into loan-related swaps tends to be situational and dependent on
changes in market conditions, as well as the interaction of a number of
factors specific to the banking entity, such as the nature of the
customer relationship. Under certain market conditions and with certain
types of customers, the frequency and use of loan-related swaps may be
infrequent, or the frequency may change over time as conditions change.
It also may be the case that a banking entity, particularly smaller
banking entities, may enter into a limited number of loan-related swaps
in one quarter and then not execute another such swap for a year or
more. Accordingly, for these swaps it may be appropriate to apply the
market making exemption by focusing on the characteristics of the
relevant market. For purposes of the exemption, the relevant market may
be a market with minimal demand, such as a market with a customer base
that demands, for example, only a few loan-related swaps in a
year.\122\ The Agencies therefore request comment as to whether it is
appropriate to permit loan-related swaps to be conducted pursuant to
the exemption for market making-related activities where the frequency
with which a banking entity executes such swaps is minimal, but the
banking entity remains prepared to execute such swaps when a customer
makes an appropriate request.\123\ For example, a banking entity could
meet the requirement to routinely stand ready to make a market in loan-
related swaps in the context of its customer base and the relevant
market if it is willing and available to engage in loan-related swap
transactions with its loan customers to meet the customers' needs in
respect of one or more loans entered into with such banking entity
throughout market cycles and as such customers' needs change.
---------------------------------------------------------------------------

    \122\ See, e.g., 79 FR at 5596 (``. . . the Agencies continue to
recognize that market makers in highly illiquid markets may trade
only intermittently or at the request of particular customers, which
is sometimes referred to as trading by appointment.'') (emphasis
added).
    \123\ The Agencies understand that, for the reasons described in
this section, loan-related swaps present a particular challenge for
smaller banking entities that are neither subject to the market risk
rule nor registered as dealers. On the other hand, such swaps
typically do not present the same challenges for banking entities
that are subject to the market risk rule or are registered as
dealers because the availability of the market-making exemption is
apparent.
---------------------------------------------------------------------------

    In addition, the Agencies note that a banking entity may also
infrequently enter into loan-related swaps in both directions because
of how those swaps are commonly used by market participants. For
example, providing a floating to fixed swap is common in connection
with a floating rate loan (as described in the example above), but the
reverse (i.e., seeking to convert from a fixed rate to a floating rate)
is much less common. Accordingly, the Agencies request comment on
whether loan-related swaps should be permitted under the market-making
exemption if the banking entity stands ready to make a market in both
directions whenever a customer makes an appropriate request, but in
practice primarily makes a market in the swaps in one direction because
of how the swaps are used.\124\
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    \124\ This section's focus on market making is provided solely
for purpose of the proposal's implementation of section 13 of the
BHC Act and does not affect a banking entity's obligation to comply
with additional or different requirements under applicable
securities, derivatives, banking, or other laws.
---------------------------------------------------------------------------

    The Agencies are also considering whether it would be appropriate
to exclude loan-related swaps from the definition of proprietary
trading for some banking entities or to permit the activity pursuant to
an exemption from the prohibition on proprietary trading other than
market making. For example, possible additions or alternatives could
include a new exclusion in Sec.  __.3(d) or a new exemption in Sec.
__.6 pursuant to the Agencies' exemptive authority under section
13(d)(1)(J) of the BHC Act. In particular, the Agencies request comment
regarding a specific option that would add an exclusion in Sec.
__.3(d), which would specify that ``proprietary trading'' under Sec.
__3 does not include the purchase or sale of related swaps by a banking
entity in a transaction in which the banking entity purchases (or
sells) a swap with a customer and contemporaneously sells (or
purchases) an offsetting derivative in connection with a loan or open
credit facility between the banking entity and the customer, if the
rate, asset, liability or other notional item underlying the swap with
the customer is, or is directly related to, a financial term of the
loan or open credit facility with the customer (including, without
limitation, the loan or open credit facility's duration, rate of
interest, currency or currencies, or principal amount) and the
offsetting swap is designed to reduce or otherwise significantly
mitigate one or more specific, identifiable risks of the swap(s) with
the customer.
    In considering any of these alternatives, the Agencies request
comment on what parameters would be appropriate for the exclusion or
exemption and what conditions should be considered to address any
concerns about whether such an exclusion or exemption could be too
broad.
    Question 101. Is it appropriate to treat loan-related swaps as
permissible under the market making exemption if a banking entity
stands ready to enter into such swaps upon request by a customer, but
enters into such swaps on an infrequent basis due to the nature of the
demand for such swaps? Why or why not?
    Question 102. Should a banking entity standing ready to transact in
either direction on behalf of customers in such swaps be eligible for
the market making exemption if, as a practical matter, it more
frequently encounters demand on one side of the market and less
frequently encounters demand on the other side for such products? Why
or why not?
    Question 103. Is the scenario described above for the treatment of
loan-related swaps workable? If not, why not? Are there alternative
approaches that would be more effective and consistent with the
statute?
    Question 104. Should the Agencies exclude loan-related swaps from
the definition of proprietary trading under Sec.  __.3? Would including
loan-related swaps within the definition of the ``trading account'' or
``proprietary trading'' be consistent with the statutory definition of
trading account? Why or why not?
    Question 105. In the alternative, should the Agencies provide an
exclusion for such loan-related swaps under Sec.  __.6? What would be
the benefits or drawbacks of each approach? How would permitting such
loan-related swaps pursuant to the Agencies' authority under section
13(d)(1)(J) of the BHC Act promote and protect the safety and soundness
of banking entities and

the financial stability of the United States? If an exclusion or
permitted activity is adopted, should the Agencies limit which banking
entities may use the exclusion or permitted activity, and what
conditions, if any, should be placed on the types, volume, or other
characteristics of the loan-related swaps and the related activity?
    Question 106. How should loan-related swaps be defined? What
parameters should be used to assess which swaps meet the definition?
    Question 107. Should other types of swaps also be addressed in the
same manner? For example, should the Agencies provide further guidance,
or include in any exclusion or exemption other end-user customer driven
swaps used by the customer to hedge commercial risk?
h. Market Making Hedging
    During implementation of the 2013 final rule, the Agencies received
a number of inquiries regarding the circumstances under which banking
entities could elect to comply with market making risk management
provisions permitted in Sec.  __.4(b) or alternatively the risk-
mitigating hedging requirements under Sec.  __.5. These inquiries
generally related to whether a trading desk could treat an affiliated
trading desk as a client, customer, or counterparty for purposes of the
market making exemption's RENTD requirement; and whether, and under
what circumstances, one trading desk could undertake market making risk
management activities for one or more other trading desks.
    Each trading desk engaging in a transaction with an affiliated
trading desk that meets the definition of proprietary trading must rely
on one of the exemptions of section 13 of the BHC Act and the 2013
final rule in order for the transaction to be permissible. In one
example presented to the Agencies, one trading desk of a banking entity
may make a market in a certain financial instrument (e.g., interest
rate swaps), and then transfer some of the risk of that instrument
(e.g., foreign exchange (``FX'') risk) to a second trading desk (e.g.,
an FX swaps desk) that may or may not separately engage in market
making-related activity. The Agencies request comment as to whether, in
such a scenario, the desk taking the risk (in the preceding example,
the FX swaps desk) and the market making desk (in the preceding
example, the interest rate desk) should be permitted to treat each
other as a client, customer, or counterparty for purposes of
establishing risk limits or reasonably expected near-term demand levels
under the market making exemption.
    The Agencies also request comment as to whether each desk should be
permitted to treat swaps executed between the desks as permitted market
making-related activities of one or both desks if the swap does not
cause the relevant desk to exceed its applicable limits and if the swap
is entered into and maintained in accordance with the compliance
requirements applicable to the desk, without treating the affiliated
desk as a client, customer, or counterparty for purposes of
establishing or increasing its limits. This approach would be intended
to maintain appropriate limits on proprietary trading by not permitting
an expansion of a trading desk's market making limits based on internal
transactions. At the same time, this approach would be intended to
permit efficient internal risk management strategies within the limits
established for each desk. The Agencies are also requesting comment on
the circumstances in which an organizational unit of an affiliate
(``affiliated unit'') of a trading desk engaged in market making-
related activities in compliance with Sec.  __.4(b) (``market making
desk'') would be permitted to enter into a transaction with the market
making desk in reliance on the market making risk management exemption
available to the market making desk. In this scenario, to effect such
reliance the market making desk would direct the affiliated unit to
execute a risk-mitigating transaction on the market making desk's
behalf. If the affiliated unit does not independently satisfy the
requirements of the market making exemption with respect to the
transaction, it would be permitted to rely on the market making
exemption available to the market making desk for the transaction if:
(i) The affiliated unit acts in accordance with the market making
desk's risk management policies and procedures established in
accordance with Sec.  __.4(b)(2)(iii); and (ii) the resulting risk
mitigating position is attributed to the market making desk's financial
exposure (and not the affiliated unit's financial exposure) and is
included in the market making desk's daily profit and loss calculation.
If the affiliated unit establishes a risk-mitigating position for the
market making desk on its own accord (i.e., not at the direction of the
market making desk) or if the risk-mitigating position is included in
the affiliated unit's financial exposure or daily profit and loss
calculation, then the affiliated unit may still be able to comply with
the requirements of the risk-mitigating hedging exemption pursuant to
Sec.  __.5 for such activity.
    The Agencies request comment on the issues identified above. In
particular, the Agencies request comment on the following questions:
    Question 108. Should the Agencies clarify the ability of banking
entities to engage in hedging transactions directly related to market
making positions, including multi-desk market making hedging,
regardless of which desk undertakes the hedging trades?
    Question 109. Have banking entities found that certain restrictions
on market making hedging activities under the final rule impede the
ability of banking entities to effectively and efficiently engage in
such hedging transactions? If so, what specific requirements have
proved to be the most problematic?
    Question 110. How effective are the existing restrictions on market
making hedging activities at reducing risks within a banking entity's
investment portfolio? Please explain.
    Question 111. Should the Agencies permit banking entities to
include affiliate hedging transactions in determining the reasonably
expected near-term demand of customers, clients, and counterparties,
and in establishing internal risk limits? Why or why not?
    Question 112. Would the changes separately proposed to Sec.  __.5
of the 2013 final rule, or other changes to Sec.  __.5, eliminate the
need for the additional interpretations described above, for example,
because a banking entity could more easily conduct these activities in
accordance with the requirements of Sec.  __.5?
3. Section __.5: Permitted Risk-Mitigating Hedging Activities
a. Section __.5 of the 2013 Final Rule
    Section 13(d)(1)(C) provides an exemption for risk-mitigating
hedging activities that are designed to reduce the specific risks to a
banking entity in connection with and related to individual or
aggregated positions, contracts, or other holdings. Section _.5 of the
2013 final rule implements section 13(d)(1)(C) of the BHC Act.
    Section __.5 of the 2013 final rule provides a multi-faceted
approach to implementing the hedging exemption to ensure that hedging
activity is designed to be risk-reducing and does not mask prohibited
proprietary trading. Risk-mitigating hedging activities must comply
with certain conditions for those activities to qualify for the
exemption. Generally, a banking entity relying on the hedging exemption
must have in place an appropriate internal

