[Federal Register Volume 85, Number 40 (Friday, February 28, 2020)]
[Proposed Rules]
[Pages 12120-12206]
[FR Doc No: 2020-02707]

Vol. 85

Friday,

No. 40

February 28, 2020

Part III

Department of the Treasury

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Office of the Comptroller of the Currency

Federal Reserve System

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Federal Deposit Insurance Corporation

Commodity Futures Trading Commission

Securities and Exchange Commission

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12 CFR Parts 44, 248, and 351

17 CFR Parts 75 and 255

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

Federal Register / Vol. 85 , No. 40 / Friday, February 28, 2020 /
Proposed Rules

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 44

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

FEDERAL RESERVE SYSTEM

12 CFR Part 248

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

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 351

RIN 3064-AF17

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 75

RIN 3038-AE93

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 255

[Release No. BHCA-8; File No. S7-02-20]
RIN 3235-AM70

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

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

ACTION: Notice of proposed rulemaking.

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

DATES: Comments must be received on or before April 1, 2020.

ADDRESSES: Interested parties are encouraged to submit written comments
jointly to all of the agencies. Commenters are encouraged to use the
title ``Proposed Revisions to Restrictions on Proprietary Trading and
Certain Interests in, and Relationships with, Hedge Funds and Private
Equity Funds'' to facilitate the organization and distribution of
comments among the agencies. Commenters are also encouraged to identify
the number of the specific question for comment to which they are
responding. Comments should be directed to:
    OCC: You may submit comments to the OCC by any of the methods set
forth below. Commenters are encouraged to submit comments through the
Federal eRulemaking Portal or email, if possible. Please use the title
``Proposed Revisions to Prohibitions and Restrictions on Proprietary
Trading and Certain Interests in, and Relationships with, Hedge Funds
and Private Equity Funds'' to facilitate the organization and
distribution of the comments. You may submit comments by any of the
following methods:
    Federal eRulemaking Portal--``Regulations.gov Classic or
Regulations.gov Beta'':
    Regulations.gov Classic: Go to https://www.regulations.gov/. Enter
``Docket ID OCC-2020-0002'' in the Search Box and click ``Search.''
Click on ``Comment Now'' to submit public comments. For help with
submitting effective comments please click on ``View Commenter's
Checklist.'' Click on the ``Help'' tab on the Regulations.gov home page
to get information on using Regulations.gov, including instructions for
submitting public comments.
    Regulations.gov Beta: Go to https://beta.regulations.gov/ or click
``Visit New Regulations.gov Site'' from the Regulations.gov Classic
homepage. Enter ``Docket ID OCC-2020-0002'' in the Search Box and click
``Search.'' Public comments can be submitted via the ``Comment'' box
below the displayed document information or by clicking on the document
title and then clicking the ``Comment'' box on the top-left side of the
screen. For help with submitting effective comments please click on
``Commenter's Checklist.'' For assistance with the Regulations.gov Beta
site, please call<PHONE_NUMBER> (toll free) or<PHONE_NUMBER> Monday-
Friday, 9 a.m.-5 p.m. ET or email<EMAIL_ADDRESS>     Email<EMAIL_ADDRESS>     Mail: Chief Counsel's Office, Office of the Comptroller of
the Currency, 400 7th Street SW, Suite 3E-218, Washington, DC 20219.
     Hand Delivery/Courier: 400 7th Street SW, Suite 3E-218,
Washington, DC 20219.
     Fax:<PHONE_NUMBER>.
    Instructions: You must include ``OCC'' as the agency name and
``Docket ID OCC 2020-0002'' in your comment. In general, the OCC will
enter all comments received into the docket and publish the comments on
the Regulations.gov website without change, including any business or
personal information that you provide such as name and address
information, email addresses, or phone numbers. Comments received,
including attachments and other supporting materials, are part of the
public record and subject to public disclosure. Do not include any
information in your comment or supporting materials that you consider
confidential or inappropriate for public disclosure.
    You may review comments and other related materials that pertain to
this rulemaking action by any of the following methods:
     Viewing Comments Electronically--Regulations.gov Classic
or Regulations.gov Beta:
    Regulations.gov Classic: Go to https://www.regulations.gov/. Enter
``Docket ID OCC-2020-0002'' in the Search box and click ``Search.''
Click on ``Open Docket Folder'' on the right side of the screen.
Comments and supporting materials can be viewed and filtered by
clicking on ``View all documents and comments in this docket'' and then
using the filtering tools on the left side of the screen. Click on the
``Help'' tab on the Regulations.gov home page to get information on
using Regulations.gov. The docket may be viewed after the close of the
comment period in the same manner as during the comment period.
    Regulations.gov Beta: Go to https://beta.regulations.gov/ or click
``Visit New Regulations.gov Site'' from the Regulations.gov Classic
homepage. Enter ``Docket ID OCC-2020-0002'' in the Search Box and click
``Search.'' Click on the ``Comments'' tab. Comments can be viewed and
filtered by clicking on the ``Sort By'' drop-down on the right side of
the screen or the ``Refine Results'' options on the left side of the
screen. Supporting materials can be viewed by clicking on the
``Documents'' tab and filtered by clicking on the ``Sort By'' drop-down
on the right side of the screen or the ``Refine Results'' options on
the left side

of the screen. For assistance with the Regulations.gov Beta site,
please call<PHONE_NUMBER> (toll free) or<PHONE_NUMBER> Monday-Friday,
9 a.m.-5 p.m. ET or email<EMAIL_ADDRESS>    The docket may be viewed after the close of the comment period in
the same manner as during the comment period.
     Viewing Comments Personally: You may personally inspect
comments at the OCC, 400 7th Street SW, Washington, DC 20219. For
security reasons, the OCC requires that visitors make an appointment to
inspect comments. You may do so by calling<PHONE_NUMBER> or, for
persons who are deaf or hearing impaired, TTY,<PHONE_NUMBER>. Upon
arrival, visitors will be required to present valid government-issued
photo identification and submit to security screening in order to
inspect comments.
    Board: You may submit comments, identified by Docket No. R-1694;
RIN 7100-AF70, by any of the following methods:
     Agency Website: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Email<EMAIL_ADDRESS>Include docket
and RIN numbers in the subject line of the message.
     Fax:<PHONE_NUMBER> or<PHONE_NUMBER>.
     Mail: Ann E. Misback, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue NW,
Washington, DC 20551.
    All public comments will be made available on the Board's website
at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons or to remove
personally identifiable information at the commenter's request.
Accordingly, comments will not be edited to remove any identifying or
contact information. Public comments may also be viewed electronically
or in paper form in Room 146, 1709 New York Avenue NW, Washington, DC
20006, between 9:00 a.m. and 5:00 p.m. on weekdays.
    FDIC: You may submit comments, identified by RIN 3064-AF17 by any
of the following methods:
     Agency Website: https://www.FDIC.gov/regulations/laws/federal/propose.html. Follow instructions for submitting comments on
the Agency website.
     Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th
Street NW, Washington, DC 20429.
     Hand Delivered/Courier: Comments may be hand-delivered to
the guard station at the rear of the 550 17th Street, NW, building
(located on F Street) on business days between 7:00 a.m. and 5:00 p.m.
     Email<EMAIL_ADDRESS>Include the 3064-AF17 on the
subject line of the message.
     Public Inspection: All comments received must include the
agency name and RIN 3064-AF17 for this rulemaking. All comments
received will be posted without change to http://www.fdic.gov/regulations/laws/federal/, including any personal information provided.
Paper copies of public comments may be ordered from the FDIC Public
Information Center, 3501 North Fairfax Drive, Room E-1002, Arlington,
VA 22226 or by telephone at<PHONE_NUMBER> or<PHONE_NUMBER>.
    CFTC: You may submit comments, identified by RIN 3038-AE93 and
``Proposed Revisions to Prohibitions and Restrictions on Proprietary
Trading and certain Interests in, and Relationships with, Hedge Funds
and Private Equity Funds,'' by any of the following methods:
     Agency Website: https://comments.cftc.gov. Follow the
instructions on the website for submitting comments.
     Mail: Send to Christopher Kirkpatrick, Secretary,
Commodity Futures Trading Commission, 1155 21st Street NW, Washington,
DC 20581.
     Hand Delivery/Courier: Same as Mail above.
    Please submit your comments using only one method. All comments
must be submitted in English, or if not, accompanied by an English
translation. Comments will be posted as received to www.cftc.gov and
the information you submit will be publicly available. If, however, you
submit information that ordinarily is exempt from disclosure under the
Freedom of Information Act, you may submit a petition for confidential
treatment of the exempt information according to the procedures set
forth in CFTC Regulation 145.9.1. The CFTC reserves the right, but
shall have no obligation, to review, pre-screen, filter, redact, refuse
or remove any or all of your submission from www.cftc.gov that it may
deem to be inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the rulemaking will be retained in the public comment
file and will be considered as required under the Administrative
Procedure Act and other applicable laws, and may be accessible under
the Freedom of Information Act.
    SEC: You may submit comments by the following methods:

Electronic Comments

     Use the SEC's internet comment form (http://www.sec.gov/rules/proposed.shtml); or
    Send an email to<EMAIL_ADDRESS>Please include File Number
S7-02-20 on the subject line.

Paper Comments

     Send paper comments in triplicate to Vanessa A.
Countryman, Secretary, Securities and Exchange Commission, 100 F Street
NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-02-20. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. The SEC will post all comments on the SEC's website (http://www.sec.gov/rules/proposed.shtml). Comments are also available for
website viewing and printing in the SEC's Public Reference Room, 100 F
Street NE, Washington, DC 20549, on official business days between the
hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted
without change. Persons submitting comments are cautioned that the SEC
does not redact or edit personal identifying information from comment
submissions. You should submit only information that you wish to make
available publicly.
    Studies, memoranda, or other substantive items may be added by the
SEC or SEC staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any materials will
be made available on the SEC's website. To ensure direct electronic
receipt of such notifications, sign up through the ``Stay Connected''
option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT:
    OCC: Roman Goldstein, Risk Specialist, Treasury and Market Risk
Policy,<PHONE_NUMBER>; Tabitha Edgens, Counsel; Mark O'Horo, Senior
Attorney, Chief Counsel's Office,<PHONE_NUMBER>; for persons who are
deaf or hearing impaired, TTY,<PHONE_NUMBER>, Office of the
Comptroller of the Currency, 400 7th Street SW, Washington, DC 20219.
    Board: Flora Ahn, Special Counsel,<PHONE_NUMBER>, Gregory
Frischmann, Senior Counsel,<PHONE_NUMBER>, Kirin Walsh, Attorney,
(202) 452-3058, or Sarah Podrygula, Attorney,<PHONE_NUMBER>, Legal
Division, Elizabeth

MacDonald, Manager,<PHONE_NUMBER>, Cecily Boggs, Senior Financial
Institution Policy Analyst,<PHONE_NUMBER>, Jinai Holmes, Lead
Financial Institution Policy Analyst,<PHONE_NUMBER>, Division of
Supervision and Regulation; Board of Governors of the Federal Reserve
System, 20th and C Streets NW, Washington, DC 20551.
    FDIC: Bobby R. Bean, Associate Director<EMAIL_ADDRESS>Andrew D.
Carayiannis, Senior Policy Analyst<EMAIL_ADDRESS>or Brian
Cox, Senior Policy Analyst<EMAIL_ADDRESS>Capital Markets Branch,
(202) 898-6888; Michael B. Phillips, Counsel<EMAIL_ADDRESS>or
Benjamin J. Klein, Counsel<EMAIL_ADDRESS>Legal Division, Federal
Deposit Insurance Corporation, 550 17th Street NW, Washington, DC
20429.
    CFTC: Cantrell Dumas, Special Counsel,<PHONE_NUMBER>,
<EMAIL_ADDRESS>Jeffrey Hasterok, Data and Risk Analyst, (646) 746-
9736<EMAIL_ADDRESS>Division of Swap Dealer and Intermediary
Oversight; Mark Fajfar, Assistant General Counsel,<PHONE_NUMBER>,
<EMAIL_ADDRESS>Office of the General Counsel; Stephen Kane, Research
Economist,<PHONE_NUMBER><EMAIL_ADDRESS>Office of the Chief
Economist; Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.
    SEC: Matthew Cook, Senior Counsel, Benjamin Tecmire, Senior
Counsel, and Jennifer Songer, Branch Chief at<PHONE_NUMBER> or
<EMAIL_ADDRESS>Division of Investment Management, U.S. Securities and
Exchange Commission, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

