------------

    \206\ As noted above, the agencies also believe that the same
rationales that support the exempt covered transactions in section
23A of the Federal Reserve Act and the Board's Regulation W also
support permitting a banking entity to engage in exempt covered
transactions with a related covered fund.
---------------------------------------------------------------------------

    Second, the proposed amendments may promote and protect U.S.
financial stability by reducing interconnectedness among firms. As
described above, the authorized covered transactions would permit
banking entities to provide a more comprehensive suite of services to
related covered funds, reducing the need to rely on third parties to
provide such services.
    This proposal would remain subject to additional limitations on
transactions with related covered funds. As specified in the statute,
such activities would be permissible only ``to the extent permitted by
any other provision of Federal or state law, and subject to the
limitations under section 13(d)(2) of the BHC Act and any restrictions
or limitations that the appropriate Federal banking agencies, the
Securities and Exchange Commission, and the Commodity Futures Trading
Commission, may determine . . .'' \207\ Section 13(d)(2) of the BHC Act
also imposes additional restrictions on any activities authorized
pursuant to section (d)(1), including those activities authorized by
rulemaking pursuant to section (d)(1)(J).\208\
---------------------------------------------------------------------------

    \207\ 12 U.S.C. 1851(d)(1).
    \208\ 12 U.S.C. 1851(d)(2); see also 2013 rule Sec. Sec.  _.7
and _.15.
---------------------------------------------------------------------------

    Sections _.14(b) and _.14(c) of the regulations implementing
section 13 of the BHC Act both generally require that a banking entity
may enter into certain transactions specified in section 23B of the
Federal Reserve Act (including ``covered transactions'' as defined in
section 23A of the Federal Reserve Act) with related covered funds only
on terms and under circumstances that are substantially the same (or at
least as favorable) to the banking entity as those prevailing at the
time for comparable transactions with or involving other nonaffiliated
companies, or in the absence of comparable transactions, on terms and
under circumstances that the banking entity in good faith would offer
to, or would apply to, nonaffiliated companies.\209\
---------------------------------------------------------------------------

    \209\ 12 U.S.C. 1851(f)(2); see 12 U.S.C. 371c-1(a)(1).
---------------------------------------------------------------------------

    Question 71. What impacts would the proposed amendments to Sec.
_.14 have on the safety and soundness of banking entities, and on the
financial stability of the United States? Would the activities
permitted under the proposed amendments to Sec.  _.14(a) of the
implementing regulations promote and protect safety and soundness of
the banking entity and U.S. financial stability, and if so, how?
    Question 72. Are there other services that a banking entity
typically provides to sponsored funds or funds for which it acts as an
investment adviser that would be prohibited under section 13(f)(1) of
the BHC Act and Sec.  _.14 of the implementing regulations as proposed
to be amended? What would be the impact on the safety and soundness of
the banking entity, and the financial stability of the United States,
of permitting a banking entity to engage in such transactions with a
related covered fund?
    Question 73. Should the agencies amend Sec.  _.14 of the
implementing regulations to permit banking entities to engage in
additional covered transactions in connection with payment, clearing,
and settlement services? Why or why not? What would be the impacts of
permitting banking entities to engage in payment, clearing, and
settlement services with related covered funds on the safety and
soundness of the banking entity? What would be the impacts of such an
approach on U.S. financial stability?
    Question 74. Should the agencies impose any additional or different
qualitative or quantitative limits on the

covered transactions contemplated by the proposed amendments to Sec.
_.14(a) of the implementing regulations? Why or why not? For example,
should the agencies impose a quantitative limit of any kind on the
covered transactions that would not be subject to the prohibition in
section 13(f)(1) of the BHC Act? If the agencies were to impose a
quantitative limit on such covered transactions, on what should such
limits be based (e.g., based on the banking entity's tier 1 capital,
the size of the fund, or some other measurement), and what limits would
be appropriate?
    Question 75. Is the proposed approach to addressing transactions
that are exempt under Section 23A and payment, clearing, and settlement
activities effective? Why or why not? Is there a better approach to
addressing these types of transactions?
    Question 76. The proposal would require that any payment, clearing,
or settlement activity be settled within five business days. Is this
length of time sufficient to effectuate the proposed permitted
activities? Why or why not? Is another length of time, such as three
days, more appropriate or consistent with current market practices?
Should the agencies adopt a limit that adopts the shorter of five days
or industry standard settlement time for a particular financial
instrument?
    Question 77. Should the agencies, for the purposes of Sec.
_.14(a)(2)(iv) of the proposed amendment, impose on the purchase of
assets a requirement that the banking entity comply with the
requirements of 12 CFR 223.15(a), as if such banking entity and its
affiliates were a member bank and the covered fund were an affiliate
thereof?