compliance program that meets specific requirements to support its
compliance with the terms of the exemption, and the compensation
arrangements of persons performing risk-mitigating hedging activities
must be designed not to reward or incentivize prohibited proprietary
trading.\125\ In addition, the hedging activity itself must meet
specified conditions; for example, at inception, it must be designed to
reduce or otherwise significantly mitigate and must demonstrably reduce
or otherwise significantly mitigate one or more specific, identifiable
risks arising in connection with and related to identified positions,
contracts, or other holdings of the banking entity, and the activity
must not give rise to any significant new or additional risk that is
not itself contemporaneously hedged.\126\ Finally, Sec.  __.5
establishes certain documentation requirements with respect to the
purchase or sale of financial instruments made in reliance of the risk-
mitigating exemption under certain circumstances.\127\
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    \125\ See 2013 final rule Sec.  __.5(b)(1) and (3).
    \126\ See 2013 final rule Sec.  __.5(b)(2).
    \127\ See 2013 final rule Sec.  __.5(c).
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b. Proposed Amendments to Section __.5
i. Correlation Analysis for Section __.5(b)(1)(iii)
    Section __.5(b)(1)(iii) of the 2013 final rule requires a
correlation analysis as part of the broader analysis of whether a
hedging position, technique, or strategy (1) may reasonably be expected
to reduce or otherwise significantly mitigate the specific risks being
hedged, and (2) demonstrably reduces or otherwise significantly
mitigates the specific risks being hedged.
    In adopting the 2013 final rule, the Agencies indicated that they
expected the banking entity to undertake a correlation analysis that
will provide a strong indication of whether a potential hedging
position, strategy, or technique will or will not demonstrably reduce
the risk it is designed to reduce. The nature and extent of the
correlation analysis undertaken would be dependent on the facts and
circumstances of the hedge and the underlying risks targeted. If
sufficient correlation cannot be demonstrated, then the Agencies
expected that such analysis would explain why not and also how the
proposed hedging position, technique, or strategy was designed to
reduce or significantly mitigate risk and how that reduction or
mitigation can be demonstrated.
    In the course of implementing Sec.  __.5 of the 2013 final rule,
the Agencies have become aware of practical difficulties with the
correlation analysis requirement. In particular, banking entities have
communicated that the correlation analysis requirement can add delays,
costs, and uncertainty, and have questioned the extent to which the
required correlation analysis helps to ensure the accuracy of hedging
activity or compliance with the requirements of section 13 of the BHC
Act.
    During implementation, the Agencies have observed that a banking
entity may sometimes develop or modify its hedging activities as the
risks it seeks to hedge are occurring, and the banking entity may not
have enough time to undertake a complete correlation analysis before it
needs to put the hedging transaction in place to fully hedge against
the risks as they arise. In other cases, the hedging activity, while
designed to reduce risk as required by the statute, may not be
practical if delays or compliance costs resulting from undertaking a
correlation analysis outweigh the benefits of performing the analysis.
In addition, the extent to which two activities are correlated and will
remain correlated into the future can vary significantly from one
position, strategy, or technique to another. Assessing whether a
particular hedge is sufficiently correlated to satisfy the correlation
requirement of Sec.  __.5(b)(1)(iii) may be difficult, especially if
that assessment must be justified after the hedge is entered into (when
information that may not have been available earlier may become
relevant). Given this uncertainty, banking entities may be hesitant to
undertake a risk-mitigating hedge out of concern of inadvertently
violating the regulation because the hedge did not satisfy one of the
requirements.
    Based on the implementation experience of the Agencies and public
feedback, the Agencies are proposing to remove the correlation analysis
requirement for risk-mitigating hedging activities. The Agencies
anticipate that removing this correlation analysis requirement would
avoid the uncertainties described above without significantly impacting
the conditions that risk-mitigating hedging activities must meet in
order to qualify for the exemption. The Agencies also note that section
13 of the BHC Act does not specifically require this correlation
analysis. Instead, the statute only provides that a hedging position,
technique, or strategy is permitted so long as it is ``. . . designed
to reduce the specific risks to the banking entity . . .'' \128\ The
2013 final rule added the correlation analysis requirement as a measure
intended to ensure compliance with this exemption.
---------------------------------------------------------------------------

    \128\ 12 U.S.C. 1851(d)(1)(C).
---------------------------------------------------------------------------

ii. Hedge Demonstrably Reduces or Otherwise Significantly Mitigates
Specific Risks for Section __.5(b)(2)(iv)(B)
    Similarly, the requirement in Sec.  __.5(b)(2)(iv)(B) that a risk-
mitigating hedging activity demonstrably reduces or otherwise
significantly mitigates specific risks is not directly required by
section 13(d)(1)(C) of the BHC Act. As noted above, the statute instead
requires that the hedge be designed to reduce or otherwise
significantly mitigate specific risks. The Agencies believe that this
is effective for addressing the relevant risks.
    In practice, it appears that the requirement to show that hedging
activity demonstrably reduces or otherwise significantly mitigates a
specific, identifiable risk that develops over time can be complex and
could potentially reduce bona fide risk-mitigating hedging activity.
The Agencies recognize that in some circumstances, it may be difficult
for banking entities to know with sufficient certainty that a potential
hedging activity being considered will continuously demonstrably reduce
or significantly mitigate an identifiable risk after it is implemented.
For example, unforeseeable changes in market conditions, event risk,
sovereign risk, and other factors that cannot be known in advance could
reduce or eliminate the otherwise intended hedging benefits. In these
events, it would be very difficult, if not impossible, for a banking
entity to comply with the continuous requirement to demonstrably reduce
or significantly mitigate the identifiable risks. In such cases, a
banking entity may determine not to enter into what would otherwise be
an effective hedge of foreseeable risks out of concern that the banking
entity may not be able to effectively comply with the continuing
hedging or mitigation requirement if unforeseen risks occur. Therefore,
the proposal would remove the ``demonstrably reduces or otherwise
significantly mitigates'' specific risk requirement from Sec.
__.5(b)(1)(iv)(B).\129\
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    \129\ For the same reasons, the Agencies are proposing to revise
Sec.  __.13(a) of the 2013 final rule (relating to permitted risk-
mitigating hedging activities involving acquisition or retention of
an ownership interest in a covered fund) to remove the references to
covered fund ownership interests acquired or retained by the banking
entity ``demonstrably'' reducing or otherwise significantly
mitigating the specific, identifiable risks to the banking entity
described in that section.

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

iii. Reduced Compliance Requirements for Banking Entities that do not
have Significant Trading Assets and Liabilities for Section __.5(b) and
(c)
    Consistent with the proposed changes relating to the scope of the
requirements for banking entities that do not have significant trading
assets and liabilities, the Agencies have reassessed the requirements
in Sec.  __.5(b) and Sec.  __.5(c) for banking entities that do not
have significant trading assets and liabilities. For these firms, the
Agencies are proposing to eliminate the requirements for a separate
internal compliance program for risk-mitigating hedging under Sec.
__.5(b)(1); certain of the specific requirements of Sec.  __.5(b)(2);
the limits on compensation arrangements for persons performing risk-
mitigating activities in Sec.  __.5(b)(3); and the documentation
requirements for those activities in Sec.  __.5(c). These requirements
are overly burdensome and complex for banking entities with moderate
trading assets and liabilities. In general, the Agencies expect that
banking entities without significant trading assets and liabilities are
less likely to engage in the types of trading activities and hedging
strategies that would necessitate these additional compliance
requirements.
    Given these considerations, it appears that removing the
requirements for banking entities that do not have significant trading
assets and liabilities to comply with the requirements of Sec.  __.5(b)
and Sec.  __.5(c) is unlikely to materially increase risks to the
safety and soundness of the banking entity or U.S. financial stability.
Therefore, the Agencies are proposing to eliminate and modify these
requirements for banking entities that do not have significant trading
assets and liabilities. In place of those requirements, new Sec.
__.5(b)(2) of the proposal would require that risk-mitigating hedging
activities for those banking entities be: (i) At the inception of the
hedging activity (including any adjustments), designed to reduce or
otherwise significantly mitigate one or more specific, identifiable
risks, including the risks specifically enumerated in the proposal; and
(ii) subject to ongoing recalibration, as appropriate, to ensure that
the hedge remains designed to reduce or otherwise significantly
mitigate one or more specific, identifiable risks. The Agencies
anticipate that these tailored requirements for banking entities
without significant trading assets and liabilities would effectively
implement the statutory requirement that the hedging transactions be
designed to reduce specific risks the banking entity incurs. In
connection with these proposed changes, the proposal also includes
conforming changes to Sec.  __.5(b)(1) and Sec.  __.5(c) of the final
2013 rule to make the requirements of those sections applicable only to
banking entities that have significant trading assets and liabilities.
iv. Reduced Documentation Requirements for Banking Entities That Have
Significant Trading Assets and Liabilities for Section __.5(c)
    Section __.5(c) of the 2013 final rule requires enhanced
documentation for hedging activity conducted under the risk-mitigating
hedging exemption if the hedging is not conducted by the specific
trading desk establishing or responsible for the underlying positions,
contracts, or other holdings, the risks of which the hedging activity
is designed to reduce.\130\ The 2013 final rule also requires enhanced
documentation for hedges established to hedge aggregated positions
across two or more desks. The 2013 final rule recognizes that a trading
desk may be responsible for hedging aggregated positions of that desk
and other desks, business units, or affiliates. In that case, the
trading desk putting on the hedge is at least one step removed from
some of the positions being hedged. Accordingly, the 2013 final rule
provides that the documentation requirements in Sec.  __.5(c) apply if
a trading desk is hedging aggregated positions that include positions
from more than one trading desk.\131\
---------------------------------------------------------------------------

    \130\ See 2013 final rule Sec.  __.5(c)(1)(i).
    \131\ See 2013 final rule Sec.  __.5(c)(1)(iii)
---------------------------------------------------------------------------

    The 2013 final rule also requires enhanced documentation for hedges
established by the specific trading desk establishing or directly
responsible for the underlying positions, contracts, or other holdings,
the risks of which the hedge is designed to reduce, if the hedge is
effected through a financial instrument, technique, or strategy that is
not specifically identified in the trading desk's written policies and
procedures as a product, instrument, exposure, technique, or strategy
that the trading desk may use for hedging.\132\ The Agencies note that
this documentation requirement does not apply to hedging activity
conducted by a trading desk in connection with the market making-
related activities of that desk or by a trading desk that conducts
hedging activities related to the other permissible trading activities
of that desk so long as the hedging activity is conducted in accordance
with the compliance program for that trading desk.
---------------------------------------------------------------------------

    \132\ See 2013 final rule Sec.  __.5(c)(1)(ii)
---------------------------------------------------------------------------

    For banking entities that have significant trading assets and
liabilities, the proposal would retain the enhanced documentation
requirements for the hedging transactions identified in Sec.
__.5(c)(1) to permit evaluation of the activity. While this
documentation requirement results in certain more extensive compliance
efforts (as acknowledged by the Agencies when the 2013 final rule was
adopted),\133\ the Agencies continue to believe this requirement serves
an important role to prevent evasion of the requirements of section 13
of the BHC Act and the 2013 final rule.
---------------------------------------------------------------------------

    \133\ 79 FR at 5638-39.
---------------------------------------------------------------------------