Table of Contents

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

I. Background

    Section 13 of the Bank Holding Company Act of 1956 (BHC Act),\1\
also known as the Volcker Rule, generally prohibits any banking entity
from engaging in proprietary trading or from acquiring or retaining an
ownership interest in, sponsoring, or having certain relationships with
a hedge fund or private equity fund (covered fund).\2\ The statute
expressly exempts from these prohibitions various activities, including
among other things:
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    \1\ 12 U.S.C. 1851.
    \2\ Id.
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     Underwriting and market making-related activities;
     Risk-mitigating hedging activities;
     Activities on behalf of customers;
     Activities for the general account of insurance companies;
and
     Trading and covered fund activities and investments by
non-U.S. banking entities solely outside the United States.\3\
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    \3\ 12 U.S.C. 1851(d)(1).
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    In addition, section 13 of the BHC Act contains an exemption that
permits banking entities to organize and offer, including sponsor,
covered funds, subject to certain restrictions, including that banking
entities do not rescue investors in those funds from loss, and are not
themselves exposed to significant losses due to investments in or other
relationships with these funds.\4\
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    \4\ 12 U.S.C. 1851(d)(1)(G). Other restrictions and requirements
include: (1) The banking entity provides bona fide trust, fiduciary,
or investment advisory services; (2) the fund is organized and
offered only to customers in connection with the provision of such
services; (3) the banking entity does not have an ownership interest
in the fund, except for a de minimis investment; (4) the banking
entity complies with certain marketing restrictions related to the
fund; (5) no director or employee of the banking entity has an
ownership interest in the fund, with certain exceptions; and (6) the
banking entity discloses to investors that it does not guarantee the
performance of the fund. Id.
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    Authority under section 13 of the BHC Act for developing and
adopting regulations to implement the prohibitions, restrictions, and
exemptions of section 13 is shared among the Board, the FDIC, the OCC,
the SEC, and the CFTC (individually, an agency, and collectively, the
agencies).\5\ The agencies originally issued a final rule implementing
section 13 in December 2013 (the 2013 rule), and those provisions
became effective on April 1, 2014.\6\
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    \5\ 12 U.S.C. 1851(b)(2).
    \6\ Prohibitions and Restrictions on Proprietary Trading and
Certain Interests in, and Relationships with, Hedge Funds and
Private Equity Funds; Final Rule, 79 FR 5535 (Jan. 31, 2014).
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    The agencies published a notice of proposed rulemaking in July 2018
(the 2018 proposed rule or 2018 proposal) that proposed several
amendments to the 2013 rule.\7\ These proposed revisions sought to
provide greater clarity and certainty about what activities are
prohibited under the 2013 rule--in particular, under the prohibition on
proprietary trading--and to better tailor the compliance requirements
based on the risk of a banking entity's activities. The agencies issued
a final rule implementing the amendments in November 2019 (the 2019
amendments), and those provisions became effective in January 2020.\8\
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    \7\ Proposed Revisions to Prohibitions and Restrictions on
Proprietary Trading and Certain Interests in, and Relationships
With, Hedge Funds and Private Equity Funds, 83 FR 33432 (July 17,
2018).
    \8\ Prohibitions and Restrictions on Proprietary Trading and
Certain Interests in, and Relationships With, Hedge Funds and
Private Equity Funds, 84 FR 61974 (Nov. 14, 2019). The agencies
refer to the regulations implementing section 13 of the BHC Act that
are effective as of February 28, 2020 as the ``implementing
regulations.''
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    As part of the 2018 proposal, the agencies suggested targeted
changes to the provisions of the 2013 rule relating to acquiring or
retaining an ownership interest in, sponsoring, or having certain
relationships with a fund and sought comments on other aspects of the
covered fund provisions beyond those changes for which specific rule
text was proposed.\9\ The 2019 amendments finalized those changes to
the covered fund provisions for which specific rule text was proposed
in the 2018 proposal. The agencies indicated they would continue to
consider other aspects of the covered fund provisions and intended to
issue a separate proposed rulemaking that specifically addresses those
areas.\10\
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    \9\ 83 FR 33471-87.
    \10\ 84 FR 62016.
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    The staffs of the agencies also have addressed several questions
concerning the regulations implementing section 13 through a series of
staff Frequently Asked Questions (FAQs).\11\ In the 2018

proposal, the agencies requested comment on the effectiveness of the
guidance provided in certain of these FAQs.\12\ The agencies discussed
comments received in the preamble to the 2019 amendments.\13\ The
proposed rule would not modify or revoke any previously issued staff
FAQs, unless otherwise specified.
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    \11\ See https://www.occ.treas.gov/topics/capitalmarkets/financial-markets/trading-volckerrule/volcker-rule-implementation-faqs.html (OCC); https://www.federalreserve.gov/bankinforeg/volcker-rule/faq.htm (Board); https://www.fdic.gov/regulations/reform/volcker/faq.html (FDIC); https://www.sec.gov/divisions/marketreg/faq-volcker-rule-section13.htm (SEC); https://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_28_VolckerRule/index.htm
(CFTC).
    \12\ 83 FR 33444-33446.
    \13\ 84 FR 61978-61980.
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High-Level Summary of Comments on 2018 Proposal 14
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    \14\ This summary is not meant to be a comprehensive assessment
of the comments received on the 2018 proposal and only reviews
certain major areas of interest. Comments are discussed in greater
detail throughout this SUPPLEMENTARY INFORMATION.
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    The agencies invited comment on all aspects of the 2018 proposal
and received over 75 unique comments and approximately 3,700 comments
from individuals using a version of a short form letter to express
opposition to the 2018 proposed rule.\15\ The preamble to the 2019
amendments reviewed comments relating to the proprietary trading
provisions of the 2018 proposal and the covered fund provisions that
were adopted as part of the 2019 amendments. The agencies generally
deferred public consideration of comments received on other aspects of
the covered fund provisions to a future proposed rulemaking.
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    \15\ 84 FR 61976.
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    Various industry groups suggested maintaining the 2013 rule's base
definition of covered fund, citing costs associated with complying with
a new definition, while others supported an alternative definition. A
number of industry groups and banks, and several Members of Congress,
urged the agencies to amend the definition of covered fund to exclude
certain funds, including the following: (1) Family wealth investment
vehicles; (2) funds that extend credit to customers; (3) long-term
investment funds that do not engage in any short-term proprietary
trading; (4) venture capital funds; and (5) customer facilitation
funds. Various public interest commenters objected to any additional
exclusions, citing insufficient notice in the 2018 proposal and the
potential for evasion of the 2013 rule.
    Commenters also proposed modifying the 2013 rule's existing
exclusions from the definition of covered fund. Numerous industry
groups suggested revising the exclusion for foreign public funds to
focus on the characteristics of the fund and foreign regulations,
rather than imposing specific conduct requirements that are difficult
to monitor and verify. Several industry groups made various suggestions
for simplifying the loan securitization exemption, including expanding
the securities an issuer is permitted to hold and permitting an issuer
to hold up to a certain percent of assets in non-loan assets.
    Finally, several bank and industry group commenters supported
making the exemptions under section 23A of the Federal Reserve Act and
the Board's Regulation W available under section 13(f) of the BHC Act.
Several such commenters also supported exempting certain payment,
clearing, and settlement services from the restrictions. A foreign bank
industry group also recommended limiting the application of section
13(f) to the U.S. operations of foreign firms.

II. Overview of Proposal

    The agencies are issuing a notice of proposed rulemaking that
proposes specific changes to the restrictions on covered fund
investments and activities and other issues related to the treatment of
investment funds in the implementing regulations (the proposal or the
proposed rule). The proposed rule is intended to improve and streamline
the covered fund provisions and provide clarity to banking entities so
that they can offer financial services and engage in other permissible
activities in a manner that is consistent with the requirements of
section 13 of the BHC Act.
    To better limit the extraterritorial impact of the implementing
regulations, the proposal would exempt the activities of certain funds
that are organized outside of the United States and offered to foreign
investors (qualifying foreign excluded funds) from the restrictions of
the implementing regulations. In certain circumstances, some foreign
funds that are not ``covered funds'' may be subject to the implementing
regulations as ``banking entities,'' if they are controlled by a
foreign banking entity, and thus could be subject to more onerous
compliance obligations than are imposed on similarly-situated covered
funds, even though the foreign funds have limited nexus to the United
States. This provision would codify an existing policy statement by the
Federal banking agencies that addresses the potential attribution to a
foreign banking entity of the activities and investments of qualifying
foreign excluded funds.
    The proposal also would make modifications to several existing
exclusions from the covered fund provisions, to provide clarity and
simplify compliance with the requirements of the implementing
regulations. First, the proposal would revise certain restrictions in
the foreign public funds exclusion to more closely align the provision
with the exclusion for similarly-situated U.S. registered investment
companies. Second, the proposed rule would permit loan securitizations
excluded from the rule to hold a small amount of non-loan assets,
consistent with past industry practice, and codify existing staff-level
guidance regarding this exclusion. In addition, the proposed rule would
revise the exclusion for small business investment companies to account
for the life cycle of those companies and would request comment on
whether to clarify the scope of the exclusion for public welfare
investments, including as it relates to rural business investment
companies and qualified opportunity zone funds. Finally, the proposed
rule would address concerns about certain components of the preamble to
the 2013 rule related to calculating a banking entity's ownership
interests in covered funds.
    The agencies recognized in the preamble to the 2013 rule that the
definition of ``covered fund'' was expansive \16\ and, based on their
experience implementing the rule, the agencies are now proposing
several new exclusions from the covered fund provisions to address the
potential over-breadth of the covered fund definition and related
requirements. For example, the agencies recognize that the exclusions
in the implementing regulations have inhibited banking entities'
relationships with credit funds, and the proposed rule would create a
new exclusion for such funds. Under the proposal, banking entities
would be able to invest in and have certain relationships with credit
funds that extend the type of credit that a banking entity may provide
directly, subject to certain safeguards. Relatedly, the proposed rule
would establish an exclusion from the definition of covered fund for
venture capital funds. This provision would help ensure that banking
entities can fully engage in this important type of development and
investment activity, which may facilitate capital formation and provide
important financing for small businesses, particularly in areas where
such financing may not be readily available.
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    \16\ See 79 FR 5677.
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    The proposal also would include two new exclusions that would allow
banking entities to provide certain traditional financial services via
a fund structure, subject to certain safeguards.

First, the proposed rule would exclude from the definition of covered
fund an entity created and used to facilitate a customer's exposures to
a transaction, investment strategy, or other service. Second, the
proposal would exclude from the covered fund definition wealth
management vehicles that manage the investment portfolio of a family,
and certain other persons, allowing a banking entity to provide
integrated private wealth management services.
    In addition, the proposed rule would permit a banking entity to
engage in a limited set of covered transactions with a covered fund the
banking entity sponsors or advises or with which the banking entity has
certain other relationships. The implementing regulations generally
prohibit all covered transactions between a covered fund and its
banking entity sponsor or investment adviser. The agencies recognize
that the existing restrictions have prevented banking entities from
providing certain traditional banking services to covered funds, such
as standard payment, clearing, and settlement services to related
covered funds.
    Lastly, the proposal would clarify certain aspects of the
definition of ownership interest. Currently, due to the broad
definition of ownership interest, some loans by banking entities to
covered funds could be deemed to be ownership interests. The proposal
would provide a safe harbor for bona fide senior loans or senior debt
instruments to make clear that an ``ownership interest'' in a fund does
not include such credit interests in the fund. In addition, the
proposal would provide clarity about the types of credit rights that
would be considered within the scope of the definition of ownership
interest. Finally, the proposed rule would simplify compliance efforts
by tailoring the calculation of a banking entity's compliance with the
implementing regulations' aggregate fund limit and covered fund
deduction, and provide clarity to banking entities regarding their
permissible investments made alongside covered funds.\17\
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    \17\ Separately, the agencies are proposing various technical
edits to the implementing regulations. See infra III.G (Technical
Amendments).
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    The agencies request comment regarding all aspects of the proposed
rule. Specific requests for comment are included in the following
sections. Comments on the proposal must be submitted to the agencies on
or before April 1, 2020.