E. Ownership Interest

    The agencies are proposing changes to the definition of ``ownership
interest'' to clarify that a debt relationship with a covered fund
would typically not constitute an ownership interest under the
regulations.\210\ In addition, the agencies are proposing amendments to
the manner in which a banking entity must calculate its ownership
interest for purposes of complying with the limits and conditions that
apply to investments in covered funds organized and offered by a
banking entity. Specifically, the proposed amendments are intended to
better align the manner in which ownership limits are calculated for
purposes of the quantitative limit on a banking entity's investment in
a single fund (the per fund limit), the quantitative limit on a banking
entity's investment in all covered funds (the aggregate fund limit),
and the calculation of the applicable capital deductions for
investments in covered funds (the covered fund deduction).\211\
---------------------------------------------------------------------------

    \210\ See 2013 rule Sec.  _.10(d)(6) (defining ``ownership
interest'' for purposes of subpart C of the rule).
    \211\ See 12 U.S.C. 1851(d)(4)(B)(ii)(I)-(II); 2013 rule
Sec. Sec.  _.10(d)(6); _.12(a)(2)(ii)-(iii), (b)-(d).
---------------------------------------------------------------------------

    The implementing regulations define an ``ownership interest'' in a
covered fund to mean any equity, partnership, or other similar
interest. Some banking entities have expressed concern about the
inclusion of the term ``other similar interest'' in the definition of
``ownership interest,'' and have indicated that the definition of this
term could lead to the inclusion of debt instruments that have standard
covenants in the measurement of an ownership interest. Under the 2013
rule, ``other similar interest'' is defined as an interest that:
     Has the right to participate in the selection or removal
of a general partner, managing member, member of the board of directors
or trustees, investment manager, investment adviser, or commodity
trading advisor of the covered fund (excluding the rights of a creditor
to exercise remedies upon the occurrence of an event of default or an
acceleration event);
     Has the right under the terms of the interest to receive a
share of the income, gains or profits of the covered fund;
     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);
     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);
     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;
     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
     Any synthetic right to have, receive, or be allocated any
of the rights above.\212\
---------------------------------------------------------------------------

    \212\ 2013 rule Sec.  _.10(d)(6)(i).
---------------------------------------------------------------------------

    This definition focuses on the attributes of the interest and
whether it provides a banking entity with economic exposure to the
profits and losses of the covered fund, rather than its form. Under the
2013 rule, a debt interest in a covered fund can be an ownership
interest if it has the same characteristics as an equity or other
ownership interest (e.g., provides the holder with voting rights; the
right or ability to share in the covered fund's profits or losses; or
the ability, directly or pursuant to a contract or synthetic interest,
to earn a return based on the performance of the fund's underlying
holdings or investments). The 2013 rule excludes carried interest
(restricted profit interest) from the definition of ownership interest,
although as discussed below, only for certain purposes.
    In the 2018 proposal the agencies requested comment on all aspects
of the 2013 rule's application to securitization transactions,
including the definition of ownership interest. Specifically, the
agencies asked whether there were any modifications that should be made
to the 2013 rule's definition of ownership interest.\213\ Among other
things, the agencies requested comments on whether they should modify
Sec.  _.6(i)(A) to provide that the ``rights of a creditor to exercise
remedies upon the occurrence of an event of default or an acceleration
event'' include the right to participate in the removal of an
investment manager for cause, or to nominate or vote on a nominated
replacement manager upon an investment manager's resignation or
removal.\214\
---------------------------------------------------------------------------