    However, based on the Agencies' experience during the first several
years of implementation of the 2013 final rule, it appears that many
hedges established by one trading desk for other affiliated desks are
often part of common hedging strategies that are used repetitively. In
those instances, the regulatory purpose for the documentation
requirements of Sec.  __.5(c) of the 2013 final rule, to permit
subsequent evaluation of the hedging activity and prevent evasion, is
much less relevant. In weighing the significantly reduced regulatory
and supervisory relevance of additional documentation of common hedging
trades against the complexity of complying with the enhanced
documentation requirements, it appears that the documentation
requirements are not necessary in those instances. Reducing the
documentation requirement for common hedging activity undertaken in the
normal course of business for the benefit of one or more other trading
desks would also make beneficial risk-mitigating activity more
efficient and potentially improve the timeliness of important risk-
mitigating hedging activity, the effectiveness of which can be time
sensitive.
    Accordingly, the Agencies are proposing a new paragraph (c)(4) in
Sec.  __.5 that would eliminate the enhanced documentation requirement
for hedging activities that meets certain conditions. In excluding a
trading desk's common hedging instruments from the enhanced
documentation requirements in Sec.  __.5(c), the Agencies seek to
distinguish those financial instruments that are commonly used for
hedging activities and require the banking entity to have in place
appropriate limits so that less common or unusual levels of hedging
activity would still be subject to

the enhanced documentation requirements. Accordingly, the proposal
would provide that compliance with the enhanced documentation
requirement would not apply to purchases and sales of financial
instruments for hedging activities that are identified on a written
list of financial instruments pre-approved by the banking entity that
are commonly used by the trading desk for the specific types of hedging
activity for which the financial instrument is being purchased or sold.
In addition, under the proposal, at the time of the purchase or sale of
the financial instruments, the related hedging activity would need to
comply with written, pre-approved hedging limits for the trading desk
purchasing or selling the financial instrument, which would be required
to be appropriate for the size, types, and risks of the hedging
activities commonly undertaken by the trading desk; the financial
instruments purchased and sold by the trading desk for hedging
activities; and the levels and duration of the risk exposures being
hedged. These conditions on the pre-approved limits are intended to
provide clarity as to the types and characteristics of the limits
needed to comply with the proposal. The Agencies would expect that a
banking entity's pre-approved limits should be reasonable and set to
correspond to the type of hedging activity commonly undertaken and at
levels consistent with the hedging activity undertaken by the trading
desk in the normal course.
    The Agencies request comment on the proposed revisions to Sec.
__.5 regarding permitted risk-mitigating hedging activities. In
particular, the Agencies request comment on the following questions:
    Question 113. What factors, if any, should the Agencies consider in
determining whether to remove the requirement that a correlation
analysis must be used to determine whether a hedging position,
technique, or strategy reduces or otherwise significantly mitigates the
specific risk being hedged?
    Question 114. Is the Agencies' assessment of the complexities of
the correlation analysis requirement across the spectrum of hedging
activities accurate? Why or why not?
    Question 115. How does the requirement to undertake a correlation
analysis impact a banking entity's decision on whether to enter into
different types of hedges?
    Question 116. How does the correlation analysis requirement affect
the timing of hedging activities?
    Question 117. Does the current requirement that a hedge must
demonstrably reduce or otherwise significantly mitigate specific risks
lead banking entities to decline to enter into hedging transactions
that would otherwise be designed to reduce or otherwise significantly
mitigate specific risks arising in connection with identified
positions, contracts, or other holdings of the banking entity? If so,
under what circumstances?
    Question 118. Would reducing the compliance requirements of Sec.
__.5(b) and Sec.  __.5(c) for banking entities that do not have
significant trading assets and liabilities reduce compliance costs and
increase certainty for these banking entities?
    Question 119. Would the proposed reductions in the compliance
requirements for risk-mitigating hedging activities by banking entities
that do not have significant trading assets and liabilities increase
materially the risks to the safety and soundness of the banking entity
or U.S. financial stability? Why or why not?
    Question 120. Would the proposed exclusion from the enhanced
documentation requirements for trading desks that hedge risk of other
desks under the circumstances described make risk-mitigating hedging
activities more efficient and timely? Why or why not? Should any of the
existing documentation requirements be retained for firms without
significant trading assets and liabilities? Are there any hedging
documentation requirements applicable in other contexts (e.g.,
accounting) that could be leveraged for the purposes of this
requirement? How would the proposed exclusion from the enhanced
documentation requirements impact both internal and external compliance
and oversight of a banking entity?
    Question 121. With respect to the proposed exclusion from enhanced
documentation for trading desks that hedge risk of other desks under
certain circumstances, are the requirements for a pre-approved list of
financial instruments and pre-approved hedging limits reasonable?
Should those requirements be modified, expanded, or reduced? If so,
how? Should the Agencies provide greater clarity for determining which
financial instruments are ``commonly used by the trading desk for the
specific type of hedging activity for which the financial instrument is
being purchased or sold'' for inclusion on the pre-approved list?
Similarly, should the Agencies provide greater clarity for determining
pre-approved hedging limits?
    Question 122: The Agencies have proposed using accounting
principles as part of the definition of trading account. Should the
Agencies similarly use accounting principles to refer to risk-mitigated
hedging activity? For example, should the Agencies provide an exemption
for hedging activity that is accounted for under the provisions of ASC
815 (Derivatives and Hedging)? Why or why not? Should the Agencies
require entities that engage in risk-mitigating hedging activity
measure hedge effectiveness? Why or why not?
4. Section __.6(e): Permitted Trading Activities of a Foreign Banking
Entity
    Section 13(d)(1)(H) of the BHC Act \134\ permits certain foreign
banking entities to engage in proprietary trading that occurs solely
outside of the United States (the foreign trading exemption).\135\ The
statute does not define when a foreign banking entity's trading occurs
``solely outside of the United States.''
---------------------------------------------------------------------------

    \134\ Section 13(d)(1)(H) of the BHC Act permits trading
conducted by a foreign banking entity pursuant to paragraph (9) or
(13) of section 4(c) of the BHC Act (12 U.S.C. 1843(c)), if the
trading occurs solely outside of the United States, and the banking
entity is not directly or indirectly controlled by a banking entity
that is organized under the laws of the United States or of one or
more States. See 12 U.S.C. 1851(d)(1)(H).
    \135\ This section's discussion of the concept of ``solely
outside of the United States'' is provided solely for purposes of
the proposal's implementation of section 13(d)(1)(H) of the BHC Act,
and does not affect a banking entity's obligation to comply with
additional or different requirements under applicable securities,
banking, or other laws. Among other differences, section 13 of the
BHC Act does not necessarily include the customer protection,
transparency, anti-fraud, anti-manipulation, and market orderliness
goals of other statutes administered by the Agencies. These other
goals or other aspects of those statutory provisions may require
different approaches to the concept of ``solely outside of the
United States'' in other contexts.
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a. Permitted Trading Activities of a Foreign Banking Entity
    The 2013 final rule includes several conditions on the availability
of the foreign trading exemption. Specifically, in addition to limiting
the exemption to foreign banking entities where the purchase or sale is
made pursuant to paragraph (9) or (13) of section 4(c) of the BHC
Act,\136\ the 2013 final rule provides that the foreign trading
exemption is available only if:
---------------------------------------------------------------------------

    \136\ 12 U.S.C. 1843(c)(9), (13). See 2013 final rule Sec.
__.6(e)(1)(i) and (ii).
---------------------------------------------------------------------------

    (i) The banking entity engaging as principal in the purchase or
sale (including any personnel of the banking entity or its affiliate
that arrange, negotiate, or execute such purchase or sale) is not
located in the United States or organized under the laws of the United
States or of any State;
    (ii) The banking entity (including relevant personnel) that makes
the decision to purchase or sell as principal

is not located in the United States or organized under the laws of the
United States or of any State;
    (iii) The purchase or sale, including any transaction arising from
risk-mitigating hedging related to the instruments purchased or sold,
is not accounted for as principal directly or on a consolidated basis
by any branch or affiliate that is located in the United States or
organized under the laws of the United States or of any State;
    (iv) No financing for the banking entity's purchase or sale is
provided, directly or indirectly, by any branch or affiliate that is
located in the United States or organized under the laws of the United
States or of any State;
    (v) The purchase or sale is not conducted with or through any U.S.
entity,\137\ other than:
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    \137\ ``U.S. entity'' is defined for purposes of this provision
as any entity that is, or is controlled by, or is acting on behalf
of, or at the direction of, any other entity that is, located in the
United States or organized under the laws of the United States or of
any State. See 2013 final rule Sec.  __.6(e)(4).
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    (A) A purchase or sale with the foreign operations of a U.S.
entity, if no personnel of such U.S. entity that are located in the
United States are involved in the arrangement, negotiation or execution
of such purchase or sale.
    The Agencies also exercised their authority under section
13(d)(1)(J) \138\ to allow the following types of purchases or sales to
be conducted with a U.S. entity:
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    \138\ 12 U.S.C. 1851(d)(1)(J).
---------------------------------------------------------------------------

    (B) A purchase or sale with an unaffiliated market intermediary
acting as principal, provided the purchase or sale is promptly cleared
and settled through a clearing agency or derivatives clearing
organization acting as a central counterparty; or
    (C) A purchase or sale through an unaffiliated market intermediary,
provided the purchase or sale is conducted anonymously (i.e., each
party to the purchase or sale is unaware of the identity of the other
party(ies) to the purchase or sale) on an exchange or similar trading
facility and promptly cleared and settled through a clearing agency or
derivatives clearing organization acting as a central counterparty.
    The proposal would modify the requirements of the 2013 final rule
relating to the foreign trading exemption in a number of ways.
Specifically, the proposal would retain the first three requirements of
the 2013 final rule, with a modification to the first requirement, and
would remove the last two requirements of Sec.  __.6(e)(3). As a
result, Sec.  __.6(e)(3), as modified by the proposal, would require
that for a foreign banking entity to be eligible for this exemption:
    (i) The banking entity engaging as principal in the purchase or
sale (including relevant personnel) is not located in the United States
or organized under the laws of the United States or of any State;
    (ii) The banking entity (including relevant personnel) that makes
the decision to purchase or sell as principal is not located in the
United States or organized under the laws of the United States or of
any State; and
    (iii) The purchase or sale, including any transaction arising from
risk-mitigating hedging related to the instruments purchased or sold,
is not accounted for as principal directly or on a consolidated basis
by any branch or affiliate that is located in the United States or
organized under the laws of the United States or of any State.
    The proposal would maintain these three requirements in order to
ensure that the banking entity (including any relevant personnel) that
engages in the purchase or sale as principal or makes the decision to
purchase or sell as principal is not located in the United States or
organized under the laws of the United States or any State.
Furthermore, the proposal would retain the 2013 final rule's
requirement that the purchase or sale, including any transaction
arising from a related risk-mitigating hedging transaction, is not
accounted for as principal at the U.S. operations of the foreign
banking entity. The proposal would, however, modify the first
requirement relative to the 2013 final rule, to replace the requirement
that any personnel of the banking entity that arrange, negotiate, or
execute such purchase or sale are not located in the United States with
one that would restrict only the relevant personnel engaged in the
banking entity's decision in the purchase or sale not located in the
United States. Under the proposed approach, for purposes of section 13
of the BHC Act and the implementing regulations, the focus of the
requirement would be on whether the banking entity that engages in the
purchase or sale as principal (including any relevant personnel) is
located in the United States. The purpose of this modification is to
make clear that some limited involvement by U.S. personnel (e.g.,
arranging or negotiating) would be consistent with this exemption so
long as the principal bearing the risk of a purchase or sale is outside
the United States. The proposed modifications would permit a foreign
banking entity to engage in a purchase or sale under this exemption so
long as the principal risk and actions of the purchase or sale do not
take place in the United States for purposes of section 13 and the
implementing regulations. The proposal would also eliminate the
following two requirements from Sec.  __.6(e), which are referred to as
the ``financing prong'' and the ``counterparty prong,'' respectively,
in the discussion that follows:
    No financing for the banking entity's purchase or sale is provided,
directly or indirectly, by any branch or affiliate that is located in
the United States or organized under the laws of the United States or
of any State;
    The purchase or sale is not conducted with or through any U.S.
entity, other than:
    A purchase or sale with the foreign operations of a U.S. entity, if
no personnel of such U.S. entity that are located in the United States
are involved in the arrangement, negotiation or execution of such
purchase or sale.
    A purchase or sale with an unaffiliated market intermediary acting
as principal, provided the purchase or sale is promptly cleared and
settled through a clearing agency or derivatives clearing organization
acting as a central counterparty; or
    A purchase or sale through an unaffiliated market intermediary,
provided the purchase or sale is conducted anonymously (i.e. each party
to the purchase or sale is unaware of the identity of the other
party(ies) to the purchase or sale) on an exchange or similar trading
facility and promptly cleared and settled through a clearing agency or
derivatives clearing organization acting as a central counterparty.
    Since the adoption of the 2013 final rule, foreign banking entities
have communicated to the Agencies that these requirements have unduly
limited their ability to make use of the statutory exemption for
proprietary trading and have resulted in an impact on foreign banking
entities' operations outside of the United States that these banking
entities believe is broader than necessary to achieve compliance with
the requirements of section 13 of the BHC Act. In response to these
concerns, the Agencies are proposing to remove the financing prong and
the counterparty prong, which would focus the key requirements of this
exemption on the principal actions and risk of the transaction. In
addition, the proposal would remove the financing prong to address
concerns that the fungibility of financing has made this requirement
difficult to apply in practice in certain circumstances to determine
whether particular financing is tied to a