III. Discussion of the Proposal

A. Qualifying Foreign Excluded Funds

    Since the adoption of the 2013 rule, a number of foreign banking
entities, foreign government officials, and other market participants
have expressed concern regarding instances in which certain funds
offered and sold outside of the United States are excluded from the
covered fund definition but still could be considered banking entities
in certain circumstances (foreign excluded funds).\18\ This situation
may occur if a foreign banking entity controls the foreign fund. A
foreign banking entity could be considered to control the fund based on
common corporate governance structures abroad such as where the fund's
sponsor selects the majority of the fund's directors or trustees, or
otherwise controls the fund for purposes of section 13 of the BHC Act
by contract or through a controlled corporate director. As a result,
such a fund would be subject to the requirements of section 13 and the
implementing regulations, including restrictions on proprietary
trading, restrictions on investing in or sponsoring covered funds, and
compliance obligations.
---------------------------------------------------------------------------

    \18\ The 2013 rule generally excludes covered funds from the
definition of ``banking entity.'' 2013 rule Sec.  _.2(c)(2)(i).
However, because foreign excluded funds are not covered funds, they
can become banking entities through affiliation with other banking
entities.
---------------------------------------------------------------------------

    The Federal banking agencies released a policy statement on July
21, 2017 (the 2017 policy statement) to address concerns about the
possible unintended consequences and extraterritorial impact of section
13 and the 2013 rule for foreign excluded funds.\19\ The 2017 policy
statement noted that the staffs of the agencies were considering
alternative ways in which the 2013 rule could be amended, or other
appropriate action could be taken, to address any unintended
consequences of section 13 and the 2013 rule for foreign excluded
funds.
---------------------------------------------------------------------------

    \19\ Statement regarding Treatment of Certain Foreign Funds
under the Rules Implementing Section 13 of the Bank Holding Company
Act (July 21, 2017), available at https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20170721a1.pdf.
---------------------------------------------------------------------------

    For purposes of the 2017 policy statement, a ``qualifying foreign
excluded fund'' meant, with respect to a foreign banking entity, an
entity that:
    (1) Is organized or established outside the United States and the
ownership interests of which are offered and sold solely outside the
United States;
    (2) Would be a covered fund were the entity organized or
established in the United States, or is, or holds itself out as being,
an entity or arrangement that raises money from investors primarily for
the purpose of investing in financial instruments for resale or other
disposition or otherwise trading in financial instruments;
    (3) Would not otherwise be a banking entity except by virtue of the
foreign banking entity's acquisition or retention of an ownership
interest in, or sponsorship of, the entity;
    (4) Is established and operated as part of a bona fide asset
management business; and
    (5) Is not operated in a manner that enables the foreign banking
entity to evade the requirements of section 13 or implementing
regulations.
    To provide additional time to consider this issue, the 2017 policy
statement provided that the Federal banking agencies would not propose
to take action during the one-year period ending July 21, 2018, against
a foreign banking entity \20\ based on attribution of the activities
and investments of a qualifying foreign excluded fund to a foreign
banking entity, or against a qualifying foreign excluded fund as a
banking entity. To be eligible for this relief, the foreign banking
entity's acquisition or retention of any ownership interest in, or
sponsorship of, the qualifying foreign excluded fund must have met the
requirements for permitted covered fund activities and investments
solely outside the United States, as provided in section 13(d)(1)(I) of
the BHC Act and Sec.  _.13(b) of the 2013 rule, as if the qualifying
foreign excluded fund were a covered fund. The agencies extended this
relief for an additional period of one year (until July 21, 2019) in
the 2018 proposal.\21\ On July 17, 2019, the Federal banking agencies
released a policy statement (the 2019 policy statement) that further
extended this period to July 21, 2021.\22\ This additional time
facilitates the agencies proposing the specific changes in the proposal
to address this issue and will allow the public to submit comments in
response to the proposal.\23\
---------------------------------------------------------------------------

    \20\ ``Foreign banking entity'' was defined for purposes of the
2017 policy statement to mean a banking entity that is not, and is
not controlled directly or indirectly by, a banking entity that is
located in or organized under the laws of the United States or any
State.
    \21\ 83 FR 33444.
    \22\ Statement regarding Treatment of Certain Foreign Funds
under the Rules Implementing Section 13 of the Bank Holding Company
Act (July 17, 2019), available at https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20190717a1.pdf.
    \23\ The agencies did not propose any specific amendments to the
2013 rule in the 2018 proposal on this issue and instead requested
comment on foreign excluded funds, the policy statements, and
related issues. See, e.g., 83 FR 33442-46.

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

    In response to questions in the 2018 proposal, several commenters
urged the agencies to exclude controlled foreign funds offered solely
outside the United States.\24\ Many suggested that the agencies
accomplish this by excluding these funds from the definition of banking
entity.\25\ Some commenters provided alternative proposals, including
establishing a rebuttable presumption of compliance and making
permanent the relief provided in the 2017 policy statement.\26\ Several
commenters suggested permitting foreign banking entities to opt to be
treated as a covered fund, instead of a banking entity, and providing
additional relief from the limitations on relationships with a covered
fund, under section _.14.\27\ One commenter suggested exempting from
the definition of ``banking entity'' foreign excluded funds controlled
by a non-U.S. banking entity as part of the non-U.S. banking entity's
asset management activities or in connection with consumer derivative
activities not marketed to U.S. residents.\28\ One commenter opposed
any type of exclusion for foreign excluded funds and argued that the
2013 rule as it stands is adequate in relation to the nexus between
U.S. and foreign activities.\29\
---------------------------------------------------------------------------

    \24\ See, e.g., Institute of International Bankers (IIB);
American Investment Council (AIC); American Bankers Association
(ABA); Financial Services Agency/Bank of Japan (FSA/BOJ); Canadian
Bankers Association (CBA); Federated Investors (FI); BVI; European
Banking Federation (EBF); Japanese Bankers Association (JBA); and
Credit Suisse (CS).
    \25\ Id.
    \26\ See, e.g., EBF and IIB.
    \27\ See, e.g., EBF; CS; IIB; and CBA.
    \28\ BVI.
    \29\ Data Boiler.
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    To provide greater clarity and certainty to banking entities and
qualifying foreign excluded funds, the agencies are proposing, pursuant
to their authority under section 13(d)(1)(J) of the BHC Act, to exempt
the activities of qualifying foreign excluded funds. Specifically, the
agencies are proposing to exempt from the proprietary trading
prohibition and covered fund restrictions the purchase or sale of a
financial instrument by a qualifying foreign excluded fund and the
acquisition or retention of any ownership interest in, or the
sponsorship of, a covered fund by a qualifying foreign excluded fund,
if any acquisition or retention of an ownership interest in, or
sponsorship of, the qualifying foreign excluded fund by the foreign
banking entity meets the requirements for permitted covered fund
activities and investments solely outside the United States, as
provided in section _.13(b) of the rule. Under the proposal, a
qualifying foreign excluded fund has the same meaning as in the 2017
and 2019 policy statements as described above.
    Section 13(d)(1)(H) and (I) of the BHC Act permit foreign banking
entities to conduct certain trading and investing activities outside
the United States, notwithstanding the restrictions under section 13(a)
of the BHC Act. As indicated in the preamble to the 2013 rule, the
purpose of these statutory provisions is to limit the extraterritorial
application of section 13 as it applies to foreign banking
entities.\30\
---------------------------------------------------------------------------

    \30\ 79 FR 5655 n. 1518 (identifying statement of Sen. Merkley
regarding how section 13(d)(1)(H) ``recognize[s] rules of
international comity by permitting foreign banks, regulated and
backed by foreign taxpayers, in the course of operating outside of
the United States to engage in activities permitted under relevant
foreign law''). The agencies believe that the same rationale applies
to section 13(d)(1)(I).
---------------------------------------------------------------------------

    In addition, section 13(d)(1)(J) of the BHC Act gives the agencies
rulemaking authority to exempt activities from the prohibitions of
section 13, provided the agencies determine that the activity in
question would promote and protect the safety and soundness of the
banking entity and the financial stability of the United States.\31\
The agencies believe that the proposal described above would be
consistent with the purposes of section 13(d)(1)(H) and (I) of the BHC
Act and could promote and protect the safety and soundness of banking
entities and U.S. financial stability.
---------------------------------------------------------------------------

    \31\ 12 U.S.C. 1851(d)(1)(J).
---------------------------------------------------------------------------

    Exempting the activities of qualifying foreign excluded funds in
the circumstances described above would provide clarity and certainty
to, and likely promote and protect the safety and soundness of, such
banking entities. This relief would be limited to the asset management
activities of these foreign funds, which are organized outside of the
United States and operate pursuant to the local laws of foreign
jurisdictions. Thus, if the activities of these foreign funds were
subjected to the restrictions applicable to banking entities,
generally, their asset management activities may be significantly
disrupted, and the foreign banking entities may be at a competitive
disadvantage to other foreign bank and non-bank market participants
conducting asset management business outside of the United States.
Exempting the activities of these foreign funds would also allow their
foreign banking entity sponsors to continue to conduct their asset
management business outside the United States as long as the foreign
banking entity's acquisition of an ownership interest in or sponsorship
of the fund meets the requirements in section _.13(b). Thus, the
proposed exemption may have the effect of promoting the safety and
soundness of these foreign funds and their sponsors, while at the same
time limiting the extraterritorial impact of the implementing
regulations, consistent with the purposes of section 13(d)(1)(H) and
(I) of the BHC Act.
    The proposed exemption would also promote and protect U.S.
financial stability. While qualifying foreign excluded funds have very
limited nexus to the U.S. financial system, they are permitted to
invest in U.S. companies. Therefore, to the extent that these funds
have any direct impact on U.S. financial stability, it would be to
promote U.S. financial stability by providing additional capital and
liquidity to U.S. capital markets. Because the proposed exemption would
require that the foreign banking entity's acquisition of an ownership
interest in or sponsorship of the fund meets the requirements in
section _.13(b), the exemption would ensure that the risks of the
investments made by these foreign funds would be booked to foreign
entities in foreign jurisdictions, thus promoting and protecting U.S.
financial stability. Additionally, subjecting such funds to the
requirements of section 13 of the BHC Act imposed on banking entities
could precipitate disruptions in foreign capital markets, which could
generate spillover effects in the U.S. financial system.
    Question 1. Should the agencies make any other amendments to
Sec. Sec.  _.6 and _.13 or include any additional parameters on the
proposed exemption? Why or why not?
    Question 2. Would the proposed amendments to Sec. Sec.  _.6 and
_.13 address the concerns raised regarding unintended consequences and
extraterritorial impact? Why or why not? If the amendments would not
address these concerns, what other amendments should be made?
    Question 3. Is the proposed approach to addressing foreign excluded
funds effective? Why or why not? If not, what alternative approach
would better address these types of entities?
    Question 4. Would the use of the term ``covered fund'' in Sec.
_.13(b)(1) or in proposed Sec.  _.13(d)(2), together with the
definition of ``covered fund'' in Sec.  _.10(b)(1), create any
unintended consequences for foreign banking entities seeking to rely on
the exemption for activities permitted by section 13(d)(1)(I) of the
BHC Act? Why or why not? If so, what other alternatives should be
considered to make the

exemption for activities permitted by section 13(d)(1)(I) of the BHC
Act clear or more workable?
    Question 5. What impacts would the proposed amendments to
Sec. Sec.  _.6 and _.13 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. Sec.
_.6 and _.13 of the regulations promote and protect safety and
soundness and U.S. financial stability? Please explain.