    \213\ 83 FR 33481.
    \214\ Id.
---------------------------------------------------------------------------

    In response to the 2018 proposal, a number of commenters supported
the agencies' suggestion to modify Sec.  _.6(i)(A) and to expressly
permit creditors to participate in the removal of an investment manager
for cause, or to nominate or vote on a nominated replacement manager
upon an investment manager's resignation or removal without causing an
interest to become an ownership interest.\215\ This notwithstanding, a
few of these commenters noted that this modification would not address
all issues with the condition as banks sometimes have contractual
rights to participate in the selection or removal of a general partner,
managing member or

member of the board of directors or trustees of a borrower that are not
limited to the exercise of a remedy upon an event of default or other
default event.\216\ Therefore, these commenters proposed eliminating
the ``other similar interest'' clause from the definition altogether
or, alternatively, replacing the definition of ownership interest with
the definition of ``voting securities'' from the Board's Regulation Y.
---------------------------------------------------------------------------

    \215\ See, e.g., SFIG; JBA; LSTA; and IAA.
    \216\ See SFIG.
---------------------------------------------------------------------------

    A number of commenters argued that debt interests issued by covered
funds and loans to third-party covered funds not advised or managed by
a banking entity should be excluded from the definition of ownership
interest.\217\ Other commenters suggested reducing the scope of the
definition of ownership interest to apply only to equity and equity-
like interests that are commonly understood to indicate a bona fide
ownership interest in a covered fund.\218\ One other commenter asked
the agencies to clarify conditions under the ``other similar interest''
clause.\219\ Specifically, the commenter asked the agencies to clarify
whether the right to receive all or a portion of the spread extends to
using the spread to pay principal or the interest that is otherwise
owed or to clarify that any debt repaid from collections on underlying
assets of a special purpose entity, but is entitled to receive only
principal and interest, is not an ownership interest. At least one
commenter asked the agencies not to modify the definition of ownership
interest as, the commenter argued, there is nothing under section 13 of
the BHC Act that limits or restricts the ability of a banking entity or
nonbank financial company to sell or securitize loans in a manner
permitted by law.\220\
---------------------------------------------------------------------------

    \217\ See, e.g., Capital One et al. and BPI.
    \218\ See, e.g., ABA and CAE.
    \219\ See SFIG.
    \220\ See Data Boiler.
---------------------------------------------------------------------------

    In response to comments received and in order to provide clarity
about the types of interests that would be considered within the scope
of the definition of ownership interest, the agencies propose to amend
the parenthetical in Sec.  _.6(i)(A) to specify that creditors'
remedies upon the occurrence of an event of default or an acceleration
event include the right to participate in the removal of an investment
manager for cause or to nominate or vote on a nominated replacement
manager upon an investment manager's resignation or removal.
Accordingly, an interest that allows its holder to remove an investment
manager for cause upon the occurrence of an event of default, for
example, would not be considered an ownership interest for this reason
alone.
    The proposed rule would also provide a safe harbor from the
definition of ownership interest, as suggested by some commenters.\221\
The safe harbor should address commenters' concerns that some ordinary
debt interests could be construed as an ownership interest. Any senior
loan or other senior debt interest that meets all of the following
characteristics would not be considered to be an ownership interest
under the proposed rule:
---------------------------------------------------------------------------

    \221\ See SFIG.
---------------------------------------------------------------------------