particular trade. Market participants have raised a number of questions
about the financing prong and have indicated that identifying whether
financing has been provided by a U.S. affiliate or branch can be
exceedingly complex, in particular with respect to demonstrating that
financing has not been provided by a U.S. affiliate or branch with
respect to a particular transaction. To address the concerns raised by
foreign banking entities and other market participants, the proposal
would amend the foreign trading exemption to focus on the principal
risk of a transaction and the location of the actions as principal and
trading decisions, so that a foreign banking entity would be able to
make use of the exemption so long as the risk of the transaction is
booked outside of the United States. While the Agencies recognize that
a U.S. branch or affiliate that extends financing could bear some
risks, the Agencies note that the proposed modifications to the foreign
trading exemption are designed to require that the principal risks of
the transaction occur and remain solely outside of the United States.
For example, the exemption would continue to provide that the purchase
or sale, including any transaction arising from risk-mitigating hedging
related to the instruments purchased or sold, may not be accounted for
as principal directly or indirectly on a consolidated basis by any U.S.
branch or affiliate.
    Similarly, foreign banking entities have communicated to the
Agencies that the counterparty prong has been overly difficult and
costly for banking entities to monitor, track, and comply with in
practice. As a result, the Agencies are proposing to remove the
requirement that any transaction with a U.S. counterparty be executed
solely with the foreign operations of the U.S. counterparty (including
the requirement that no personnel of the counterparty involved in the
arrangement, negotiation, or execution may be located in the United
States) or through an unaffiliated intermediary and an anonymous
exchange in order to materially reduce the reported inefficiencies
associated with rule compliance. In addition, market participants have
indicated that this requirement has in practice led foreign banking
entities to overly restrict the range of counterparties with which
transactions can be conducted, as well as disproportionately burdened
compliance resources associated with those transactions, including with
respect to counterparties seeking to do business with the foreign
banking entity in foreign jurisdictions.
    As a result, the Agencies propose to remove the counterparty prong.
The proposal would focus the requirements of the foreign trading
exemption on the location of a foreign banking entity's decision to
trade, action as principal, and principal risk of the purchase or sale.
This proposed focus on the location of actions and risk as principal is
intended to align with the statute's definition of ``proprietary
trading'' as ``engaging as principal for the trading account of the
banking entity.'' \139\ Consistent with that approach, the focus of the
proposed approach would be on the activities of a foreign banking
entity as principal in the United States. The statute exempts the
trading of foreign banking entities that is conducted ``solely''
outside the United States. Under the proposal, the relevant inquiry
would focus on whether the principal risk of the transaction is located
or held outside of the United States and the location of the trading
decision and banking entity acting as principal. The proposal would
remove the requirements of Sec.  __.6(e)(3) that are less directly
relevant to these considerations.
---------------------------------------------------------------------------

    \139\ See 12 U.S.C. 1851(h)(4) (emphasis added).
---------------------------------------------------------------------------

    Information provided by foreign banking entities has demonstrated
that few trading desks of foreign banking entities have utilized the
foreign trading exemption in practice. This information has raised
concerns that the current requirements for the exemption may be overly
restrictive of permitted activities. Accordingly, the proposal would
modify the exemption under the 2013 final rule to make the requirements
more workable, so that it may be available to foreign banking entities
trading solely outside the United States.
    The Agencies request comment as to whether the proposed
modifications to the foreign trading exemption would result in
disadvantages for U.S. banking entities competing with foreign banking
entities. The statute contains an exemption to allow foreign banking
entities to engage in trading activity that is solely outside the
United States. The statute also contains a prohibition on proprietary
trading for U.S. banking entities regardless of where their activity is
conducted. The statute generally prohibits U.S. banking entities from
engaging in proprietary trading because of the perceived risks of those
activities to U.S. banking entities and the U.S. economy. The Agencies
believe that this means that the prohibition on proprietary trading is
intended make U.S. banking entities safer and stronger, and reduce
risks to U.S. financial stability, and that the foreign operations of
foreign banking entities should not be subject to the prohibition on
proprietary trading for their activities overseas. The proposal would
implement this distinction with respect to transactions that occur
outside of the United States where the principal risk is booked outside
of the United States and the actions and decisions as principal occur
outside of the United States by foreign operations of foreign banking
entities. Under the statute and the rulemaking framework, U.S. banking
entities would be able to continue trading activities that are
consistent with the statute and regulation, including permissible
market-making, underwriting, and risk-mitigating hedging activities as
well as other types of trading activities such as trading on behalf of
customers. U.S. banking entities are permitted to engage in these
trading activities as exemptions from the general prohibition on
proprietary trading under the statute. Moreover, and consistent with
the statute, the proposal seeks to streamline and reduce the
requirements of several of these key exemptions to make them more
workable and available in practice to all banking entities subject to
section 13 of the BHC Act and the implementing regulations.\140\
---------------------------------------------------------------------------

    \140\ At the same time, however, the Agencies recognize the
possibility that there may also be risks to U.S. banking entities
and the U.S. economy as a result of allowing foreign banking
entities to conduct a broader range of activities within the United
States. For example, and as discussed above, the Agencies are
requesting comment on whether the proposal would give foreign
banking entities a competitive advantage over U.S. banking entities
with respect to identical trading activity in the United States.
---------------------------------------------------------------------------

    Consistent with the 2013 final rule, the exemption under the
proposal would not exempt the U.S. or foreign operations of U.S.
banking entities from having to comply with the restrictions and
limitations of section 13 of the BHC Act. Thus, the U.S. and foreign
operations of a U.S. banking entity that is engaged in permissible
market making-related activities or other permitted activities may
engage in those transactions with a foreign banking entity that is
engaged in proprietary trading in accordance with the exemption under
Sec.  __.6(e) of the 2013 final rule, so long as the U.S. banking
entity complies with the requirements of Sec.  __.4(b), in the case of
market making-related activities, or other relevant exemption
applicable to the U.S. banking entity. The proposal, like the 2013
final rule, would not impose a duty on the foreign banking entity or
the U.S. banking entity to ensure that its counterparty is conducting
its activity in conformance with section 13 and the implementing
regulations. Rather, that

obligation would be on each party subject to section 13 to ensure that
it is conducting its activities in accordance with section 13 and the
implementing regulations.
    The proposal's exemption for trading of foreign banking entities
outside the United States could potentially give foreign banking
entities a competitive advantage over U.S. banking entities with
respect to permitted activities of U.S. banking entities because
foreign banking entities could trade directly with U.S. counterparties
without being subject to the limitations associated with the market-
making or other exemptions under the rule. This competitive disparity
in turn could create a significant potential for regulatory arbitrage.
In this respect, the Agencies seek to mitigate this concern through
other changes in the proposal; for example, U.S. banking entities would
continue to be able to engage in all of the activities permitted under
the 2013 final rule and the proposal, including the simplified and
streamlined requirements for market-making and risk-mitigating hedging
and other types of trading activities. The proposal's modifications
therefore in general seek to balance concerns regarding competitive
impact while mitigating the concern that an overly narrow approach to
the foreign trading exemption may cause market bifurcations, reduce the
efficiency and liquidity of markets, make the exemption overly
restrictive to foreign banking entities, and harm U.S. market
participants.
    The Agencies request comment on the proposal's revised approach to
implementing the foreign trading exemption. In particular, the Agencies
request comment on the following questions:
    Question 123. Is the proposal's implementation of the foreign
trading exemption appropriate and effectively delineated? If not, what
alternative would be more appropriate and effective?
    Question 124. Are the proposal's provisions regarding when an
activity will be considered to have occurred solely outside the United
States for purposes of the foreign trading exemption effective and
sufficiently clear? If not, what alternative would be clearer and more
effective? Should any requirements be modified or removed? If so, which
requirements and why? Should additional requirements be added? If so,
what requirements and why? For example, should the financing prong or
the counterparty prong be retained or modified rather than eliminated?
Why or why not? Do the proposed modifications effectively focus the
foreign trading exemption on the principal actions and risk of the
transaction and ensure that the principal risk remains solely outside
the United States? Are there any other conditions the Agencies should
include in the foreign trading and foreign fund exemptions to address
the possibility that risks associated with foreign trading or covered
fund activities could flow into the U.S. financial system through
financing for those activities coming from U.S. branches of affiliates,
without raising the same compliance difficulties banking entities have
experienced with the current financing prong?
    Question 125. What effects do commenters believe the proposed
modifications to the foreign trading exemption, particularly with
respect to trading with U.S. entities, would have with respect to the
safety and soundness of banking entities and U.S. financial stability?
Would the proposed modifications allow for risks to aggregate in the
United States based on activity of foreign banking entities? For
example, what effects would removal of the counterparty prong have for
U.S. financial market liquidity, and what consequences could such
effects have for the safety and soundness of banking entities and U.S.
financial stability? Could the proposal be further modified, consistent
with statutory requirements, to better promote and protect the safety
and soundness of banking entities and U.S. financial stability? Please
explain.
    Question 126. What impact could the proposal have on a foreign
banking entity's ability to trade in the United States? Should any
additional requirements of the 2013 final rule be removed? Why or why
not? If so, which requirements and why? Should any of the requirements
of the 2013 final rule that the Agencies are proposing to eliminate be
retained? Why or why not? If so, which requirements and why?
    Question 127. Does the proposal's approach raise competitive equity
concerns for U.S. banking entities? If so, in what ways? Would the
proposed modifications allow for foreign entities to access the U.S.
markets without commensurate regulation? How would this impact
competition? Would this disadvantage U.S. entities? Would the proposed
revisions to the 2013 final rule's exemptions for market making,
underwriting, and risk-mitigating hedging and new exclusions contained
in this proposal help to mitigate these concerns? How could such
concerns be addressed while effectively implementing this statutory
exemption?
    Question 128. The proposed approach would eliminate the requirement
in the 2013 final rule that trading performed pursuant to the foreign
trading exemption not be conducted with or through any U.S. entity,
subject to certain exceptions.\141\ Would eliminating this requirement
give foreign banking entities a competitive advantage over U.S. banking
entities with respect to identical trading activity in the United
States? For example, would eliminating this requirement give foreign
banking entities a competitive advantage over U.S. banking entities
with respect to permitted market-making or underwriting activities? Why
or why not? Are there ways that any such competitive disparities could
potentially be mitigated or eliminated in a manner consistent with the
statute? If so, please explain. Would the proposed approach create
opportunities for certain banking entities to avoid the operation of
the rule in ways that would frustrate the purposes of the statute? If
so, how?
---------------------------------------------------------------------------

    \141\ See Sec.  __.6(e)(3).
---------------------------------------------------------------------------

    Question 129. The proposed approach would eliminate the requirement
in the 2013 final rule that personnel of the banking entity who
arrange, negotiate, or execute a purchase or sale under the foreign
trading exemption be located outside the United States.\142\ Should
this requirement be removed? Why or why not? Would eliminating this
restriction, thereby allowing foreign banking entities to perform
certain core market-facing activities in the United States and with
U.S. customers, create competitive disparities between foreign banking
entities and U.S. banking entities? Please explain. Are there ways that
any such competitive disparities could potentially be mitigated or
eliminated in a manner consistent with the statute? If so, please
explain. Would the proposed approach create opportunities for banking
entities to avoid the operation of the rule in ways that would
frustrate the purposes of the statute? If so, how?
---------------------------------------------------------------------------

    \142\ See Sec. Sec.  __.6(e)(3)(i) and __.6(e)(3)(v)(A).
---------------------------------------------------------------------------

    Question 130. Instead of removing the requirement that any
personnel of the banking entity that arrange, negotiate, or execute a
purchase or sale be located outside of the United States, should the
Agencies provide definitions or guidance on these terms, for example,
similar to definitions and guidance adopted or issued by the SEC and
CFTC under Title VII of the Dodd-Frank Act and implementing
regulations? Are there any other modifications that would be more
appropriate?