B. Modifications to Existing Covered Fund Exclusions

1. Foreign Public Funds
    In addition to the foreign excluded fund issues discussed above
with respect to the banking entity definition, there are other foreign
fund issues that arise under the covered fund definition. In order to
provide consistent treatment between U.S. registered investment
companies and their foreign equivalents, the implementing regulations
exclude foreign public funds from the definition of covered fund. A
foreign public fund is generally defined under the implementing
regulations as any issuer that is organized or established outside of
the United States and the ownership interests of which are (1)
authorized to be offered and sold to retail investors in the issuer's
home jurisdiction and (2) sold predominantly through one or more public
offerings outside of the United States.\32\ The agencies stated in the
preamble to the 2013 rule that they generally expect that an offering
is made predominantly outside of the United States if 85 percent or
more of the fund's interests are sold to investors that are not
residents of the United States.\33\ The 2013 rule defines ``public
offering'' for purposes of this exclusion to mean a ``distribution,''
as defined in Sec.  _.4(a)(3) of subpart B, of securities in any
jurisdiction outside the United States to investors, including retail
investors, provided that the distribution complies with all applicable
requirements in the jurisdiction in which such distribution is being
made; the distribution does not restrict availability to investors
having a minimum level of net worth or net investment assets; and the
issuer has filed or submitted, with the appropriate regulatory
authority in such jurisdiction, offering disclosure documents that are
publicly available.\34\
---------------------------------------------------------------------------

    \32\ See 2013 rule Sec.  _.10(c)(1); see also 79 FR 5678 (``For
purposes of this exclusion, the [a]gencies note that the reference
to retail investors, while not defined, should be construed to refer
to members of the general public who do not possess the level of
sophistication and investment experience typically found among
institutional investors, professional investors or high net worth
investors who may be permitted to invest in complex investments or
private placements in various jurisdictions. Retail investors would
therefore be expected to be entitled to the full protection of
securities laws in the home jurisdiction of the fund, and the
[a]gencies would expect a fund authorized to sell ownership
interests to such retail investors to be of a type that is more
similar to a U.S. registered investment company rather than to a
U.S. covered fund.'').
    \33\ 79 FR 5678.
    \34\ 2013 rule Sec.  _.10(c)(1)(iii).
---------------------------------------------------------------------------

    The 2013 rule places an additional condition on a U.S. banking
entity's ability to rely on the foreign public fund exclusion with
respect to any foreign fund it sponsors.\35\ The foreign public fund
exclusion is only available to a U.S. banking entity with respect to a
foreign fund sponsored by the U.S. banking entity if, in addition to
the requirements discussed above, the fund's ownership interests are
sold predominantly to persons other than the sponsoring banking entity,
the issuer (or affiliates of the sponsoring banking entity or issuer),
and employees and directors of such entities.\36\ The agencies stated
in the preamble to the 2013 rule that, consistent with the agencies'
view concerning whether a foreign public fund has been sold
predominantly outside of the United States, the agencies generally
expect that a foreign public fund would satisfy this additional
condition if 85 percent or more of the fund's interests are sold to
persons other than the sponsoring U.S. banking entity and the specified
persons connected to that banking entity.\37\
---------------------------------------------------------------------------

    \35\ Although the discussion of this condition generally refers
to U.S. banking entities for ease of reading, the condition also
applies to foreign subsidiaries of a U.S. banking entity. See 2013
rule Sec.  _.10(c)(1)(ii) (applying this limitation ``[w]ith respect
to a banking entity that is, or is controlled directly or indirectly
by a banking entity that is, located in or organized under the laws
of the United States or of any State and any issuer for which such
banking entity acts as sponsor'').
    \36\ See 2013 rule Sec.  _.10(c)(1)(ii).
    \37\ 79 FR 5678.
---------------------------------------------------------------------------

    In adopting the foreign public fund exclusion, the agencies' view
was that it was appropriate to exclude these funds from the ``covered
fund'' definition because they are sufficiently similar to U.S.
registered investment companies.\38\ The agencies also expressed the
view that the additional condition applicable to U.S. banking entities
with respect to foreign funds that they sponsor was designed to treat
foreign public funds consistently with similar U.S. funds and to limit
the extraterritorial application of section 13 of the BHC Act,
including by permitting U.S. banking entities and their foreign
affiliates to carry on traditional asset management businesses outside
of the United States, while also seeking to limit the possibility for
evasion through foreign public funds.\39\
---------------------------------------------------------------------------

    \38\ Id.
    \39\ Id.
---------------------------------------------------------------------------

    Based on experience implementing the 2013 rule, as well as
discussions with and comments received from regulated entities, it
appears that some of the conditions of the foreign public fund
exclusion may not be necessary to ensure consistent treatment of
foreign public funds and registered investment companies. Moreover,
some conditions may make it difficult for a non-U.S. fund to qualify
for the exclusion or for a banking entity to validate whether a non-
U.S. fund qualifies for the exclusion, resulting in certain non-U.S.
funds that are similar to U.S. registered investment companies being
treated as covered funds. For example, the requirement that the fund be
authorized to be offered and sold to retail investors in the fund's
home jurisdiction (the home jurisdiction requirement) disqualifies
certain funds that are organized in one jurisdiction but only
authorized to be sold to retail investors in another jurisdiction.\40\
It appears that, for a variety of reasons, it is not uncommon for
foreign retail funds to be organized in one jurisdiction and sold in
another jurisdiction.\41\
---------------------------------------------------------------------------

    \40\ See, e.g., IIB; Bank Policy Institute (BPI); EBF; and JBA.
    \41\ For example, commenters have noted that retail funds are
sometimes organized in the Cayman Islands for tax considerations but
only offered for sale in Japan. See, e.g., BPI.
---------------------------------------------------------------------------

    Additionally, the requirement that a fund be sold ``predominantly''
through one or more public offerings may cause certain compliance and
monitoring difficulties.\42\ This is because banking entities may have
limited visibility into the distribution history of a third-party
sponsored fund, or, in the case of a fund sponsored by the banking
entity, the fund's interests may be sold through third-party
distributors, and the precise pattern of distribution may be affected
by market forces and changes in investor demand.\43\ Also, the
limitation on ownership of interests in a U.S. banking entity-sponsored
foreign public fund by certain employees (including their immediate
family members) of the sponsoring banking entity or fund may be
difficult for banking entities to monitor for similar reasons, and
imposes a requirement on foreign public funds that may not apply to
similarly situated U.S. registered investment companies.\44\ Finally,
commenters have expressed concerns with the expectation stated in the
preamble to the 2013 rule that for a U.S. banking entity-sponsored

foreign fund to satisfy the condition that it be ``predominantly'' sold
to persons other than the sponsoring U.S. banking entity and certain
persons connected to that banking entity, 85 percent of the ownership
interests in the fund should be sold to such persons.\45\
---------------------------------------------------------------------------

    \42\ See, e.g., BPI.
    \43\ Id.
    \44\ See, e.g., IIB.
    \45\ See, e.g., Investment Company Institute.
---------------------------------------------------------------------------

    To address the concerns noted above related to the home
jurisdiction requirement and the requirement that ownership interests
be sold predominantly through public offerings, the agencies are
proposing to replace those two requirements with a requirement that the
fund is authorized to offer and sell ownership interests, and such
interests are offered and sold, through one or more public offerings.
The agencies are also proposing to modify the definition of ``public
offering'' from the implementing regulations to add a new requirement
that the distribution is subject to substantive disclosure and retail
investor protection laws or regulations, to help ensure that funds
qualifying for this exclusion are sufficiently similar to U.S.
registered investment companies. Additionally, the proposal would only
apply the condition that the distribution comply with all applicable
requirements in the jurisdiction where it is made to instances in which
the banking entity acts as the investment manager, investment adviser,
commodity trading advisor, commodity pool operator, or sponsor. This
change is intended to address the potential difficulty that a banking
entity investing in a third-party sponsored fund may have in
determining whether the distribution of such fund complied with all the
requirements in the jurisdiction where it was made.
    The changes discussed above would seek to ensure that the exclusion
remains limited to funds that are authorized to be sold to retail
investors, but it would no longer require the fund to be authorized to
be sold to retail investors in the jurisdiction where it is organized.
Additionally, while the fund would still be required to be offered and
sold through one or more public offerings (which would require, among
other things, that the distribution be made in a jurisdiction outside
the United States that subjects the foreign public fund to substantive
disclosure and retail investor protection laws or regulations), the
proposal would eliminate the requirement that it be sold
``predominantly'' through one or more public offerings. This change
would eliminate the difficulty that banking entities have described in
tracking the specific distribution patterns of ownership interests in
such funds, and it would more closely align the treatment of foreign
public funds with that of U.S. registered investment companies, which
have no such requirement. The agencies believe the revised requirement
would help ensure that the foreign public fund is sufficiently similar
to a U.S. registered investment company.
    To simplify the requirements of the exclusion and address concerns
described by banking entities with the difficulty in tracking the sale
of ownership interests to employees and their immediate family members,
the proposal would eliminate the limitation on selling ownership
interests of the issuer to employees (other than senior executive
officers) of the sponsoring banking entity or the issuer (or affiliates
of the banking entity or issuer). This change would also help to align
the treatment of foreign public funds with that of U.S. registered
investment companies, as the exclusion for U.S. registered investment
companies has no such limitation. The proposal would continue to limit
the sale of ownership interests to directors or senior executive
officers of the sponsoring banking entity or the fund (or their
affiliates), as the agencies believe that such a requirement would be
simpler for a banking entity to track. As discussed in the preamble to
the 2013 rule, this requirement is intended to prevent evasion of
section 13 of the BHC Act.\46\
---------------------------------------------------------------------------

    \46\ 79 FR 5678-79.
---------------------------------------------------------------------------

    As reflected in the detailed questions that follow, the agencies
request comment on all aspects of the proposed modifications to the
foreign public fund exclusion, including whether the exclusion is
effective in identifying foreign funds that may be sufficiently similar
to U.S. registered investment companies and permitting U.S. banking
entities and their foreign affiliates to carry on traditional asset
management businesses outside of the United States, without creating
opportunities for evasion of the requirements of section 13 of the BHC
Act.
    Question 6. Are foreign funds that satisfy the proposed conditions
in the foreign public fund exclusion sufficiently similar to U.S.
registered investment companies such that it is appropriate to exclude
these funds from the covered fund definition? Why or why not? If these
foreign funds are not sufficiently similar to U.S. registered
investment companies, how should the agencies modify the exclusion's
conditions to permit only funds that are sufficiently similar to U.S.
registered investment companies to rely on it? Are there foreign funds
that cannot satisfy the exclusion's proposed conditions but that are
nonetheless sufficiently similar to U.S. registered investment
companies such that it would be appropriate to exclude those foreign
funds from the covered fund definition? If so, how should the agencies
modify the exclusion's conditions to permit those funds to rely on it?
    Question 7. How effectively does the proposed replacement of the
home jurisdiction requirement and the requirement that ownership
interests be sold predominantly through public offerings with a
requirement that the fund is authorized to offer and sell ownership
interests, and such interests are offered and sold, through one or more
public offerings address the concerns discussed above related to the
compliance with these requirements? If such concerns are not addressed,
how should the agencies further modify these requirements?
    Question 8. Is the additional condition added to the ``public
offering'' definition requiring the distribution be subject to
substantive disclosure and retail investor protection laws or
regulations sufficiently clear and effective? If not, how should the
agencies modify or clarify this requirement? Should the agencies
further specify features of ``substantive disclosure and retail
investor protection laws or regulations?'' Would it be clearer if the
agencies identified particular types of laws or regulations that would
meet this condition (e.g., requirements for periodic filings with, and
periodic examinations by, the appropriate regulatory authority;
requirements for periodic reports to be distributed to retail
investors; or a prohibition against fraud)?
    Question 9. In what ways, if any, is it difficult for a banking
entity to determine whether a fund satisfies the implementing
regulations' condition of the ``public offering'' definition requiring
that the distribution comply with all applicable requirements in the
jurisdiction in which the distribution is made? Should the agencies
eliminate this requirement with respect to funds for which the banking
entity does not serve as the investment manager, investment adviser,
commodity trading advisor, commodity pool operator, or sponsor, as
proposed, or should this requirement be otherwise modified? Would
eliminating or modifying this requirement create an opportunity for
evasion of the requirements of section 13? If so, how should the
agencies address this concern?
    Question 10. As discussed above, the agencies propose to modify the

additional conditions on U.S. banking entity-sponsored foreign funds,
which are intended in part to limit the possibility for evasion of
section 13. In what ways, if any, would the proposed modifications,
including the elimination of the limitations on certain employees
owning interests in the fund, create an opportunity for evasion? How
should the agencies modify these additional requirements to limit the
possibility for evasion? Is the limitation on directors and senior
executive officers owning interests in the fund necessary or
appropriate to prevent evasion of section 13? Why or why not? Should
the agencies eliminate or modify this limitation? How difficult is it
for banking entities to monitor and track this limitation? Commenters
should address whether banking entities already track this information.
    Question 11. Is the proposed requirement that the fund's ownership
interests are sold predominantly to persons other than the sponsoring
banking entity or the issuer (or affiliates of the sponsoring banking
entity or issuer), and directors and senior executive officers of such
entities, necessary to prevent evasion of the requirements of section
13? If the requirement is not necessary to prevent evasion, how should
the agencies eliminate or further modify this requirement? Should the
agencies consider this condition satisfied if 75 percent (or some other
percentage) of the ownership interests are sold to persons other than
the sponsoring banking entity, the issuer (or affiliates of the
sponsoring banking entity or issuer), and directors and senior
executive officers of such entities? Why or why not?
    Question 12. Do the proposed changes to the foreign public fund
exclusion, in the aggregate, increase opportunities for evasion of the
requirements of section 13? If so, how should the agencies address
these concerns? Should the agencies include a specific reservation of
authority to prevent evasion through the foreign public fund exclusion,
or are the anti-evasion provisions in Sec.  __.21 of the implementing
regulations sufficient to address these concerns? \47\
---------------------------------------------------------------------------