    (1) The holders of such interest do not receive any profits of the
covered fund but may only receive: (i) Interest payments which are not
dependent on the performance of the covered fund; and (ii) fixed
principal payments on or before a maturity date;
    (2) The entitlement to payments on the interest is absolute and may
not be reduced because of the losses arising from the covered fund,
such as allocation of losses, write-downs or charge-offs of the
outstanding principal balance, or reductions in the principal and
interest payable; 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 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).
    The agencies believe that the proposed conditions for the safe
harbor would provide more clarity and predictability to banking
entities and enable them to determine more readily whether an interest
would be an ownership interest under the regulations implementing
section 13 of the BHC Act. The three conditions under the proposed safe
harbor would ensure that debt interests that do not have equity-like
characteristics are not considered ownership interests. At the same
time, the agencies believe that the conditions are rigorous enough to
prevent banking entities from evading the prohibition on acquiring or
retaining an ownership interest in a covered fund.
    The proposal also would modify the implementing regulations to
better align the manner in which a banking entity calculates the
aggregate fund limit and covered fund deduction with the manner in
which it calculates the per fund limit, as it relates to investments by
employees of the banking entity. Specifically, consistent with how
investments by employees and directors are treated generally under the
existing rule of construction in Sec.  _.12(b)(1)(iv), the proposal
would modify Sec. Sec.  _.12(c) and _.12(d) to require attribution of
amounts paid by an employee or director to acquire a restricted profit
interest only when the banking entity has financed the acquisition.
    The 2013 rule excludes from the definition of ownership interest
certain restricted profit interests.\222\ As a threshold matter, the
exclusion from the definition of ownership interest is limited to
restricted profit interests held by an entity, employee, or former
employee in a covered fund for which the entity or employee serves as
investment manager, investment adviser, commodity trading advisor, or
other service provider.\223\ To be excluded from the definition of
ownership interest, the restricted profit interest must also meet
various other conditions, including that any amounts invested in the
covered fund--including amounts paid by the entity, an employee of the
entity, or former employee of the entity--are within the applicable
limits under Sec.  _.12 of the 2013 rule.\224\
---------------------------------------------------------------------------

    \222\ 2013 rule Sec.  _.10(d)(6)(ii). As noted in the preamble
to the 2013 rule, the term ``restricted profit interest'' was used
to avoid any confusion from using the term ``carried interest,''
which is used in other contexts. The proposed rule would focus on
the treatment of restricted profit interests for purposes of
calculating compliance with the aggregate fund limit and covered
fund deduction, but would not address in any way the treatment of
such profit interests under other laws, including under Federal
income tax law. See 79 FR 5706, n. 2091.
    \223\ 2013 rule Sec.  _.10(d)(6)(ii).
    \224\ 2013 rule Sec.  _.10(d)(6)(ii)(C).
---------------------------------------------------------------------------

    Section _.12 of the 2013 rule provides different rules for purposes
of calculating compliance with the per fund limit and for purposes of
calculating compliance with the aggregate fund limit and covered fund
deduction. Under the 2013 rule, for purposes of calculating the per
fund limit and the aggregate fund limit, a banking entity is attributed
ownership interests in a covered fund that are acquired by an employee
or director if the banking entity, directly or indirectly, extends
financing for the purpose of enabling the employee or director to
acquire the ownership interest in the fund, and the financing is used
to acquire such ownership interest.\225\ As noted in the preamble to
the 2013 rule, the attribution to a banking entity of ownership
interests acquired by an employee or director using financing provided
by the banking entity ensures that funding provided by the banking
entity to acquire ownership interests in the fund, whether provided

directly or indirectly, is counted against the per fund limit and
aggregate fund limit.\226\
---------------------------------------------------------------------------

    \225\ 2013 rule Sec.  _.12(b)(1)(iv).
    \226\ See 79 FR 5733.
---------------------------------------------------------------------------