C. Subpart C--Covered Fund Activities and Investments

1. Section __.10: Prohibition on Acquisition or Retention of Ownership
Interests in, and Certain Relationships With, a Covered Fund
a. Prohibition Regarding Covered Fund Activities and Investments
    As noted above and except as otherwise permitted, section
13(a)(1)(B) of the BHC Act generally prohibits a banking entity from
acquiring or retaining any ownership interest in, or sponsoring, a
covered fund.\143\ Section 13(d) of the BHC Act contains certain
exemptions to this prohibition. Subpart C of the 2013 final rule
implements these and other provisions of section 13 related to covered
funds. Specifically, Sec.  __.10(a) of the 2013 final rule establishes
the scope of the covered fund prohibitions and Sec.  __.10(b) of the
2013 final rule defines a number of key terms, including ``covered
fund.'' Section __.10(c) of the 2013 final rule tailors the definition
of ``covered fund'' by providing particular exclusions. The covered
fund definition, taking into account the particular exclusions, is
central to the operation of subpart C of the 2013 final rule because it
specifies the types of entities to which the prohibition contained in
Sec.  __.10(a) of the 2013 final rule applies, unless the relevant
activity is specifically permitted under an available exemption
contained elsewhere in subpart C of the final rule.
---------------------------------------------------------------------------

    \143\ See 12 U.S.C. 1851(a)(1)(B).
---------------------------------------------------------------------------

    In the 2013 final rule, the Agencies adopted a tailored definition
of ``covered fund'' that covers issuers of the type that would be
investment companies but for section 3(c)(1) or 3(c)(7) of the
Investment Company Act \144\ with exclusions for certain specific types
of issuers. The Agencies designed the exclusions to focus the covered
fund definition on vehicles used for the investment purposes that the
Agencies believed were the target of section 13 of the BHC Act.\145\
The definition of ``covered fund'' under the 2013 final rule also
includes certain funds organized and offered outside of the United
States to address the potential for circumvention of the restrictions
in section 13 through foreign fund structures and certain types of
commodity pools for which a registered commodity pool operator has
elected to claim the exemption provided by section 4.7 of the CFTC's
regulations or investor limitations apply.\146\ In the preamble to the
2013 final rule, the Agencies stated their belief that the definition
was consistent with the words, structure, purpose, and legislative
history of section 13 of the BHC Act.\147\ In particular, the Agencies
stated that the purpose of section 13 appears to be to limit the
involvement of banking entities in high-risk proprietary trading, as
well as their investment in, sponsorship of, and other connections
with, entities that engage in investment activities for the benefit of
banking entities, institutional investors, and high-net worth
individuals.\148\ Further, the Agencies indicated that section 13
permitted them to tailor the scope of the definition to funds that
engage in the investment activities contemplated by section 13 (as
opposed, for example, to vehicles that merely serve to facilitate
corporate structures).\149\ Tailoring the scope of the definition was
intended to allow the Agencies to avoid any unintended results that
might follow from a definition that was inappropriately imprecise.\150\
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    \144\ Sections 3(c)(1) and 3(c)(7) of the Investment Company Act
are exclusions commonly relied on by a wide variety of entities that
would otherwise be covered by the broad definition of ``investment
company'' contained in that Act. 12 U.S.C. 1851(h)(2). Sections
3(c)(1) and 3(c)(7) of the Investment Company Act, in relevant part,
provide two exclusions from the definition of ``investment company''
for: (1) Any issuer whose outstanding securities are beneficially
owned by not more than one hundred persons and which is not making
and does not presently propose to make a public offering of its
securities (other than short-term paper); or (2) any issuer, the
outstanding securities of which are owned exclusively by persons
who, at the time of acquisition of such securities, are ``qualified
purchasers'' as defined by section 2(a)(51) of the Investment
Company Act, and which is not making and does not at that time
propose to make a public offering of such securities. See 15 U.S.C.
80a-3(c)(1) and (c)(7).
    \145\ See 79 FR at 5671.
    \146\ Id. In the preamble to the 2013 final rule, the Agencies
also expressed their intent to exercise the statutory anti-evasion
authority provided in section 13(e) of the BHC Act and other
prudential authorities in order to address instances of evasion. The
2013 final rule permits the Agencies to jointly determine to include
within the definition of ``covered fund'' any fund excluded from
that definition, and this authority may be exercised to address
instances of evasion. See 2013 final rule Sec.  __.10(c).
    \147\ See 79 FR at 5670. Section 13(h)(2) provides that: ``the
terms `hedge fund' and `private equity fund' mean an issuer that
would be an investment company as defined in the [Investment Company
Act] (15 U.S.C. 80a-1 et seq.), but for section 3(c)(1) or 3(c)(7)
of that Act, or such similar funds as the [Agencies] may, by rule,
as provided in subsection (b)(2), determine.'' See 12 U.S.C.
1851(h)(2) (emphasis added).
    \148\ See 79 FR at 5670.
    \149\ See id. at 5666.
    \150\ In adopting the 2013 final rule, the Agencies referred to
legislative history that suggested that Congress may have foreseen
that its base definition could lead to unintended results and might
be overly broad, too narrow, or otherwise off the mark. See id. at
5670-71.
---------------------------------------------------------------------------

    The Agencies request comment on whether the 2013 final rule's
covered fund definition effectively implements the statute and is
appropriately tailored to identify funds that engage in the investment
activities contemplated by section 13. The Agencies also request
comment on whether the definition has been inappropriately imprecise
and, if so, whether that has led to any unintended results.
i. Covered Fund ``Base Definition''--Section __.10(b)
    In considering whether to further tailor the covered fund
definition, the Agencies seek comment in this section on the 2013 final
rule's general approach to defining the term ``covered fund'' and the
2013 final rule's ``base definition'' of covered fund, that is, the
definition as provided in Sec.  __.10(b) before applying the exclusions
found in Sec.  __.10(c), as well as alternatives to this base
definition.\151\ In the sections that follow the Agencies request
comment on exclusions from the covered fund definition that relate to
specific areas of concern expressed to the Agencies.
---------------------------------------------------------------------------

    \151\ See 2013 final rule Sec.  __.10(b)(1)(i), (ii), and (iii).
---------------------------------------------------------------------------

    Question 131. The Agencies adopted in the 2013 final rule a unified
definition of ``covered fund'' rather than having separate definitions
for ``hedge fund'' and ``private equity fund'' because the statute
defines ``hedge fund'' and ``private equity fund'' without
differentiation. Instead of retaining a unified definition of ``covered
fund,'' should the Agencies separately define ``hedge fund'' and
``private equity fund'' or define ``covered fund'' as a ``hedge fund''
or ``private equity fund''? Would such an approach more effectively
implement the statute? If so, how should the Agencies define these
terms and why? Alternatively, the Agencies request comment below as to
whether the Agencies should provide exclusions from the covered fund
base definition for an issuer that does not share certain
characteristics commonly associated with a hedge fund or private equity
fund. If the Agencies were to define the terms ``hedge fund'' and
``private equity fund,'' would it be more effective to do so with an
exclusion from the covered fund definition for issuers that do not
resemble ``hedge funds'' and ``private equity funds''?
    Question 132. In the 2013 final rule, the Agencies tailored the
scope of the definition to funds that engage in the investment
activities contemplated by section 13. Does the 2013 final rule's
definition of ``covered fund'' effectively include funds that engage in
those

investment activities? Are there funds that are included in the
definition of ``covered fund'' that do not engage in those investment
activities? If so, what types of funds, and should the Agencies modify
the definition to exclude them? Are there funds that engage in those
investment activities but are not included in the definition of
``covered fund''? If so, what types of funds and should the Agencies
modify the definition to include them? If the Agencies should modify
the definition, how should it be modified?
    Question 133. In the preamble to the 2013 final rule, the Agencies
stated that tailoring the scope of the definition of ``covered fund''
would allow the Agencies to avoid unintended results that might follow
from a definition that is ``inappropriately imprecise.'' \152\ Has the
final definition been ``inappropriately imprecise'' in practice? If so,
how? Should the Agencies modify the base definition to be more precise?
If so, how? Alternatively or in addition to modifying the base
definition, could the Agencies modify or add any exclusions to make the
definition more precise, as discussed below?
---------------------------------------------------------------------------

    \152\ See 79 FR at 5670-71.
---------------------------------------------------------------------------

    Question 134. The 2013 final rule's definition of ``covered fund''
includes certain funds organized and offered outside of the United
States with respect to a U.S. banking entity that sponsors or invests
in the fund in order to address structures that might otherwise allow
circumvention of the restrictions of section 13. Does this ``foreign
covered fund'' provision effectively address those circumvention
concerns? If not, should the Agencies modify this provision to address
those circumvention concerns more directly or in some other way? If so,
how?
    Question 135. The 2013 final rule's definition of ``covered fund''
includes certain commodity pools in order to address structures that
might otherwise allow circumvention of the restrictions in section 13.
In adopting this ``covered commodity pool'' provision, the Agencies
sought to take a tailored approach that is designed to accurately
identify those commodity pools that are similar to issuers that would
be investment companies as defined in the Investment Company Act but
for section 3(c)(1) or 3(c)(7) of that Act, consistent with section
13(h)(2) of the BHC Act. Does this ``covered commodity pool'' provision
effectively address those circumvention concerns? If not, should the
Agencies modify this provision to address those circumvention concerns
more directly or in some other way? If so, how? Has the covered
commodity pool provision been effective in including in the covered
fund base definition those commodity pools that are similar to issuers
that would be investment companies but for section 3(c)(1) or 3(c)(7)?
Has it been under- or over-inclusive? What kinds of commodity pools
have been included in or excluded from the covered fund base definition
and are these inclusions or exclusions appropriate? If the covered
commodity pool provision is under- or over-inclusive, what changes
should the Agencies make and how would those changes be more effective?
    Question 136. What kinds of compliance and other costs have banking
entities incurred in analyzing whether particular issuers are covered
funds and implementing compliance programs for covered fund activities?
Has the breadth of the base definition raised particular compliance
challenges? Have the 2013 final rule's exclusions from the covered fund
definition helped to reduce compliance costs or provided greater
certainty as to the scope of the covered fund definition?
    Question 137. If the Agencies modify the covered fund base
definition in whole or in part, would banking entities expect to incur
significant costs or burdens in order to become compliant? That is,
after having established compliance, trading, risk management, and
other systems predicated on the 2013 final rule's covered fund
definition, what are the kinds of costs and any other burdens and their
magnitude that banking entities would experience if the Agencies were
to modify the covered fund base definition?
    Question 138. The Agencies understand that banking entities have
already expended resources in reviewing a wide range of issuers to
determine if they are covered funds, as defined in the 2013 final rule.
What kinds of costs and burdens would banking entities and others
expect to incur if the Agencies were to modify the covered fund base
definition to the extent any modifications were to require banking
entities to reevaluate issuers to determine if they meet any revised
covered fund definition? To what extent would modifying the covered
fund base definition require banking entities to reevaluate issuers
that a banking entity previously had determined are not covered funds?
Would any costs and burdens be justified to the extent the Agencies
more effectively tailor the covered fund definition to focus on the
concerns underlying section 13? Could any costs and burdens be
mitigated if the Agencies further tailored or added exclusions from the
covered fund definition or developed new exclusions, as opposed to
changing the covered fund base definition?
    Question 139. To what extent do the proposed modifications to other
provisions of the 2013 final rule affect the impact of the scope of the
covered fund definition? For example, as described below, the Agencies
are proposing to eliminate some of the additional, covered-fund
specific limitations that apply under the 2013 final rule to a banking
entity's underwriting, market making, and risk-mitigating hedging
activities. As another example, the Agencies are requesting comment
below about whether to incorporate into Sec.  __.14's limitations on
covered transactions the exemptions provided in section 23A of the
Federal Reserve Act (``FR Act'') and the Board's Regulation W. To the
extent commenters have concerns regarding the breadth of the covered
fund definition, would these concerns be addressed or mitigated by the
changes the Agencies are proposing to the other covered fund provisions
or on which the Agencies are seeking comment?
ii. Particular Exclusions From the Covered Fund Definition
    As discussed above, the 2013 final rule contains exclusions from
the base definition of ``covered fund'' that tailor the covered fund
definition. The Agencies designed these exclusions to avoid any
unintended results that might follow from a definition of ``covered
fund'' that was inappropriately imprecise. In this section, the
Agencies request comment on whether to modify certain existing
exclusions from the covered fund definition. The Agencies also request
comment on whether to provide new exclusions in order to more
effectively tailor the definition. Finally, with respect to all of the
potential modifications the Agencies discuss in this section, the
Agencies seek comment as to the potential effect of the other changes
the Agencies are proposing today to the covered fund provisions and on
additional changes on which the Agencies seek comment. That is, would
these proposed changes address in whole or in part any concerns about
the breadth of the covered fund definition?
iii. Foreign Public Funds
    The 2013 final rule generally excludes from the definition of
``covered fund'' any issuer that is organized or established outside of
the United States and the ownership interests of which are (i)
authorized to be offered and sold to retail investors in the issuer's
home jurisdiction and (ii) sold predominantly