    \47\ Section _.21 of the implementing regulations provides in
part that whenever an agency finds reasonable cause to believe any
banking entity has engaged in an activity or made an investment in
violation of section 13 of the BHC Act or the implementing
regulations, or engaged in any activity or made any investment that
functions as an evasion of the requirements of section 13 of the BHC
Act or the implementing regulations, the agency may take any action
permitted by law to enforce compliance with section 13 of the BHC
Act and the 2013 rule, including directing the banking entity to
restrict, limit, or terminate any or all activities under the 2013
rule and dispose of any investment.
---------------------------------------------------------------------------

2. Loan Securitizations
    Section 13 of the BHC Act provides that ``[n]othing in this section
shall be construed to limit or restrict the ability of a banking entity
. . . to sell or securitize loans in a manner otherwise permitted by
law.'' \48\ To effectuate this statutory requirement, the 2013 rule
excludes from the definition of covered fund loan securitizations that
issue asset-backed securities and hold only loans, certain rights and
assets, and a small set of other financial instruments (permissible
assets).\49\ The staffs of the agencies in June 2014 issued an FAQ
explaining that assets other than permitted securities can be servicing
assets for purposes of the loan securitization exclusion.\50\
---------------------------------------------------------------------------

    \48\ 12 U.S.C. 1851(g)(2).
    \49\ See 2013 rule Sec.  ____.10(c)(8). Loan is further defined
as any loan, lease, extension of credit, or secured or unsecured
receivable that is not a security or derivative. Implementing
regulations Sec.  __.2(t).
    \50\ Loan Securitization Servicing FAQ. See supra n. 11 and
accompanying text. See also, infra, Leases and Servicing Assets for
a discussion of the FAQ.
---------------------------------------------------------------------------

    Since the adoption of the 2013 rule, several banking entities and
other participants in the loan securitization industry have commented
that the limited set of permissible assets has inappropriately
restricted their ability to use the loan securitization exclusion. The
agencies asked several questions regarding the efficacy and scope of
the exclusion and the Loan Securitization Servicing FAQ in the 2018
proposal.\51\ Comments were focused on permitting small amounts of non-
loan assets and clarifying the treatment of leases and related assets.
The agencies are proposing to codify the Loan Securitization Servicing
FAQ and permit loan securitizations to hold a small amount of non-loan
assets. The agencies also request comment on whether other revisions
are necessary or appropriate to effectuate section 13 of the BHC Act,
as described in greater detail below.
---------------------------------------------------------------------------

    \51\ 83 FR 33480-81.
---------------------------------------------------------------------------

Leases and Servicing Assets
    The 2013 rule defines ``loan'' to include leases and permits loan
securitizations to hold rights or other assets (servicing assets) that
arise from the structure of the loan securitization or from the loans
supporting a loan securitization.\52\ Rights or other servicing assets
are assets designed to facilitate the servicing of the assets
underlying a loan securitization or the distribution of proceeds from
those assets to holders of the asset-backed securities.\53\ In response
to confusion regarding the scope of these two provisions, the staffs of
the agencies released the Loan Securitization Servicing FAQ. Under this
FAQ, a servicing asset may or may not be a security, but if the
servicing asset is a security, it must be a permitted security under
the rule.
---------------------------------------------------------------------------

    \52\ 2013 rule Sec. Sec.  ____.2(s); ____.10(c)(8)(i)(D), (v).
    \53\ See, e.g., FASB Statement No. 156: Accounting for Servicing
of Financial Assets, ] 61 (FAS 156).
---------------------------------------------------------------------------

    Several commenters on the 2018 proposal supported codifying this
FAQ, with one commenter encouraging the agencies to include specific
examples of servicing assets.\54\ However, one commenter suggested that
the Loan Securitization Servicing FAQ was sufficient and that the
regulation need not be modified.\55\ Another commenter suggested that
the exclusion be expanded to cover leases and related assets, including
operating or capital leases.\56\
---------------------------------------------------------------------------

    \54\ Structured Finance Industry Group (SFIG) and JBA.
    \55\ Data Boiler.
    \56\ SFIG.
---------------------------------------------------------------------------

    The agencies propose codifying the Loan Securitization Servicing
FAQ to clarify the scope of the servicing asset provision.\57\ However,
the agencies are not proposing to separately list leases within the
loan securitization exclusion because leases are included in the
definition of loan and thus are permitted assets for loan
securitizations under the current exclusion.\58\
---------------------------------------------------------------------------

    \57\ The proposal also clarifies that special units of
beneficial interest and collateral certificates meeting the
requirements of paragraph (c)(8)(v) of the exclusion that are
securities need not meet the requirements of paragraph (c)(8)(iii)
of the exclusion.
    \58\ See implementing regulations Sec.  _.2(t).
---------------------------------------------------------------------------

    Question 13. Does the proposed modification of the loan
securitization exclusion sufficiently permit securitization of leases,
servicing assets, and related assets, including leases that are
security interests? Why or why not?
Limited Holdings of Non-Loan Assets
    In the preamble to the 2013 rule, the agencies declined to permit
loan securitizations to hold a certain amount of non-loan assets.\59\
The agencies supported a narrow scope of permissible assets by noting
that ``the purpose underlying section 13 is not to expand the scope of
assets in an excluded loan securitization beyond loans as defined in
the final rule and the other assets that the agencies are specifically
permitting in a loan securitization.'' \60\
---------------------------------------------------------------------------

    \59\ 79 FR 5687-88.
    \60\ 79 FR 5687.
---------------------------------------------------------------------------

    Several commenters on the 2018 proposal disagreed with the
agencies'

views and supported expanding the range of permissible assets in an
excluded loan securitization.\61\ Many commenters recommended allowing
loan securitizations to hold up to five or ten percent of non-loan
assets. Commenters suggested that a limited bucket of non-loan assets
would be consistent with exclusions under the Investment Company Act,
such as section 3(c)(5)(C) and rule 3a-7.\62\ Commenters argued that
banking entities would use such authority to incorporate into
securitizations corporate bonds, interests in letters of credit, cash
and short-term highly liquid investments, derivatives, and senior
secured bonds that do not significantly change the nature and risk
profile of the securitization.\63\ One commenter suggested permitting
additional non-loan assets so long as the securitization is ``primarily
backed by qualifying assets that are not impermissible securities or
derivatives.'' \64\
---------------------------------------------------------------------------

    \61\ E.g., Investment Adviser Association (IAA); Loan
Syndications and Trading Association (LSTA); ABA; SFIG; Goldman
Sachs (GS); BPI; JBA; and Securities Industry and Financial Markets
Association (SIFMA).
    \62\ BPI.
    \63\ LSTA and JBA.
    \64\ SFIG.
---------------------------------------------------------------------------

    One commenter suggested that permitting loan securitizations to
hold a small number of non-loan assets, typically fixed income
securities, would decrease compliance burdens associated with analyzing
fund assets and increase fund managers' flexibility in responding to
market conditions and customer preferences.\65\ One commenter also
claimed that permitting non-loan holdings below a certain threshold
would conform the rule with industry practice without requiring a
wholesale redefinition of covered funds.\66\ In addition, some
commenters maintained that such an approach was consistent with the
rule of construction because inclusion of small amounts of non-
permissible assets was standard practice, particularly for
international securitizations, and permitted by law.\67\ In contrast,
another commenter objected to allowing a limited amount of non-loan
investments and suggested that permitting such investments would be
contrary to the general purpose of section 13 of the BHC Act, which the
commenter claimed was to divest banking entities of risky assets.\68\
---------------------------------------------------------------------------

    \65\ SFIG.
    \66\ LSTA.
    \67\ LSTA and SIFMA. Some of these commenters subsequently
indicated that the loan securitization industry has evolved since
the issuance of the 2013 rule and loan securitization issuers no
longer include non-loan assets and might not include non-loan assets
in a securitization even if the scope of non-loan assets permitted
to be held was expanded.
    \68\ Data Boiler.
---------------------------------------------------------------------------

    After considering the comments received on the 2018 proposal, the
agencies are proposing to allow a loan securitization vehicle to hold
up to five percent of assets in non-loan assets. Authorizing loan
securitizations to hold small amounts of non-loan assets could,
consistent with section 13 of the BHC Act, permit loan securitizations
to respond to market demand and reduce compliance costs associated with
the securitization process without significantly increasing risk to
banking entities and the financial system. The proposed limit on the
amount of non-loan assets also would assuage potential concerns that
allowing certain non-loan assets will lead to evasion, indirect
proprietary trading, and other impermissible activities or excessive
risk to the banking entity. Moreover, loan securitizations provide an
important avenue for banking entities to fund lending programs, and
allowing loan securitizations to hold a small amount of non-loan assets
in response to customer and market demand may increase a banking
entity's capacity to provide financing and lending.
    Question 14. Should the loan securitization exclusion permit loan
securitization issuers to hold a certain percentage of non-loan assets?
Why or why not? If so, should the maximum percentage of permissible
non-loan assets be five or ten percent, or some other amount?
Regardless of the non-loan asset limit, what should be the method of
calculating compliance with the limit (e.g., market value, par value,
principal balance, or some other measure)? Would permitting loan
securitization issuers to hold a certain percentage of non-loan assets
further the statutory rule of construction in section 13(g)(2) of the
BHC Act? If so, explain how.
    Question 15. In what ways, if any, should the agencies limit the
type of permissible non-loan assets to certain asset classes or
structures (e.g., only debt securities or any permissible asset, such
as a derivative)? Would the inclusion of certain financial
instruments--such as derivatives and collateralized debt obligations--
raise safety and soundness concerns? If so, should qualifying loan
securitizations be permitted to hold such instruments and, if so, what
restrictions should be placed on the holding of such instruments? What,
if any, other restrictions should the agencies impose on non-loan
assets to reduce the potential for evasion of the rule?
Cash Equivalents
    The loan securitization exclusion permits issuers to hold certain
types of contractual rights or assets directly arising from the loans
supporting the asset-backed securities that a loan securitization
relying on the exclusion may hold, including cash equivalents. In
response to questions about the scope of the cash equivalent provision,
the Loan Securitization Servicing FAQ stated that ``cash equivalents''
means high quality, highly liquid investments whose maturity
corresponds to the securitization's expected or potential need for
funds and whose currency corresponds to either the underlying loans or
the asset-backed securities.\69\ To promote transparency and clarity,
the proposal would codify this additional language in the Loan
Securitization Servicing FAQ regarding the meaning of ``cash
equivalents.'' \70\ The agencies are not requiring ``cash equivalents''
to be ``short term,'' because the agencies recognize that a loan
securitization may need greater flexibility to match the maturity of
high quality, highly liquid investments to its expected or potential
need for funds.
---------------------------------------------------------------------------

    \69\ See supra, n. 11.
    \70\ Proposed rule Sec.  _.10(c)(8)(iii)(A).
---------------------------------------------------------------------------