    For purposes of calculating the aggregate fund limit and the
covered fund deduction, the 2013 rule includes a different calculation
with respect to restricted profit interests in a covered fund organized
or offered by a banking entity pursuant to paragraph (d)(1)(G).\227\
Specifically, for purposes of calculating a banking entity's compliance
with the aggregate fund limit and the covered fund deduction, the
banking entity must include any amounts paid by the banking entity or
an employee in connection with obtaining a restricted profit interest
in the covered fund.\228\ The agencies continue to believe that it is
appropriate for a banking entity to count amounts invested by the
banking entity (or its affiliates) to acquire restricted profit
interests in a fund organized and offered by the banking entity for
purposes of the aggregate fund limit and capital deduction. However,
the agencies believe attribution of employee and director ownership of
restricted profit interests to a banking entity may not be necessary in
the circumstance when a banking entity does not finance, directly or
indirectly, the employee or director's acquisition of a restricted
profit interest in a covered fund organized or offered by the banking
entity. Therefore, the proposal would limit the attribution of an
employee or director's restricted profit interest in a covered fund
organized or offered by the banking entity to only those circumstances
when the banking entity has directly or indirectly financed the
acquisition of the restricted profit interest. This proposed revision
would not change the treatment of the banking entity's or its
affiliates' ownership of a restricted profit interest under the
implementing regulations. The agencies expect that the proposed change
may simplify a banking entity's compliance with the aggregate fund
limit and covered fund deduction provisions of the rule, and more fully
recognize that employees and directors may use their own resources, not
provided by the banking entity, to invest in ownership interests or
restricted profit interests in a covered fund they advise (for example,
to align their personal financial interests with those of other
investors in the covered fund).
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    \227\ 2013 rule Sec.  _.10(d)(6)(C); Sec.  _.12(c)(1), (d). See
also 12 U.S.C. 1851(d)(1)(G).
    \228\ Id.
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    Question 78. Under the proposal, the right to participate in the
removal of an investment manager for cause, or to nominate or vote on a
nominated replacement manager upon an investment manager's resignation
or removal, would be limited to removal or replacement upon the
occurrence of an event of default or an acceleration event. Commenters
noted in comments on the 2018 proposal that loan securitizations may
include additional ``for cause'' termination events (e.g., the
insolvency of the investment manager; the breach by the investment
manager of certain representations or warranties; or the occurrence of
a ``key person'' event or a change in control with respect to the
investment manager) that might not constitute an event of default.
Should the proposal be expanded to include the right to participate in
any removal of an investment manager for cause, or to nominate or vote
on a nominated replacement manager upon an investment manager's
resignation or removal, whether or not an event of default or an
acceleration event has occurred? Why or why not?
    Question 79. Under the current rule, an interest that has the right
to receive a share of the income, gains or profits of the covered fund
is considered an ownership interest. Should the agencies modify this
condition to clarify that only an interest which has the right to
receive a share of the ``net'' income, gains or profits of the covered
fund is an ownership interest? If so, why?
    Question 80. Is the proposed safe harbor appropriate? Why or why
not? Do the proposed conditions under the safe harbor sufficiently
alleviate concerns that a senior debt instrument would not be construed
as an ownership interest? If not, what amendments should be made to the
proposed conditions under the safe harbor or what additional conditions
should be added and why? In particular, should the reference to ``fixed
principal payments'' under the safe harbor condition in paragraph
(d)(6)(ii)(B)(1)(ii) be replaced with ``contractually determined
principal payments,'' ``repayment of a fixed principal amount,'' or any
other similar wording that may be more representative of typical
principal distributions under various types of debt instruments,
including asset-backed securities?
    Question 81. Should the safe harbor be limited only to senior debt
instruments, as proposed? Why or why not? If so, do the proposed
conditions sufficiently distinguish between senior debt instruments and
other debt instruments?
    Question 82. Should the agencies modify the methodology of
calculating a banking entity's compliance with the aggregate fund limit
and covered fund deduction in the manner proposed? Why or why not?
Would the proposed revisions pose any risk that a banking entity could
evade the aggregate fund limit and covered fund deduction, and if so,
how? Would additional restrictions on the treatment of restricted
profit interests be appropriate?

F. Parallel Investments

    The 2013 rule requires that a banking entity hold no more than
three percent of the total ownership interests of a covered fund that
the banking entity organizes and offers pursuant to Sec.  _.11 of the
2013 rule.\229\ Section _.12(b)(1)(i) of the 2013 rule requires that,
for purposes of this ownership limitation, ``the amount and value of a
banking entity's permitted investment in any single covered fund shall
include any ownership interest held under Sec.  _.12 directly by the
banking entity, including any affiliate of the banking entity.'' \230\
Section _.12(b) also includes several other rules of construction that
address circumstances under which an investment in a covered fund would
be attributed to a banking entity.
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    \229\ 2013 rule Sec.  _.12(a).
    \230\ 2013 rule Sec.  _.12(b)(1)(i).
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    The 2011 notice of proposed rulemaking included a proposed
provision that would have required attribution, under certain
circumstances, of certain direct investments by a banking entity
alongside, or otherwise in parallel with, a covered fund.\231\ When
adopting the 2013 rule, the agencies declined to adopt the proposed
provision governing parallel investments after considering the language
of the statute and commenters' views on that provision. Commenters
asserted that the provision was inconsistent with the statute, which
limits investments in covered funds and not direct investments.\232\ In
declining