through one or more public offerings outside of the United States.\153\
The Agencies stated in the preamble to the 2013 final 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.\154\
---------------------------------------------------------------------------

    \153\ See 2013 final rule Sec.  __.10(c)(1); See also 79 FR at
5678 (``For purposes of this exclusion, the Agencies 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 Agencies would expect a fund
authorized to sell ownership interests to such retail investors to
be of a type that is more similar to a [RIC] rather than to a U.S.
covered fund.''); 2013 final rule Sec.  __.10(c)(1)(iii) (defining
the term ``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).
    \154\ 79 FR at 5678.
---------------------------------------------------------------------------

    The 2013 final rule places an additional condition on a U.S.
banking entity's ability to rely on the FPF exclusion with respect to
any FPF it sponsors.\155\ The FPF 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, affiliates of the issuer and the
sponsoring banking entity, and employees and directors of such
entities.\156\ The Agencies stated in the preamble to the 2013 final
rule that, consistent with the Agencies' view concerning whether an FPF
has been sold predominantly outside of the United States, the Agencies
generally expect that an FPF will 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.\157\
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    \155\ Although the discussion of this condition generally refers
to U.S. banking entities for ease of reading, the condition also
applies to foreign affiliates of a U.S. banking entity. See 2013
final 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'').
    \156\ See 2013 final rule Sec.  __.10(c)(1)(ii).
    \157\ 79 FR at 5678.
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    In adopting the FPF exclusion, the Agencies' view was that it is
appropriate to exclude these funds from the ``covered fund'' definition
because they are sufficiently similar to U.S. RICs.\158\ The Agencies
also expressed the view that the additional condition applicable to
U.S. banking entities is designed to treat FPFs 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.\159\
---------------------------------------------------------------------------

    \158\ Id. (``The requirements that a foreign public fund both be
authorized for sale to retail investors and sold predominantly in
public offerings outside of the United States are based in part on
the Agencies' view that foreign funds that meet these requirements
generally will be sufficiently similar to [RICs] such that it is
appropriate to exclude these foreign funds from the covered fund
definition.'')
    \159\ Id. (``This additional condition reflects the Agencies'
view that the foreign public fund exclusion is 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. The exclusion is not intended to
permit a U.S. banking entity to establish a foreign fund for the
purpose of investing in the fund as a means of avoiding the
restrictions imposed by section 13.'').
---------------------------------------------------------------------------

    The Agencies request comment on all aspects of the FPF exclusion,
including whether the exclusion is effective in identifying foreign
funds that may be sufficiently similar to RICs and permitting U.S.
banking entities and their foreign affiliates to carry on traditional
asset management businesses outside of the United States, as the
Agencies contemplated in adopting this exclusion. As reflected in the
detailed questions that follow, the Agencies seek comment on a range of
possible ways to modify this exclusion, including: (i) Whether the
Agencies could simplify or omit certain of the exclusion's conditions--
including those not applicable to excluded RICs--while still
identifying funds that should be excluded and addressing the
possibility for evasion through the Agencies' broad anti-evasion
authority; (ii) whether the exclusion's conditions requiring a fund to
be authorized for sale to retail investors in the issuer's home
jurisdiction and sold predominantly in public offerings outside of the
United States should be retained and, if so, whether the Agencies
should modify or clarify these conditions; and (iii) whether the
additional conditions for U.S. banking entities with respect to the
FPFs they sponsor are appropriate. Specifically, in considering whether
to further tailor the FPF exclusion, the Agencies seek comment below on
the following:
    Question 140. Are foreign funds that satisfy the current conditions
in the FPF exclusion sufficiently similar to RICs such that it is
appropriate to exclude these foreign funds from the covered fund
definition? Why or why not? Are there foreign funds that cannot satisfy
the exclusion's conditions but that are nonetheless sufficiently
similar to RICs such that it is appropriate to exclude these foreign
funds from the covered fund definition? If so, how should the Agencies
modify the exclusion's conditions to permit these funds to rely on it?
Conversely, are there foreign funds that satisfy the exclusion's
conditions but are not sufficiently similar to RICs such that it is not
appropriate to exclude these funds from the covered fund definition? If
so, how should the Agencies modify the exclusion's conditions to
prohibit these funds from relying on it? Conversely, are changes to the
FPF exclusion necessary given the other changes the Agencies are
proposing today and on which the Agencies seek comment?
    Question 141. RICs are excluded from the covered fund definition
regardless of whether their ownership interests are sold in public
offerings or whether their ownership interests are sold predominantly
to persons other than the sponsoring banking entity, affiliates of the
issuer and the sponsoring banking entity, and employees and directors
of such entities. Is such an exclusion appropriate? Why or why not?
    Question 142: As discussed above, the Agencies designed the FPF
exclusion to identify foreign funds that are sufficiently similar to
RICs such that it is appropriate to exclude these foreign funds from
the covered fund definition, but included additional conditions not
applicable to RICs in part to limit the possibility for evasion of the
2013 final rule. Do FPFs present a heightened risk of evasion that
justifies these additional conditions, as they currently exist or with
any of the modifications on which the Agencies request comment below?
Why or why not?
    Question 143: As an alternative, should the Agencies address
concerns about evasion through other means, such as the anti-evasion
provisions in Sec.  __.21 of the 2013 final rule? \160\ The

2013 final rule includes recordkeeping requirements designed to
facilitate the Agencies' ability to monitor banking entities'
investments in FPFs to ensure that banking entities do not use the
exclusion for FPFs in a manner that functions as an evasion of section
13. Specifically, under the 2013 final rule, a U.S. banking entity with
more than $10 billion in total consolidated assets is required to
document its investments in foreign public funds, broken out by each
FPF and each foreign jurisdiction in which any FPF is organized, if the
U.S. banking entity and its affiliates' ownership interests in FPFs
exceed $50 million at the end of two or more consecutive calendar
quarters.\161\ The Agencies are proposing to retain these and other
covered fund recordkeeping requirements with respect to banking
entities with significant trading assets and liabilities.
---------------------------------------------------------------------------

    \160\ Section __.21 of the 2013 final rule 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 2013 final rule, 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 2013 final
rule, the Agency may take any action permitted by law to enforce
compliance with section 13 of the BHC Act and the 2013 final rule,
including directing the banking entity to restrict, limit, or
terminate any or all activities under the 2013 final rule and
dispose of any investment.
    \161\ See 2013 final rule Sec.  __.20(e).
---------------------------------------------------------------------------

    Alternatively, would retaining specific provisions designed to
address anti-evasion concerns, whether as they currently exist or
modified, provide greater clarity as to the scope of foreign funds
excluded from the definition and avoid uncertainty that could result
from a less prescriptive exclusion?
    Question 144. One condition of the FPF exclusion is that the fund
must be ``authorized to offer and sell ownership interests to retail
investors in the issuer's home jurisdiction.'' The Agencies understand
that banking entities generally interpret the 2013 final rule's
reference to the issuer's ``home jurisdiction'' to mean the
jurisdiction in which the issuer is organized. Is this condition
helpful in identifying FPFs that should be excluded from the covered
fund definition? Why or why not? The Agencies provided guidance
regarding the 2013 final rule's current reference to ``retail
investors.'' \162\ Has this provided sufficient clarity? Additionally,
as discussed below, the 2013 final rule contains an additional
condition requiring that to meet the exclusion, a fund must sell
ownership interests predominantly through one or more public offerings
outside the United States. As an alternative to requiring that the fund
be authorized to sell interests to retail investors, should the
Agencies instead require that the fund be authorized to sell interests
in a ``public offering''?
---------------------------------------------------------------------------

    \162\ See supra note 153.
---------------------------------------------------------------------------

    Question 145. The Agencies understand that some funds may be formed
under the laws of one non-U.S. jurisdiction, but offered to retail
investors in another. For example, Undertakings for Collective
Investment in Transferable Securities (``UCITS'') funds and investment
companies with variable capital, or SICAVs, may be domiciled in one
jurisdiction in the European Union, such as Ireland or Luxembourg, but
may be offered and sold in one or more other E.U. member states. In
this case a foreign fund could be authorized for sale to retail
investors, as contemplated by the FPF exclusion, but fail to satisfy
this condition. Should the Agencies modify this condition to address
this situation? If so, how?
    Question 146. Should the Agencies, for example, modify the
condition to omit any reference to the fund's ``home jurisdiction'' and
instead provide, for example, that the fund must be authorized to offer
and sell ownership interests to retail investors in ``the primary
jurisdiction'' in which the issuer's ownership interests are offered
and sold? Would that or a similar approach effectively identify funds
that are sufficiently similar to RICs, including funds that are formed
under the laws of one jurisdiction and offered and sold in another? For
purposes of determining the primary jurisdiction, would the Agencies
need to define the term ``primary'' or a similar term to provide
sufficient clarity? If so, how should the Agencies define this or a
similar term? Are there funds for which it could be difficult to
identify a ``primary'' jurisdiction? Does the condition need to refer
to a ``primary jurisdiction,'' or would it be sufficient to require
that the fund be authorized to offer and sell ownership interests to
retail investors in ``any jurisdiction'' in which the issuer's
ownership interests are offered and sold? Should the exclusion focus on
whether the fund is authorized to make a public offering in the
primary, or any, jurisdiction in which it is offered and sold as a
proxy for whether it is authorized for sale to retail investors?
    If the Agencies were to make a modification like the one described
immediately above, should the exclusion retain the reference to the
issuer's ``home'' jurisdiction? For example, should the Agencies modify
this condition to require that the fund be ``authorized to offer and
sell ownership interests to retail investors in the primary
jurisdiction in which the issuer's ownership interests are offered and
sold,'' without any reference to the home jurisdiction? Would this
modification be effective, or does the exclusion need to retain a
reference to an issuer the ownership interests of which are authorized
for sale to retail investors in the home jurisdiction, as well as the
primary jurisdiction in which the issuer's ownership interests are
offered and sold? Why? If the rule retained a reference to
authorization in the fund's home jurisdiction, would this raise
concerns if a fund were authorized to be sold to retail investors in
the fund's home jurisdiction, but was not sold in that jurisdiction and
instead was sold to institutions or other non-retail investors in a
different jurisdiction in which the fund was not authorized to sell
interests to retail investors or to make a public offering? Are there
other formulations the Agencies should make to identify foreign funds
that are authorized to offer and sell their ownership interests to
retail investors? Which formulations and why?
    Question 147. Under the 2013 final rule, a foreign public fund's
ownership interests must be sold predominantly through one or more
``public offerings'' outside of the United States, in addition to the
condition discussed above that the fund must be authorized for sale to
retail investors. One result of this ``public offerings'' condition is
that a fund that is authorized for sale to retail investors--including
a fund authorized to make a public offering--cannot rely on the
exclusion if the fund does not in fact offer and sell ownership
interests in public offerings. Some foreign funds, like some RICs, may
be authorized for sale to retail investors but may choose to offer
ownership interests to high-net worth individuals or institutions in
non-public offerings. Do commenters believe it is appropriate that
these foreign funds cannot rely on the FPF exclusion? Should the
Agencies further tailor the FPF exclusion to focus on whether the
fund's ownership interests are authorized for sale to retail investors
or the fund is authorized to conduct a public offering, as discussed
above, rather than whether the fund interests were actually sold in a
public offering? Would the investor protection and other regulatory
requirements that would tend to make foreign funds similar to a U.S.
registered fund generally be a consequence of a fund's authorization
for sale to retail investors or authorization to make a public
offering?
    If a fund is authorized to conduct a public offering in a non-U.S.
jurisdiction, would the fund be subject to all of the regulatory
requirements that apply in that jurisdiction for funds