    Question 16. Should the agencies codify the cash equivalents
language in the Loan Securitization Servicing FAQ? Why or why not?
3. Public Welfare and Small Business Funds
i. Public Welfare Funds
    Section 13(d)(1)(E) of the BHC Act permits, among other things, a
banking entity to make and retain investments that are designed
primarily to promote the public welfare of the type permitted under 12
U.S.C. 24(Eleventh).\71\ Consistent with the statute, the 2013 rule
excludes from the definition of ``covered fund'' issuers that make
investments that are designed primarily to promote the public welfare,
of the type permitted under paragraph 11 of section 5136 of the Revised
Statutes of the United States (12 U.S.C. 24).\72\ The agencies noted in
the preamble to the 2013 rule that excluding issuers in the business of
making public welfare investments would give effect to the statutory
exemption for these investments. The agencies further stated their
belief that permitting a banking entity to sponsor and invest in
entities that are in the business of making public welfare investments
would result in banking entities being able to provide

valuable expertise and services to these entities and to provide
funding and assistance to small businesses and low- and moderate-income
communities. The agencies also stated their belief that excluding
issuers that are in the business of making public welfare investments
would allow banking entities to continue to provide capital to
community-improving projects and, in some instances, promote capital
formation.\73\
---------------------------------------------------------------------------

    \71\ See 12 U.S.C. 1851(d)(1)(E).
    \72\ 2013 rule Sec.  _.10(c)(11)(ii).
    \73\ See 79 FR 5698.
---------------------------------------------------------------------------

    In response to the 2018 proposal, the agencies received one comment
stating that the 2013 rule's exclusion for funds that are designed
primarily to promote the public welfare does not account for community
development investments that are made through investment vehicles. The
commenter recommended expressly excluding all investments that qualify
for Community Reinvestment Act (CRA) credit, including direct and
indirect investments in a community development fund, small business
investment company (SBIC), or similar fund.\74\
---------------------------------------------------------------------------

    \74\ See ABA.
---------------------------------------------------------------------------

    The OCC's regulations implementing 12 U.S.C. 24(Eleventh) provide
that investments that receive consideration as qualified investments
under the regulations implementing the CRA (CRA-qualified investments)
would also meet the public welfare investment requirements.\75\ The
2013 rule did not expressly incorporate these implementing regulations
into the exclusion for public welfare investments. The agencies are
requesting comment on whether any change should be made to clarify that
all permissible public welfare investments, under any agency's
regulation, are excluded from the covered fund restrictions.\76\ For
example, the agencies understand that there may be uncertainty
regarding how the exclusion for public welfare investments applies to
community development investments that are made through fund
structures--for example, an investment fund that invests exclusively in
SBICs, that is designed to receive consideration as a CRA-qualified
investment, and that would be considered a public welfare investment
under applicable regulations.
---------------------------------------------------------------------------

    \75\ See 12 CFR 24.3 (stating that, for national banks, an
investment that would receive consideration under 12 CFR 25.23 as a
``qualified investment'' is a public welfare investment); 12 CFR
25.23 (describing the investment test under the regulations
implementing the CRA for national banks).
    \76\ A banking entity must have independent authority to make a
public welfare investment. For example, a banking entity that is a
state member bank may make a public welfare investment to the extent
permissible under 12 U.S.C. 338a and 12 CFR 208.22.
---------------------------------------------------------------------------

    In particular, the agencies request comment on the following:
    Question 17. Is the scope of the current public welfare investment
fund exclusion properly calibrated? Why or why not? Under what
circumstances, if any, have banking entities experienced compliance
challenges under the covered fund provisions in Subpart C regarding
investments in community development, public welfare, or similar funds
that are designed to receive consideration as CRA-qualified
investments?
    Question 18. Have banking entities avoided making investments that
are designed to receive consideration as CRA-qualified investments
because they believed that the investment may not satisfy the public
welfare investment fund exclusion? If so, what factors have caused
uncertainty as to whether an issuer qualifies for the exclusion for
public welfare investment funds?
    Question 19. In what ways would it promote transparency, clarity,
and consistency with other Federal banking regulations if the agencies
explicitly exclude from the definition of covered fund any issuer that
invests exclusively or substantially in investments that are designed
to receive consideration as CRA-qualified investments? What policy
considerations weigh for or against such an exclusion? What conditions
should apply to such an exclusion?
    Question 20. Should the agencies establish a separate exclusion for
CRA-qualified investments or incorporate such an exclusion into the
exclusion for public welfare investments?
    Question 21. Rural Business Investment Companies (RBICs)--as
defined under 203(l) and 203(m) of the Investment Advisers Act of 1940
(``Advisers Act'')--are companies licensed under the Rural Business
Investment Program (RBIP), a program created as a joint initiative
between the U.S. Department of Agriculture and the Small Business
Administration. The RBIP was designed to promote economic development
and job creation in rural communities by investing in companies
involved in the production, processing and supply of food and
agriculture-related products. Under the implementing regulations, are
many RBICs excluded from the definition of covered fund because of the
public welfare exclusion or because of another provision? \77\ Should
the agencies provide an express exclusion from the definition of
covered fund for RBICs, similar to the exclusion for SBICs? Are RBICs
substantially similar to SBICs and public welfare companies that
banking entities are permitted to make and retain investments in under
section 13(d)(1)(E) of the BHC Act? Would excluding RBICs in the same
manner that SBICs and public welfare companies are excluded from the
definition of covered fund provide certainty regarding the covered fund
status of RBICs or serve similar interests, as identified by commenters
in response to the 2018 proposal?
---------------------------------------------------------------------------

    \77\ Following enactment of the RBIC Advisers Relief Act of
2018, Pub. L. 115-417 (2019), advisers to solely RBICs and advisers
to solely SBICs are exempt from investment adviser registration
pursuant to Advisers Act, section 203(b)(8) and 203(b)(7),
respectively. The venture capital fund adviser exemption deems RBICs
and SBICs to be venture capital funds for purposes of the
registration exemption. 15 U.S.C. 80b-3(l). Accordingly, the
agencies' proposed exclusion for certain venture capital funds
discussed below, see infra section III.C.2, which would require that
a fund be a ``venture capital fund'' as defined in the SEC
regulations implementing the registration exemption, could apply to
RBICs and SBICs to the extent that they satisfy the other elements
of the proposed exclusion.
---------------------------------------------------------------------------

    Question 22. The Tax Cuts and Jobs Act established the
``opportunity zone'' program to provide tax incentives for long-term
investing in designated economically distressed communities. The
program allows taxpayers to defer and reduce taxes on capital gains by
reinvesting gains in ``qualified opportunity funds'' (QOFs) that are
required to have at least 90 percent of their assets in designated low-
income zones. Do commenters believe that many or all QOFs are excluded
from the definition of covered fund under the implementing regulations
under the public welfare exclusion or another exclusion or exemption?
Should the agencies provide an express exclusion from the definition of
covered fund for QOFs? Are QOFs substantially similar to SBICs and
public welfare companies that banking entities are permitted to make
and retain investments in under section 13(d)(1)(E) of the BHC Act?
Would excluding QOFs in the same manner that SBICs and public welfare
companies are excluded from the definition of covered fund provide
certainty regarding the covered fund status of QOFs or serve similar
interests, as identified by commenters in response to the 2018
proposal?
ii. Small Business Investment Companies
    Consistent with section 13 of the BHC Act,\78\ the 2013 rule
excludes from the definition of covered fund SBICs and issuers that
have received notice from the Small Business Administration to

proceed to qualify for a license as a SBIC, which notice or license has
not been revoked.\79\ The agencies explained in the preamble to the
2013 rule that excluding SBICs from the definition of ``covered fund''
would give appropriate effect to the statutory exemption for
investments in SBICs in a way that facilitates national community and
economic development objectives.\80\
---------------------------------------------------------------------------

    \78\ See 12 U.S.C. 1851(d)(1)(E) (permitting investments in
SBICs).
    \79\ See 2013 rule Sec.  _.10(c)(11).
    \80\ See 79 FR 5698.
---------------------------------------------------------------------------

    In response to the 2018 proposal,\81\ the agencies received three
comments recommending revising the 2013 rule's exclusion for SBICs to
clarify that SBICs that surrender their SBIC licenses when winding down
may continue to qualify for the exclusion for SBICs.\82\ Two of these
commenters stated that SBICs often surrender their licenses during
wind-down, which is when the fund focuses on returning capital to
partners.\83\ One commenter asserted that, during the wind-down phase
of an SBIC's lifecycle, an SBIC license is neither necessary nor a
prudent use of partnership funds.\84\ One commenter noted that banking
entities that are investors in SBICs generally do not control whether
an SBIC surrenders its license. This could raise questions as to
whether an issuer that a banking entity invested in when the issuer was
an SBIC could become a covered fund for reasons outside the banking
entity's control.\85\ In contrast, another commenter suggested concerns
about the SBIC exclusion generally.\86\
---------------------------------------------------------------------------

    \81\ 89 FR 33432.
    \82\ See Small Business Investors Alliance (SBIA); Capital One
et al.; and BB&T Corporation (BB&T).
    \83\ See SBIA and BB&T.
    \84\ See BB&T.
    \85\ See SBIA.
    \86\ Data Boiler.
---------------------------------------------------------------------------

    The agencies propose to revise the exclusion for SBICs to clarify
how the exclusion would apply to SBICs that surrender their licenses
during wind-down phases. The proposed rule would specify that the
exclusion for SBICs applies to an issuer that was an SBIC that has
voluntarily surrendered its license to operate as a small business
investment company in accordance with 13 CFR 107.1900 and does not make
new investments (other than investments in cash equivalents) after such
voluntary surrender.\87\
---------------------------------------------------------------------------

    \87\ For purposes of this exclusion, ``cash equivalents'' would
mean high quality, highly liquid investments whose maturity
corresponds to the issuer's expected or potential need for funds and
whose currency corresponds to the issuer's assets.
---------------------------------------------------------------------------

    The agencies believe that continuing to apply the SBIC exclusion to
an issuer that has surrendered its SBIC license is appropriate because,
absent these revisions, banking entities may become discouraged from
investing in SBICs due to concern that an SBIC may become a covered
fund during its wind-down phase. As indicated by the statutory
exemption for investments in SBICs, section 13 of the BHC Act was not
intended to discourage investments in SBICs.\88\
---------------------------------------------------------------------------

    \88\ See 12 U.S.C. 1851(d)(1)(E).
---------------------------------------------------------------------------

    The proposed rule includes conditions designed to ensure that the
revised exclusion is not abused. In particular, the requirement that an
issuer that has voluntarily surrendered its license does not make new
investments (other than investments in cash equivalents) after
surrendering its license is intended to ensure that the exclusion would
only apply to funds that are actually winding down and not funds that
are making new investments (whether wholly new or as follow-on
investments to existing investments) or that are engaged in speculative
activities. In addition, the exclusion would only apply to an issuer
that surrenders its SBIC license in accordance with 13 CFR 107.1900.
The agencies note that surrendering a license under 13 CFR 107.1900
requires the prior written approval of the Small Business
Administration. Furthermore, because the exclusion would only apply to
an issuer that voluntarily surrenders its SBIC license, the exclusion
would not extend to an issuer if its SBIC license has been revoked.
    The agencies request comment on the proposed revisions to the
exclusion for SBICs. Specifically, the agencies request comment on the
following.
    Question 23. Should the agencies revise the SBIC exclusion as
proposed? Why or why not? Would the proposed revisions to the SBIC
exclusion appropriately address issuers that surrender their SBIC
licenses? If not, what changes should be made to the proposal?
    Question 24. Should the proposed exclusion for issuers that
surrender their SBIC licenses include a requirement that the issuer
operate pursuant to a written plan to dissolve within a set period of
time, such as five years? Why or why not? If so, what is the
appropriate time period?
    Question 25. What additional restrictions, if any, should apply to
the proposed exclusion for issuers that surrender their SBIC licenses?
    Question 26. What specific activities or investments, if any,
should an issuer that surrenders its SBIC license be expressly
permitted to engage in during wind-down phases, such as follow-on
investments in existing portfolio companies and why? What conditions
should apply to such activities or investments?