to adopt this parallel investment provision, the agencies noted that
banking entities rely on a number of investment authorities and
structures to make investments and meet the needs of their
clients.\233\
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    \231\ See Prohibitions and Restrictions on Proprietary Trading
and Certain Interests in, and Relationships With, Hedge Funds and
Private Equity Funds, 76 FR 68846, 68951-52 (Nov. 7, 2011) (``To the
extent that a covered banking entity is contractually obligated to
directly invest in, or is found to be acting in concert through
knowing participation in a joint activity or parallel action toward
a common goal of investing in, one or more investments with a
covered fund that is organized and offered by the covered banking
entity, whether or not pursuant to an express agreement, such
investments shall be included in any calculation required under
paragraph (a)(2) of this section.'') (2011 proposed rule).
    \232\ ABA (arguing that there was no basis in the statute for
any of the attribution rules proposed in the 2011 notice of proposed
rulemaking, including the proposed provision regarding the treatment
of an investment the banking entity is contractually obligated to
invest in alongside a sponsored covered fund).
    \233\ 79 FR 5734.
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    The 2013 rule restricts a banking entity's investment in a covered
fund organized and offered pursuant to Sec.  _.11 to three percent of
the total number or value of the outstanding ownership interests of the
fund.\234\ That regulatory requirement is consistent with section
13(d)(4) of the BHC Act, which limits the size of investments by a
banking entity in a hedge fund or private equity fund.\235\ Neither
section 13(d)(4) of the BHC Act nor the text of the 2013 rule require
that a banking entity treat an otherwise permissible investment the
banking entity makes alongside a covered fund as an investment in the
covered fund. The text of the 2013 rule does not impose any
quantitative limits on any investments by banking entities made
alongside, or otherwise in parallel with, covered funds.\236\
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    \234\ 2013 rule Sec.  _.12(a).
    \235\ 12 U.S.C. 1851(d)(4).
    \236\ Any investment by the banking entity would need to comply
with the proprietary trading restrictions in Subpart B of the
implementing regulations.
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    However, in the preamble to the 2013 rule, the agencies went on to
discuss the potential for evasion of the per fund limit and aggregate
fund limit in the 2013 rule, and stated that ``if a banking entity
makes investments side by side in substantially the same positions as
the covered fund, then the value of such investments shall be included
for purposes of determining the value of the banking entity's
investment in the covered fund.'' \237\ The agencies also stated that
``a banking entity that sponsors the covered fund should not itself
make any additional side by side co-investment with the covered fund in
a privately negotiated investment unless the value of such co-
investment is less than 3% of the value of the total amount co-invested
by other investors in such investment.'' \238\
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    \237\ 79 FR 5734 (emphasis added).
    \238\ See id. at 5734 Id.
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    The agencies did not discuss the application of the per fund limit
and aggregate fund limit in the context of a banking entity's
investments alongside a covered fund in the 2018 proposal. Nonetheless,
in response to the 2018 proposal, three commenters recommended that the
rule should not impose a limit on parallel investments and noted that
this restriction is not reflected in the 2013 rule text.\239\ These
commenters argued that a restriction on parallel investments interferes
with banking entities' ability to make otherwise permissible
investments directly on their balance sheets. These commenters also
contended that it is not necessary to restrict direct investments by a
banking entity in this manner because these investments are subject to
all the capital and safety and soundness requirements that apply to the
banking entity.\240\ Further, two commenters asserted that such direct
investments are also subject to the proprietary trading provisions of
the 2013 rule.\241\
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    \239\ FSF; Goldman; and SIFMA.
    \240\ FSF; Goldman; and SIFMA.
    \241\ FSF and SIFMA.
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    In light of the comments received, the agencies are proposing to
add a new rule of construction to Sec.  _.12(b) that would address
investments made by banking entities alongside covered funds.\242\ As
discussed in more detail below, these provisions would clarify in the
rule text that banking entities are not required to treat these types
of direct investments alongside a covered fund as an investment in the
covered fund as long as certain conditions are met.
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    \242\ Proposed rule Sec.  _.12(b)(5). These kinds of investments
could be, for example, parallel investments or co-investments. For
these purposes, ``parallel investments'' generally refers to a
series of investments that are made side-by-side with a covered
fund, and ``co-investments'' generally refers to a specific
investment opportunity that is made available to third-parties when
the general partner or investment manager for the covered fund
determines that the covered fund does not have sufficient capital
available to make the entire investment in the target portfolio
company or determines that it would not be suitable for the covered
fund to take the entire available investment.
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    Specifically, proposed Sec.  _.12(b)(5) would provide that:

     A banking entity shall not be required to include in
the calculation of the investment limits under Sec.  _.12(a)(2) 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.
     A banking entity shall not be restricted under Sec.
_.12 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.

    As discussed in the preamble to the 2013 rule, the agencies
recognize that banking entities rely on a number of investment
authorities and structures to make investments and meet the needs of
their clients and shareholders.\243\ The proposed rule of construction
would provide clarity to banking entities that they may make such
investments for the benefit of their clients and shareholders, provided
that those investments comply with applicable laws and regulations.
Accordingly, banking entities would not be permitted to engage in
prohibited proprietary trading alongside a covered fund. Moreover,
banking entities would need to have authority to make any investment
alongside a covered fund under applicable banking and other laws and
regulations, and would need to ensure that the investment complies with
applicable safety and soundness standards. For example, national banks
are restricted in their ability to make direct equity investments under
12 U.S.C. 24(Seventh) and 12 CFR part 1. Banking entities that rely on
the proposed rule of construction to invest alongside a covered fund
that is organized and offered by the banking entity pursuant to Sec.
_.11 would still be required to comply with all of the conditions under
Sec.  _.11 with respect to the covered fund, which would, among other
things, prohibit the banking entity from guaranteeing, assuming, or
otherwise insuring the obligations or performance of the covered fund.
As a result, the banking entity would not be permitted to make a direct
investment alongside a covered fund that the banking entity organizes
and offers for the purpose of artificially maintaining or increasing
the value of the fund's positions. The banking entity would also need
to ensure that any such direct investment alongside an organized and
offered covered fund does not cause the sponsoring banking entity's
permitted organizing and offering activities to violate the prudential
backstops under Sec.  _.15.\244\ In particular, to the extent the
investment would result in a material conflict of interest between the
banking entity and its clients, for example because the banking entity
may exit the position at a different time or on different terms than
the covered fund, the banking entity would be required to provide
timely and effective disclosure in accordance with Sec.  _.15(b) prior
to making the investment.
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    \243\ 79 FR 5734.
    \244\ The agencies note that the banking entity's direct
investment would not itself be subject to Sec.  _.15.
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    The 2013 rule imposes certain attribution rules and eligibility
requirements for investments by directors and employees of a banking
entity in covered funds organized and offered by the banking entity.
Specifically, Sec.  _.12(b)(1)(iv) of the 2013 rule requires
attribution of an investment by a director or employee of a banking
entity who acquires an ownership interest in his or her personal
capacity in a covered fund sponsored by the banking entity if the

banking entity, directly or indirectly, extends financing for the
purpose of enabling the director or employee to acquire the ownership
interest in the fund and the financing is used to acquire such
ownership interest in the covered fund. Section _.11(a)(7) prohibits
investments by any director or employee of the banking entity (or an
affiliate thereof) in the covered fund, other than any director or
employee who is directly engaged in providing investment advisory,
commodity trading advisory, or other services to the covered fund at
the time the director or employee makes the investment.
    The agencies recognize that directors and employees of banking
entities may participate in investments alongside a covered fund, for
example on an ad hoc basis or as part of a compensation arrangement.
Consistent with the agencies' proposed rule of construction regarding
direct investments by banking entities alongside a covered fund, the
agencies would expect that any direct investments (whether a series of
parallel investments or a co-investment) by a director or employee of a
banking entity (or an affiliate thereof) made alongside a covered fund
in compliance with applicable laws and regulations would not be treated