intended for broad distribution, including to retail investors, even if
the fund is not in fact sold in a public offering to retail investors?
    Question 148. The 2013 final rule defines the term ``public
offering'' for purposes of this exclusion to mean a ``distribution''
(as defined in Sec.  __.4(a)(3) of the 2013 final rule) of securities
in any jurisdiction outside the United States to investors, including
retail investors, provided that (i) the distribution complies with all
applicable requirements in the jurisdiction in which such distribution
is being made; (ii) the distribution does not restrict availability to
investors having a minimum level of net worth or net investment assets;
and (iii) the issuer has filed or submitted, with the appropriate
regulatory authority in such jurisdiction, offering disclosure
documents that are publicly available.\163\ If the Agencies were to
modify the FPF exclusion to focus on whether the fund's ownership
interests are authorized for sale to retail investors or the fund is
authorized to conduct a public offering--rather than whether the fund's
interests were actually sold in a public offering--should the Agencies
retain some or all of the conditions included in the 2013 final rule's
definition of the term ``public offering''? For example, should the
Agencies retain the requirement that a public offering is one that does
not restrict availability to investors having a minimum level of net
worth or net investment assets; and/or the requirement that an FPF file
or submit, with the appropriate regulatory authority in such
jurisdiction, offering disclosure documents that are publicly
available? Would either of these two conditions, either alone or
together, help to identify foreign funds that are sufficiently similar
to RICs? Why or why not? Is the reference to a ``distribution'' (as
defined in Sec.  __.4(a)(3) of the 2013 final rule) effective? Should
the Agencies modify the reference to a ``distribution'' to address
instances in which a fund's ownership interests generally are sold to
retail investors in secondary market transactions, as with exchange-
traded funds, for example? Should the definition of ``public offering''
also take into account whether a fund's interests are listed on an
exchange?
---------------------------------------------------------------------------

    \163\ See 2013 final rule Sec.  __.10(c)(1)(iii).
---------------------------------------------------------------------------

    Question 149. The public offering definition provides in part that
the distribution does not restrict availability to investors having a
minimum level of net worth or net investment assets. Are there
jurisdictions that permit offerings that would otherwise meet the
definition of a public offering but that restrict availability to
investors having a minimum level of net worth or net investment assets
or that otherwise restrict the types of investors who can participate?
    Conversely, should the Agencies retain the requirement that an FPF
actually conduct a public offering outside of the United States? Would
a foreign fund that actually sells ownership interests in public
offerings outside of the United States tend to provide greater
information to the public or be subject to additional regulatory
requirements than a fund that is authorized to conduct a public
offering but offers and sells its ownership interests in non-public
offerings?
    Question 150. If the Agencies retain the requirement that an FPF
actually conduct a public offering outside of the United States, should
the Agencies retain the requirement that the fund's ownership interests
must be sold ``predominantly'' through one or more such offerings? Why
or why not? As mentioned above, the Agencies stated in the preamble to
the 2013 final rule that they generally expect a fund's offering would
satisfy this requirement if 85 percent or more of the fund's interests
are sold to investors that are not residents of the United States. Has
this guidance been helpful in identifying FPFs that should be excluded,
if the Agencies retain the requirement that an FPF actually conduct a
public offering outside of the United States?
    Question 151. The Agencies understand that some banking entities
have faced compliance challenges in determining whether 85 percent or
more of the fund's interests are sold to investors that are not
residents of the United States. Where foreign funds are listed on a
foreign exchange, for example, it may not be feasible to obtain
sufficient information about a fund's owners to make these
determinations. The Agencies understand that banking entities also have
experienced difficulties in obtaining sufficient information about a
fund's owners in some cases where the foreign fund is sold through
intermediaries. What sorts of compliance and other costs have banking
entities incurred in developing and maintaining compliance systems to
track foreign public funds' compliance with this condition? To the
extent that commenters have experienced these or other compliance
challenges, how have commenters addressed them? Have funds failed to
qualify for the FPF exclusion because of this condition? Which kinds of
funds and why? Do commenters believe that these funds should
nonetheless be treated as FPFs? Why? If the Agencies retain this
condition, should they reduce the required percentage of a fund's
ownership interests that must be sold to investors that are not
residents of the United States? Which percentage would be appropriate?
Should the percentage be more than 50 percent, for example? Would a
lower percentage mitigate the compliance challenges discussed above? If
the Agencies do not retain the condition that an FPF must be sold
predominantly through one or more public offerings outside of the
United States, should the Agencies impose any limitations on the extent
to which the fund can be offered in private offerings in the United
States?
    Question 152. The 2013 final rule places an additional condition on
a U.S. banking entity's ability to rely on the FPF exclusion with
respect to any FPF it sponsors: The fund's ownership interests must be
sold predominantly to persons other than the sponsoring banking entity
and certain persons connected to that banking entity. Has this
additional condition been effective in identifying FPFs that should be
excluded from the covered fund definition? Has it been effective in
permitting U.S. banking entities to continue their asset management
businesses outside of the United States while also limiting the
opportunity for evasion of section 13? Conversely, has this additional
condition resulted in the compliance challenges discussed above in
connection with the Agencies' view that a fund generally is sold
``predominantly'' in public offerings 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? The Agencies understand that
determining whether the employees and directors of a banking entity and
its affiliates have invested in a foreign fund has been particularly
challenging for banking entities because the 2013 final rule defines
the term ``employee'' to include a member of the immediate family of
the employee.\164\ Is there a more direct way to define the term
``employee'' to mitigate the compliance challenges but still be
effective in limiting the opportunity for evasion of section 13? If so,
how? Should a revised definition specify who is included in an
employee's immediate family for this purpose? Should a revised
definition exclude immediate family members? If so, why?
---------------------------------------------------------------------------

    \164\ See 2013 final rule Sec.  __.2(j).
---------------------------------------------------------------------------

    Question 153. What other aspects of the conditions for FPFs have
resulted in

compliance challenges? Has the condition that FPFs be sold
predominantly through public offerings outside of the United States
resulted in U.S. banking entities, including their foreign affiliates
and subsidiaries, determining not to sponsor new FPFs because of
concerns about compliance challenges and costs? If the Agencies retain
this additional condition, should they reduce the required percentage
of a fund's ownership interests sold to persons other than the
sponsoring U.S. banking entity and certain persons connected to that
banking entity? Which percentage would be appropriate? Would a lower
percentage mitigate the compliance challenges discussed above? Are
there other conditions that might better serve the same purpose but
reduce the challenges presented by this condition? One effect of this
condition is that a U.S. banking entity can own up to 15 percent of an
FPF that it sponsors, but can own up to 25 percent of a RIC after the
seeding period.\165\ Is this disparate treatment appropriate? Another
effect of this condition is that a U.S. banking entity can own up to 15
percent of an FPF that it sponsors, but a foreign banking entity can
own up to 25 percent of an FPF that it sponsors. Is this disparate
treatment appropriate?
---------------------------------------------------------------------------

    \165\ The limitation on a banking entity's investment in a U.S.
registered fund under the 2013 final rule results from the
definition of ``banking entity.'' If a banking entity owns,
controls, or has power to vote 25 percent or more of any class of
voting securities of another company, including a U.S. registered
fund after a seeding period, that other company will itself be a
banking entity under the 2013 final rule.
---------------------------------------------------------------------------

    Question 154. Following the adoption of the 2013 final rule, staffs
of the Agencies provided responses to certain FAQs, including whether
an entity that is formed and operated pursuant to a written plan to
become an FPF would receive the same treatment as an entity formed and
operated pursuant to a written plan to become a RIC or BDC.\166\
---------------------------------------------------------------------------

    \166\ All the Agencies have published all FAQs on each of their
public websites. See Frequently Asked Question number 5, available
at https://www.federalreserve.gov/bankinforeg/volcker-rule/faq.htm#5; Covered Fund Definition, available at https://www.sec.gov/divisions/marketreg/faq-volcker-rule-section13.htm;
Foreign Public Fund Seeding Vehicles, available at https://www.fdic.gov/regulations/reform/volcker/faq/foreign.html; Foreign
Public Fund Seeding Vehicles, available at https://occ.gov/topics/capital-markets/financial-markets/trading-volcker-rule/volcker-rule-implementation-faqs.html#foreign; Foreign Public Fund Seeding
Vehicles, available at<EMAIL_ADDRESS>---------------------------------------------------------------------------