C. Proposed Additional Covered Fund Exclusions

1. Credit Funds
    The agencies are proposing to create a new exclusion from the
definition of ``covered fund'' under Sec.  _.10(b) for credit funds
that make loans, invest in debt, or otherwise extend the type of credit
that banking entities may provide directly under applicable banking
law. In the preamble to the 2013 rule, the agencies declined to
establish an exclusion from the definition of covered fund for credit
funds.\89\ The agencies cited concerns about whether such funds could
be distinguished from private equity funds and hedge funds and the
possible evasion of the requirements of section 13 of the BHC Act
through the availability of such an exclusion. In addition, the
agencies suggested that some credit funds would be able to operate
using other exclusions from the definition of covered fund in the 2013
rule, such as the exclusion for joint ventures or the exclusion for
loan securitizations.\90\
---------------------------------------------------------------------------

    \89\ 79 FR 5705. The agencies did not request comments
specifically on credit funds in the associated 2011 proposed rule.
See 76 FR 68896-900.
    \90\ Id.
---------------------------------------------------------------------------

    In the 2018 proposal, the agencies issued a broad request for
comment on whether to provide new exclusions from the definition of
covered fund to more effectively tailor the 2013 rule.\91\ Several
commenters urged the agencies to establish an exclusion for funds that
extend credit to customers in a manner similar to what banking entities
are otherwise authorized to provide directly because the credit funds
were not able to take advantage of the alternative exclusions noted by
the agencies in the 2013 rule's preamble.\92\ Commenters also offered
specific suggestions relating to the scope, requirements of, and
restrictions on such an exclusion.
---------------------------------------------------------------------------

    \91\ 83 FR 33471-72. The agencies did not request comments
specifically on credit funds in the 2018 proposal.
    \92\ E.g., SIFMA; GS; ABA; Financial Services Forum (FSF); and
CS.
---------------------------------------------------------------------------

    The agencies understand that many credit funds have not been able
to utilize the joint venture and loan securitization exclusions \93\
and are

proposing an exclusion for credit funds. A credit fund, for the
purposes of the proposed exclusion, is an issuer whose assets consist
solely of:
---------------------------------------------------------------------------

    \93\ For example, one industry group commenter claimed that ``no
credit funds have been able to qualify for the exclusion for joint
ventures, and very few have been able to qualify for the exclusion
for loan securitization vehicles, because these exclusions simply
were not tailored for credit funds. In particular, credit funds are
generally unable to satisfy the conditions of the loan
securitization exclusion because credit funds do not typically issue
asset-backed securities, credit funds are managed and to meet the
needs of clients, credit funds typically invest in debt securities
and warrants.'' SIFMA.
---------------------------------------------------------------------------

     Loans;
     Debt instruments;
     Related rights and other assets that are related or
incidental to acquiring, holding, servicing, or selling loans, or debt
instruments; and
     Certain interest rate or foreign exchange derivatives.\94\
---------------------------------------------------------------------------

    \94\ Proposed rule Sec.  _.10(c)(15)(i).
---------------------------------------------------------------------------

    To ease compliance burdens, several provisions of the proposed
exclusion are similar to and modeled on conditions in the loan
securitization exclusion. For example, any related rights or other
assets held that are securities must be cash equivalents, securities
received in lieu of debts previously contracted with respect to loans
held or, unique to the proposed credit funds exclusion, certain equity
securities (or rights to acquire equity securities) received on
customary terms in connection with the credit fund's loans or debt
instruments.\95\ Relatedly, any derivatives held by the credit fund
must relate to loans, permissible debt instruments, or other rights or
assets held and reduce the interest rate and/or foreign exchange risks
related to these holdings.\96\ The proposed exclusion also would be
broader than the loan securitization exclusion, by providing that a
credit fund would be able to transact in certain debt instruments.\97\
---------------------------------------------------------------------------

    \95\ Proposed rule Sec.  _.10(c)(15)(i)(C).
    \96\ Proposed rule Sec.  _.10(c)(15)(i)(D).
    \97\ Proposed rule Sec.  _.10(c)(15)(i)(B).
---------------------------------------------------------------------------

    As noted above, the proposed exclusion would permit the credit fund
to receive and hold a limited amount of equity securities (or rights to
acquire equity securities) that are received on customary terms in
connection with the credit fund's loans or debt instruments.\98\ The
agencies understand that some banking entities are permitted to take as
consideration for a loan to a borrower a warrant or option issued by
the borrower--which allows the creditor to share in the profits,
income, or earnings of the borrower--as an alternative or replacement
to interest on an extension of credit.\99\ To ensure that an extension
of credit may be subject to similar conditions, regardless of form, the
agencies believe that excluded credit funds should be able to hold
certain equity instruments, subject to appropriate conditions. The
agencies are inviting comment on the nature and scope of such
conditions. Although the agencies are not proposing a specific
quantitative limit on equity securities (or rights to acquire equity
securities) in the proposed rule, the agencies expect that such a limit
may be appropriate, and are considering imposing such a limit in a
final rule. The agencies are thus soliciting comment, below, about the
terms of any quantitative limit on equity securities (or rights to
acquire equity securities), and the method for calculating such a
limit.
---------------------------------------------------------------------------

    \98\ Proposed rule Sec.  _.10(c)(15)(i)(C)(1)(iii).
    \99\ See 12 CFR 7.1006. See also SIFMA.
---------------------------------------------------------------------------

    The exclusion also would be subject to certain additional
restrictions to ensure that the issuer is actually engaged in providing
credit and credit intermediation and is not operated for the purpose of
evading the provisions of section 13 of the BHC Act.\100\ Under the
proposal, a credit fund would not be a covered fund, provided that:
---------------------------------------------------------------------------

    \100\ Proposed rule Sec.  _.10(c)(15)(iv)-(vi).
---------------------------------------------------------------------------

     The fund does not engage in activities that would
constitute proprietary trading, as defined in Sec.  _.3(b)(1)(i) of the
rule, as if the fund were a banking entity; \101\ and
---------------------------------------------------------------------------

    \101\ Proposed rule Sec.  _.10(c)(15)(ii)(A). For the avoidance
of doubt, a credit fund would not be able to elect a different
definition of proprietary trading or trading account.
---------------------------------------------------------------------------

     The fund does not issue asset-backed securities.\102\
---------------------------------------------------------------------------

    \102\ Proposed rule Sec.  _.10(c)(15)(ii)(B).
---------------------------------------------------------------------------

    In addition, a banking entity would not be able to rely on the
credit fund exclusion unless certain conditions were met. If a banking
entity sponsors or serves as an investment adviser or commodity trading
advisor to a credit fund, the banking entity would be required to
provide disclosures specified in section __.11(a)(8), and ensure that
the activities of the credit fund 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.\103\
Likewise, a banking entity would not be permitted to rely on the credit
fund exclusion if it guarantees the performance of the fund,\104\ or if
the fund holds any debt securities, equity, or rights to receive equity
that the banking entity would not be permitted to acquire and hold
directly.\105\ Furthermore, a banking entity's investment in and
relationship with a credit fund would be required to comply with the
limitations in section __.14 (except the banking entity would be
permitted to acquire and retain any ownership interest in the credit
fund), and the limitations in section __.15 regarding material
conflicts of interest, high-risk investments, and safety and soundness
and financial stability, in each case as though the credit fund were a
covered fund.\106\ A banking entity's investment in and relationship
with a credit fund also would be required to comply with applicable
safety and soundness standards.\107\ Finally, a banking entity that
invests in or has a relationship with a credit fund would continue to
be subject to capital charges and other requirements under applicable
banking law.\108\
---------------------------------------------------------------------------

    \103\ Proposed rule Sec.  _.10(c)(15)(iii).
    \104\ Proposed rule Sec.  _.10(c)(15)(iv).
    \105\ Id.
    \106\ Proposed rule Sec.  _.10(c)(15)(v)(A).
    \107\ Proposed rule Sec.  _.10(c)(15)(v)(B).
    \108\ For example, a banking entity's investment in or
relationship with a credit fund could be subject to the regulatory
capital adjustments and deductions relating to investments in
financial subsidiaries or in the capital of unconsolidated financial
institutions, if applicable. See 12 CFR 217.22.
---------------------------------------------------------------------------

    The agencies believe that the proposed credit fund exclusion would
(1) address the application of the covered fund provisions to credit-
related activities in which banking entities are permitted to engage
directly and (2) be consistent with and effectuate Congress's intent
that section 13 of the BHC Act not limit or restrict banking entities'
ability to sell loans.\109\ The agencies also believe the proposed
credit fund exclusion may effectively address concerns the agencies
expressed in the preamble to the 2013 rule about the administrability
and evasion of section 13 of the BHC Act. Banking entities already have
experience using and complying with the loan securitization exclusion.
Establishing an exclusion for credit funds based on the framework
provided by the loan securitization exclusion would allow banking
entities to provide traditional extensions of credit regardless of the
specific form, whether directly via a loan made by a banking entity, or
indirectly through an investment in or relationship with a credit fund
that transacts primarily in loans and certain debt instruments.
---------------------------------------------------------------------------

    \109\ 12 U.S.C. 1851(g)(2).
---------------------------------------------------------------------------

    The proposed credit fund exclusion limits the universe of potential
funds that could rely on the exclusion by clearly specifying the types
of activities those funds may engage in. Excluded credit funds could
transact in or hold only loans, permissible debt instruments, and
certain related rights or assets. These financial products, and the
regulations delimiting the use thereof, are well-known and should not
raise administrability and evasion concerns. Similarly, the requirement

that the credit fund not engage in activities that would constitute
proprietary trading under section 13 of the BHC Act and implementing
regulations should help to ensure that credit extensions that are
bought and sold are held for the purpose of facilitating the extension
of credit and not for the purpose of evading the requirements of
section 13. Finally, the restrictions on guarantees and other
limitations should eliminate the ability and incentive for either the
banking entity sponsoring a credit fund or any affiliate to provide
additional support beyond the ownership interest retained by the
sponsor. Thus, the agencies expect that, together, the proposed
criteria for the credit fund exclusion would prevent a banking entity
having any incentive to bail out such funds in periods of financial
stress or otherwise expose the banking entity to the types of risks
that the covered fund provisions of section 13 were intended to
address.
    The agencies request comment on all aspects of the proposed credit
fund exclusion.
    Question 27. Is the proposed rule's approach to a credit fund
exclusion appropriate and effective? Why or why not? Do the conditions
imposed on the proposed exclusion effectively address the concerns
about administrability and evasion that the agencies expressed in the
preamble to the 2013 rule?
    Question 28. What types of loans and permissible debt instruments
or some subset of those assets, if any, should a credit fund be able to
hold? Are the definitions used in the proposed exclusion appropriate
and clear?
    Question 29. The agencies believe it could be appropriate to permit
credit funds to hold a small amount of non-loan and non-debt assets,
such as warrants or other equity-like interests directly related to the
other permitted assets, subject to appropriate conditions. Should
credit funds be able to hold small amounts of equity securities (or
rights to acquire equity securities) received on customary terms in
connection with the credit fund's loans or debt instruments? If so,
what should be the quantitative limit on permissible non-loan and non-
debt assets? Should the limit be five or ten percent of assets, or some
other amount? How should such quantitative limit be calculated? Does
the holding of a certain amount of equity securities (or rights to
acquire equity securities) raise concerns that banking entities may use
credit funds to evade the limitations and prohibitions in section 13 of
the BHC Act? Why or why not? For example, under the proposal, could the
holdings of an excluded fund be predominantly equity securities (or
rights to acquire equity securities) received on customary terms in
connection with the credit fund's loans or debt instruments? If so,
how?
    Question 30. The proposed credit fund exclusion would permit
excluded credit funds to hold related rights and other assets that are
related or incidental to acquiring, holding, servicing, or selling
loans or debt instruments, provided that each right or asset that is a
security meets certain requirements. Should credit funds be allowed to
hold such related rights and other assets? Are these assets necessary
for the proper functioning of a credit fund? Are the requirements
regarding rights or assets that are securities applicable to the
holdings of credit funds or otherwise appropriate?
    Question 31. Is the list of permitted securities appropriately
scoped, overbroad, or under-inclusive? Why or why not? Should the list
of permitted securities be modified? If so, how and why?
    Question 32. The proposal provides that any interest rate or
foreign exchange derivatives held by the credit fund adhere to certain
requirements. Should credit funds be allowed to hold these, or any
other type of derivatives? Are the requirements that the written terms
of the derivatives directly relate to assets held and that the
derivatives reduce the interest rate and/or foreign exchange risks
related to the assets held applicable to the holdings of credit funds
generally? Are such requirements otherwise appropriate? Why or why not?
    Question 33. Which safety and soundness standards, if any, should
be referenced in the credit fund exclusion? Should the agencies
reference the safety and soundness standards codified in the banking
agencies' regulations, e.g., 12 CFR part 30, 12 CFR part 364, or other
safety and soundness standards? Safety and soundness standards can vary
depending on the type of banking entity. Is there a universally
applicable standard that would be more appropriate, such as standards
applicable to insured depository institutions?
    Question 34. Is the application of sections _.14 and _.15 to the
proposed credit fund exclusion appropriate? Why or why not? Should a
banking entity that sponsors or serves as an investment adviser to a
credit fund be required to comply with the limitations imposed by both
sections _.14(a) and (b)? Why or why not?
    Question 35. Is it appropriate to require a banking entity that
sponsors or serves as an investment adviser or commodity trading
advisor to a credit fund, to comply with the disclosure requirements of
Sec.  _.11(a)(8), as if the credit fund were a covered fund? Why or why
not?
    Question 36. Is the definition of proprietary trading in the credit
fund exclusion appropriately scoped, overbroad, or under-inclusive? Why
or why not? If the definition is not appropriately scoped, is there an
alternative definition of proprietary trading? Should credit funds
sponsored by, or that have as an investment adviser, a banking entity
be able or be required to use the associated banking entity's
definition of proprietary trading, for the purposes of this exclusion?
Why or why not? Would such an approach impose undue compliance burdens?
If so, what are such burdens?
    Question 37. Should the agencies establish additional provisions to
prevent evasion of section 13 of the BHC Act? Why or why not? If so,
what requirements would be appropriate and properly balance providing
firms with flexibility to facilitate extensions of credit and ensuring
compliance with section 13 of the BHC Act? For example, should the
agencies impose quantitative limitations, additional capital charges,
control restrictions, or other requirements on use of the credit fund
exclusion?
    Question 38. The proposed exclusion for credit funds is similar to
the current exclusion for loan securitizations. Should the agencies
combine the proposed credit fund exclusion with the current loan
securitization exclusion? If so, how? What would be the benefits and
drawbacks of combining the exclusions or maintaining separate
exclusions for each type of activity? If the two exclusions remain
separate, should the proposed credit fund exclusion contain a
requirement that a credit fund not issue asset-backed securities? Why
or why not?
2. Venture Capital Funds
    Under the implementing regulations, venture capital funds that
invest in small businesses and start-up businesses that would be
investment companies but for the exclusion contained in section 3(c)(1)
or 3(c)(7) of the Investment Company Act are covered funds unless they
otherwise qualify for an exclusion. The agencies are proposing to add
an exclusion from the definition of ``covered fund'' under Sec.
_.10(b) of the rule that would allow banking entities to acquire or
retain an ownership interest in, or sponsor, certain venture capital
funds to the extent the banking entity is permitted to engage in such
activities under otherwise applicable law. The exclusion