    The staffs observed that the 2013 final rule explicitly excludes
from the covered fund definition an issuer that is formed and operated
pursuant to a written plan to become a RIC or BDC in accordance with
the banking entity's compliance program as described in Sec.
__.20(e)(3) of the 2013 final rule and that complies with the
requirements of section 18 of the Investment Company Act. The staffs
observed that the 2013 final rule does not include a parallel provision
for an issuer that will become a foreign public fund. The staffs stated
that they do not intend to advise the Agencies to treat as a covered
fund under the 2013 final rule an issuer that is formed and operated
pursuant to a written plan to become a qualifying foreign public fund.
The staffs observed that any written plan would be expected to document
the banking entity's determination that the seeding vehicle will become
a foreign public fund, the period of time during which the seeding
vehicle will operate as a seeding vehicle, the banking entity's plan to
market the seeding vehicle to third-party investors and convert it into
an FPF within the time period specified in Sec.  __.12(a)(2)(i)(B) of
the 2013 final rule, and the banking entity's plan to operate the
seeding vehicle in a manner consistent with the investment strategy,
including leverage, of the seeding vehicle upon becoming a foreign
public fund. Has the staffs' position facilitated consistent treatment
for seeding vehicles that operate pursuant to a plan to become an FPF
as that provided for seeding vehicles that operate pursuant to plans to
become RICs or BDCs? Why or why not? Should the Agencies amend the 2013
final rule to implement this or a different approach for seeding
vehicles that will become foreign public funds? What other approaches
should the Agencies take and why? Should the Agencies amend the 2013
final rule to require seeding vehicles that operate pursuant to a
written plan to become an FPF to include in such written plan the same
or different types of documentation as the documentation required of
seeding vehicles that operate pursuant to plans to become RICs or BDCs?
If different types of documentation should be required of seeding
vehicles that will become foreign public funds, why would those
different types of documentation be appropriate? Would requiring those
different types of documentation impose costs or burdens on the issuers
that are greater or less than the costs and burdens imposed on issuers
that will become RICs or BDCs?
iv. Family Wealth Management Vehicles
    Some families manage their wealth by establishing and acquiring
ownership interests in ``family wealth management vehicles.'' Family
wealth management vehicles take a variety of legal forms, including
limited liability companies, limited partnerships, other pooled
investment vehicles, and trusts. The structures in which these vehicles
operate vary in complexity, ranging from simple standalone arrangements
covering a single beneficiary to complex multi-tier structures intended
to benefit multiple generations of family members. In some cases, these
vehicles have been in existence for more than 100 years while in other
cases, they are nascent entities with little to no operating history.
The Agencies are aware of no set of consistent standards that govern
the characteristics of family wealth management vehicles or the manner
in which they operate.
    Because family wealth management vehicles might hold assets that
meet the definition of ``investment securities'' \167\ in the
Investment Company Act, they may be investment companies that either
need to register as such or otherwise rely on an exclusion from the
definition of investment company. Many family wealth management
vehicles rely on the exclusions provided by sections 3(c)(1) or 3(c)(7)
of the Investment Company Act. Family wealth management vehicles that
would be investment companies but for sections 3(c)(1) or 3(c)(7) will
therefore be covered funds unless they satisfy the conditions for one
of the 2013 final rule's exclusions from the covered fund definition.
Concerns regarding family wealth management vehicles were raised to the
Agencies following the adoption of the 2013 final rule, which does not
provide an exclusion from the covered fund definition specifically
designed to address these vehicles.
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    \167\ Section 3(a)(2) of the Investment Company Act defines
``investment securities'' to include all securities except
Government securities, securities issued by employees' securities
companies, and majority-owned subsidiaries of the owner which are
not investment companies, and are not relying on the exception from
the definition of investment company in section 3(c)(1) or 3(c)(7).
Section 3(a)(1)(C) defines an investment company, in part, as any
issuer that is engaged or proposes to engage in the business of
investing, reinvesting, owning, holding, or trading in securities,
and owns or proposes to acquire investment securities having a value
exceeding 40 per centum of the value of each such issuer's total
assets (exclusive of Government securities and cash items) on an
unconsolidated basis.
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    Family wealth management vehicles also often maintain accounts and
advisory arrangements with banking entities. These banking entities may
provide a range of services to family wealth management vehicles,
including investment advice, brokerage execution, financing, and
clearance and settlement services. Family wealth management vehicles
structured as trusts for the benefit of family members also often

appoint banking entities, acting in a fiduciary capacity, as trustees
for the trusts.
    Section __.14 of the 2013 final rule provides, in part, that no
banking entity that serves, directly or indirectly, as the investment
manager, investment adviser, commodity trading advisor, or sponsor to a
covered fund, or that organizes and offers the fund under Sec.  __.11
of the 2013 final rule, may enter into a transaction with the covered
fund that would be a ``covered transaction,'' as defined in section 23A
of the FR Act.\168\ To the extent that a family wealth management
vehicle is a covered fund, then Sec.  __.14 would apply. Specifically,
if a banking entity provides services, such as advisory services, that
trigger application of Sec.  __.14, the banking entity would be
prohibited from providing the family wealth management vehicle a range
of customer-facing banking services that involve ``covered
transactions.'' Examples of these prohibited covered transactions
include intraday or short-term extensions of credit in connection with
the clearance and settlement of securities transactions executed by the
banking entity for the family wealth management vehicle.
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    \168\ See 2013 final rule Sec.  __.14(a).
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    The Agencies are not proposing changes in the status of family
wealth management vehicles in the proposal, but are seeking comment on
their reliance on exclusions in the Investment Company Act, whether or
not they should be excluded from the definition of covered fund, the
role of banking entities with respect to family wealth management
vehicles, and the potential implications of changes in their status
under the 2013 final rule. In considering whether to address the status
of family wealth management vehicles, the Agencies seek comment on the
following:
    Question 155. Do family wealth management vehicles typically rely
on the exclusions in sections 3(c)(1) or 3(c)(7) under the Investment
Company Act? Are there other exclusions from the definition of
``investment company'' in the Investment Company Act upon which family
wealth management vehicles can rely? What have been the additional
challenges for family wealth management vehicles and the banking
entities that service them when considering whether these vehicles rely
on the exclusions in sections 3(c)(1) or 3(c)(7)?
    Question 156. Should the Agencies exclude family wealth management
vehicles from the definition of ``covered fund''? If so, how should the
Agencies define ``family wealth management vehicle,'' and is this the
appropriate terminology? What factors should the Agencies consider to
distinguish a family wealth management vehicle from a hedge fund or
private equity fund, as contemplated by the statute, given that these
vehicles may utilize identical structures and pursue comparable
investment strategies? Would any of the definitions in rule
202(a)(11)(G)-1 under the Investment Advisers Act of 1940 effectively
define family wealth management vehicle? Should the Agencies, for
example, define a family wealth management vehicle to mean an issuer
that would be a ``family client,'' as defined in rule 202(a)(11)(G)-
1(d)(4)? What modifications to that definition would be appropriate for
purposes of any exclusion from the covered fund definition? For
example, that definition defines a ``family client,'' in part, to
include any company wholly owned (directly or indirectly) exclusively
by, and operated for the sole benefit of, one or more other family
clients, which include any family member or former family member. That
rule defines a ``family member'' to mean ``all lineal descendants
(including by adoption, stepchildren, foster children, and individuals
that were a minor when another family member became a legal guardian of
that individual) of a common ancestor (who may be living or deceased),
and such lineal descendants' spouses or spousal equivalents; provided
that the common ancestor is no more than 10 generations removed from
the youngest generation of family members.'' Would this approach to
defining a ``family member'' be appropriate in the context of an
exclusion from the covered fund definition? Why or why not and, if not,
what other approaches should the Agencies take? Are there any family
wealth management vehicles organized or managed outside of the United
States that raise similar concerns? If so, should the Agencies define
these family wealth management vehicles differently?
    Question 157. Would an exclusion for family wealth management
vehicles create any opportunities for evasion, for example, by allowing
a banking entity to structure investment vehicles in a manner to evade
the restrictions of section 13 on covered fund activities? Why or why
not? If so, how could such concerns be addressed? Please explain.
    Question 158. What services do banking entities provide to family
wealth management vehicles? Below, the Agencies seek comment on whether
section 14 of the implementing regulation should incorporate the
exemptions within section 23A of the FR Act and the Board's Regulation
W. Would this approach permit banking entities to provide these
services to family wealth management vehicles? Are there other ways in
which the Agencies should address the issue of banking entities being
prohibited from providing services to family wealth vehicles that would
be covered transactions?
    Question 159. Are there any similar vehicles outside of the family
wealth management context that pose similar issues?
v. Fund Characteristics
    As the Agencies stated in the preamble to the 2013 final rule, an
alternative to the 2013 final rule's approach of defining a covered
fund would be to reference fund characteristics. In the preamble to the
2013 final rule, the Agencies stated that a characteristics-based
definition could be less effective than the approach taken in the 2013
final rule as a means to prohibit banking entities, either directly or
indirectly, from engaging in the covered fund activities limited or
proscribed by section 13.\169\ The Agencies also stated that a
characteristics-based approach could require more analysis by banking
entities to apply those characteristics to every potential covered fund
on a case-by-case basis and could create greater opportunity for
evasion. Finally, the Agencies stated that although a characteristics-
based approach could mitigate the costs associated with an investment
company analysis, depending on the characteristics, such an approach
could result in additional compliance costs in some cases to the extent
banking entities would be required to implement policies and procedures
to prevent issuers from having characteristics that would bring them
within the covered fund definition.
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    \169\ See 79 FR at 5671.
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    As the Agencies consider whether to further tailor the covered fund
definition, the Agencies invite commenters' views and request comment
on whether it may be appropriate to exclude from the definition of
``covered fund'' entities that lack certain characteristics commonly
associated with being a hedge fund or a private equity fund:
    Question 160. Should the Agencies exclude from the definition of
``covered fund'' entities that lack certain enumerated traits or
factors of a hedge fund or private equity fund? If so, what traits or
factors should be incorporated and why? For instance, the SEC's Form

PF defines the terms ``hedge fund'' and ``private equity fund,'' as
described below.\170\ Would it be appropriate to exclude from the
definition of ``covered fund'' an entity that does not meet either of
the Form PF definitions of ``hedge fund'' and ``private equity fund''?
If the Agencies were to take this approach, should we, for example,
modify the 2013 final rule to provide that an issuer is excluded from
the covered fund definition if that issuer is neither a ``hedge fund''
nor a ``private equity fund,'' as defined in Form PF, or should the
Agencies incorporate some or all of the substance of the definitions in
Form PF into the 2013 final rule?
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    \170\ See Form PF, Glossary of Terms. Form PF uses a
characteristics-based approach to define different types of private
funds. A ``private fund'' for purposes of Form PF is any issuer that
would be an investment company, as defined in section 3 of the
Investment Company Act, but for section 3(c)(1) or 3(c)(7) of that
Act. Form PF defines the following types of private funds: Hedge
funds, private equity funds, liquidity funds, real estate funds,
securitized asset funds, venture capital funds, and other private
funds. See infra at note 167.
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    Question 161. If the Agencies were to incorporate the substance of
the definitions of hedge fund and private equity fund in Form PF,
should the Agencies make any modifications to these definitions for
purposes of the 2013 final rule? Also, Form PF is designed for
reporting by funds advised by SEC-registered advisers. Would any
modifications be needed to have the characteristics-based exclusion
apply to funds not advised by SEC-registered advisers, in particular
foreign funds with non-U.S. advisers not registered with the SEC?
    Question 162. Form PF defines ``hedge fund'' to mean any private
fund (other than a securitized asset fund): (a) With respect to which
one or more investment advisers (or related persons of investment
advisers) may be paid a performance fee or allocation calculated by
taking into account unrealized gains (other than a fee or allocation
the calculation of which may take into account unrealized gains solely
for the purpose of reducing such fee or allocation to reflect net
unrealized losses); (b) that may borrow an amount in excess of one-half
of its net asset value (including any committed capital) or may have
gross notional exposure in excess of twice its net asset value
(including any committed capital); or (c) that may sell securities or
other assets short or enter into similar transactions (other than for
the purpose of hedging currency exposure or managing duration). If the
Agencies were to incorporate these provisions as part of a
characteristics-based exclusion, should any of these provisions be
modified? If so, how? Additionally, Form PF's definition of the term
``hedge fund'' provides that, solely for purposes of Form PF, any
commodity pool is categorized as a hedge fund.\171\ If the Agencies
were to define the term ``hedge fund'' based on the definition in Form
PF, should the term include only those commodity pools that come within
the ``hedge fund'' definition without regard to this clause in the Form
PF definition that treats every commodity pool as a hedge fund for
purposes of Form PF? Why or why not?
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    \171\ Form PF defines ``commodity pool'' by reference to the
definition in section 1a(10) of the Commodity Exchange Act. See 7
U.S.C. 1a(10).
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    Question 163. By contrast, Form PF primarily defines ``private
equity fund'' not by affirmative characteristics, but as any private
fund that is not a hedge fund, liquidity fund, real estate fund,
securitized asset fund or venture capital fund, as those terms are
defined in Form PF,\172\ and that does not provide investors with
redemption rights in the ordinary course. If the Agencies were to
provide a characteristics-based exclusion, should the Agencies do so by
incorporating the definitions of these other private funds? If so,
should the Agencies modify such definitions, and if so, how?
Alternatively, rather than referencing the definition of private equity
fund in Form PF in a characteristics-based exclusion, the Agencies
could design their own definition of a private equity fund based on
traits and factors commonly associated with a private equity fund. For
example, the Agencies understand that private equity funds commonly (i)
have restricted or limited investor redemption rights; (ii) invest in
public and non-public companies through privately negotiated
transactions resulting in private ownership of the business; (iii)
acquire the unregistered equity or equity-like securities of such
companies that are illiquid as there is no public market and third