would be available with respect to ``qualifying venture capital
funds,'' which the proposal defines as an issuer that meets the
definition in 17 CFR 275.203(l)-1 and that meets several additional
criteria specified below.
    Contemporaneous with the passage of the Dodd-Frank Act, multiple
Members of Congress made statements indicating that section 13 of the
BHC Act should not restrict the activities of venture capital
funds.\110\ Several of these Members of Congress noted that properly
conducted venture capital funds do not present the same concerns at
which section 13 of the BHC Act was directed and can promote the public
interest and job creation.\111\ In addition, in accordance with section
13(b)(1) of the BHC Act, the Financial Stability Oversight Council
(FSOC) released a report providing recommendations concerning
implementation of section 13.\112\ The FSOC Report noted that several
commenters recommended excluding venture capital funds from the
definition of ``hedge fund'' and ``private equity fund'' because the
nature of venture capital funds is fundamentally different from such
other funds and because they promote innovation.\113\ The FSOC Report
stated that the treatment of venture capital funds was a significant
issue and noted that the SEC had recently proposed rules distinguishing
the characteristics and activities of venture capital funds from other
private funds.\114\ The FSOC Report recommended that the agencies
carefully evaluate the range of funds and other legal vehicles that
rely on the exclusions contained in section 3(c)(1) or 3(c)(7) and
consider whether it would be appropriate for the regulations
implementing section 13 to adopt a narrower definition in some
cases.\115\
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    \110\ See 156 Cong. Rec. E1295 (daily ed. July 13, 2010)
(statement of Rep. Eshoo) (``the purpose of the Volcker Rule is to
eliminate risk-taking activities by banks and their affiliates while
at the same time preserving safe, sound investment activities that
serve the public interest . . . Venture capital funds do not pose
the same risk to the health of the financial system. They promote
the public interest by funding growing companies critical to
spurring innovation, job creation, and economic competitiveness. I
expect the regulators to use the broad authority in the Volcker Rule
wisely and clarify that funds . . . such as venture capital funds,
are not captured under the Volcker Rule and fall outside the
definition of `private equity.' ''); 156 Cong. Rec. S5904 (daily ed.
July 15, 2010) (statement of Sen. Boxer) (recognizing ``the crucial
and unique role that venture capital plays in spurring innovation,
creating jobs and growing companies'' and that ``the intent of the
rule is not to harm venture capital investment.''); 156 Cong. Rec.
S5905 (daily ed. July 15, 2010) (statement of Sen. Dodd) (confirming
``the purpose of the Volcker rule is to eliminate excessive risk
taking activities by banks and their affiliates while at the same
time preserving safe, sound investment activities that serve the
public interest'' and stating ``properly conducted venture capital
investment will not cause the harms at which the Volcker rule is
directed. In the event that properly conducted venture capital
investment is excessively restricted by the provisions of section
619, I would expect the appropriate Federal regulators to exempt it
using their authority under section 619[d][1](J) . . .''); 156 Cong.
Rec. S6242 (daily ed. July 26, 2010) (statement of Sen. Scott Brown)
(``One other area of remaining uncertainty that has been left to the
regulators is the treatment of bank investments in venture capital
funds. Regulators should carefully consider whether banks that focus
overwhelmingly on lending to and investing in start-up technology
companies should be captured by one-size-fits-all restrictions under
the Volcker rule. I believe they should not be. Venture capital
investments help entrepreneurs get the financing they need to create
new jobs. Unfairly restricting this type of capital formation is the
last thing we should be doing in this economy.'').
    \111\ See 156 Cong. Rec. E1295 (daily ed. July 13, 2010)
(statement of Rep. Eshoo); 156 Cong. Rec. S5904 (daily ed. July 15,
2010) (statement of Sen. Boxer); 156 Cong. Rec. S5905 (daily ed.
July 15, 2010) (statement of Sen. Dodd); 156 Cong. Rec. S6242 (daily
ed. July 26, 2010) (statement of Sen. Scott Brown).
    \112\ See Financial Stability Oversight Counsel, Study and
Recommendations on Prohibitions on Proprietary Trading and Certain
Relationships with Hedge Funds and Private Equity Funds (Jan. 18,
2011), available at https://www.treasury.gov/initiatives/Documents/Volcker%20sec%20%20619%20study%20final%201%2018%2011%20rg.pdf. (FSOC
Report).
    \113\ See id.
    \114\ See id.
    \115\ See id.
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    In the 2011 proposed rule, the agencies requested comment on
whether to exclude venture capital funds from the definition of
``covered fund.'' \116\ The agencies received several comments
supporting such an exclusion and two comments opposing such an
exclusion,\117\ but declined to explicitly exclude venture capital
funds from the definition of ``covered fund'' in the 2013 rule.\118\
The agencies indicated at the time that they did not believe the
statutory language of section 13 supported providing an exclusion for
venture capital funds.\119\ The agencies explained that this view was
based on an understanding that Congress treated venture capital funds
as a subset of private equity funds in other contexts and that Congress
did not adopt an express exclusion for venture capital funds in section
13 of the BHC Act.\120\ Specifically, the agencies cited to
Congressional reports related to section 402 of the Dodd-Frank Act that
characterized venture capital funds as ``a subset of private investment
funds specializing in long-term equity investment in small or start-up
businesses.'' \121\ The agencies further stated that it appeared that
the activities and risk profiles for banking entities regarding
sponsorship of, and investment in, private equity and venture capital
funds were not readily distinguishable.\122\
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    \116\ See 76 FR 68915.
    \117\ See 79 FR 5703-04.
    \118\ See id.
    \119\ See id.
    \120\ See id.
    \121\ Id. (quoting S. Rep. No. 111-176 (2010)). See also H. Rep.
No. 111-517 (2010) (indicating that venture capital funds are
subsets of ``private funds''). However, the agencies did not address
the difference in terminology that Congress used in section 402 of
the Dodd-Frank Act (``private funds'') and section 619 (``hedge
funds'' and ``private equity funds''). Nor did the agencies address
the different statutory definitions of these terms. Section 402
defines ``private fund'' as ``an issuer that would be an investment
company, as defined in section 3 of the Investment Company Act of
1940 (15 U.S.C. 80a-3), but for section 3(c)(1) or 3(c)(7) of that
Act.'' Section 619 defines ``hedge fund or private equity fund'' as
``an issuer that would be an investment company, as defined in
section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-3),
but for section 3(c)(1) or 3(c)(7) of that Act, or such similar
funds as the [agencies] may, by rule . . . determine.'' (emphasis
added).
    \122\ See 79 FR 5704. The agencies do not believe the fact that
Congress expressly distinguished these funds from other types of
private funds in other provisions of the Dodd-Frank Act is
dispositive. In this context, we do not believe that the differences
in how the terms private equity fund and venture capital fund are
used in the Dodd-Frank Act prohibit this proposal. The agencies
believe it is reasonable under the authority given to the agencies
under the statute to exclude these funds from the definition of
``covered fund.''
---------------------------------------------------------------------------

    In 2017, the U.S. Department of the Treasury issued a report
stating that the definition of ``covered fund'' is overly broad and
that the covered fund provisions are not well-tailored to the
objectives of section 13 of the BHC Act.\123\ The report stated that
changes to the covered fund provisions would ``greatly assist in the
formation of venture and other capital that is critical to fund
economic growth opportunities.'' \124\ In the 2018 proposal, the
agencies requested comment on whether to exclude from the definition of
``covered fund'' issuers that do not meet the definition of ``hedge
fund'' or ``private equity fund'' in the SEC's Form PF.\125\ The
agencies noted that a venture capital fund, as defined in rule 203(l)-1
under the Advisers Act, is not a ``private equity fund'' or ``hedge
fund,'' as those terms are defined in Form PF and requested comment on
whether to include venture capital funds within the definition of
``covered fund'' if the agencies adopted a definition of covered fund
based on the definitions in Form PF.\126\
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    \123\ See U.S. Department of the Treasury, A Financial System
That Creates Economic Opportunities: Banks and Credit Unions at 77
(June 2017).
    \124\ See id.
    \125\ See 83 FR 33478.
    \126\ See id.
---------------------------------------------------------------------------

    In response to the 2018 proposal, the agencies received several
comments

supporting excluding venture capital funds from the definition of
covered fund.\127\ Commenters stated that the legislative record does
not indicate that Congress intended to restrict the activities of
venture capital funds and that Members of Congress supported excluding
venture capital funds from the definition of covered fund.\128\
Commenters further stated that venture capital funds engage in long-
term investments that promote growth, capital formation, and
competitiveness.\129\ Some commenters specifically recommended using
the definition of ``venture capital fund'' in rule 203(l)-1 under the
Advisers Act to determine the scope of a venture capital fund
exclusion.\130\ One commenter argued that venture capital funds should
be treated the same as private equity funds.\131\ Two commenters
opposed excluding venture capital funds from the definition of covered
fund.\132\ In addition, several commenters opposed redefining ``covered
fund'' using the definitions of ``hedge fund'' and ``private equity
fund'' in Form PF.\133\ Two commenters supported using the definitions
in Form PF as a basis for excluding certain issuers from the definition
of covered fund.\134\ In addition, the agencies received several
comments stating the rule should allow banking entities to invest in
funds that engage only in long-term activities, including venture
capital investments, that would be permissible for the banking entity
to engage in directly.\135\
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    \127\ See ABA; BPI; IIB; SIFMA; Crapo et al.; Hultgren;
Hensarling et al; National Venture Capital Association (NVCA); and
Center for American Entrepreneurship (CAE).
    \128\ See ABA; BPI; Representative Hultgren; NVCA; and Center
for Capital Markets Competitiveness (CCMC).
    \129\ See ABA; BPI; Representative Hultgren; NVCA;
Representatives Hensarling et al.; and CAE.
    \130\ See Representative Hultgren and NVCA.
    \131\ See AIC.
    \132\ See Occupy the SEC and Data Boiler.
    \133\ See, e.g., Americans for Financial Reform; AIC; and SIFMA.