lending money to customers.
---------------------------------------------------------------------------

    \1872\ The determination of whether an instrument falls outside
the definition of loan because it is a security or a derivative is
based on the federal securities laws and the Commodity Exchange Act.
Whether a loan, lease, extension of credit, or secured or unsecured
receivable is a note or evidence of indebtedness that is defined as
a security under the federal securities laws will depend on the
particular facts and circumstances, including the economic terms of
the transaction. See supra note 1831 and accompanying text.
---------------------------------------------------------------------------

ii. Contractual Rights or Assets
    Under the proposed loan securitization definition, a covered fund
that is an issuer of asset-backed securities would have been permitted
to hold contractual rights or assets directly arising from those loans
supporting the asset-backed securities.\1873\ The proposal did not
identify or describe such contractual rights or assets.
---------------------------------------------------------------------------

    \1873\ See proposed rule Sec.  ----.13(d).
---------------------------------------------------------------------------

    Commenters requested that the Agencies expand the list of
contractual rights and assets that an issuer of asset-backed securities
would be permitted to hold under the proposed loan securitization
exemption.\1874\ Examples of the additional rights and assets requested
by commenters include cash and cash accounts; \1875\ cash equivalents;
\1876\ liquidity agreements, including asset purchase agreements,
program support facilities and support commitments; \1877\ credit
enhancements; \1878\ asset-backed securities; \1879\ municipal
securities; \1880\ repurchase agreements; \1881\ credit-linked notes;
\1882\ trust certificates; \1883\ lease residuals; \1884\ debt
securities; \1885\ and derivatives.\1886\ As an alternative, commenters
requested that an issuer of asset-backed securities be permitted to
hold under the proposed loan securitization exemption certain of such
additional rights and/or assets up to a threshold, such as a specified
percentage of the assets of such covered fund.\1887\
---------------------------------------------------------------------------

    \1874\ See Allen & Overy (on behalf of Foreign Bank Group); AFME
et al.; ASF (Feb. 2012); Cleary Gottlieb; Credit Suisse (Williams);
Commercial Real Estate Fin. Council; GE (Feb. 2012); GE (Aug. 2012);
ICI (Feb. 2012); Japanese Bankers Ass'n.; JPMC; LSTA (Feb. 2012);
LSTA (July 2012); RBC; SIFMA et al. (Covered Funds) (Feb. 2012);
SIFMA (Securitization) (Feb. 2012); Vanguard.
    \1875\ See Allen & Overy (on behalf of Foreign Bank Group); ASF
(Feb. 2012); Cleary Gottlieb; Credit Suisse (Williams).
    \1876\ See Allen & Overy (on behalf of Foreign Bank Group); ASF
(Feb. 2012); Cleary Gottlieb; Credit Suisse (Williams); Commercial
Real Estate Fin. Council; JPMC; LSTA (Feb. 2012); LSTA (July 2012);
RBC; SIFMA (Securitization) (Feb. 2012). Commenters requested
inclusion of the following examples of cash equivalents: government
guaranteed securities, money market funds, and ``other highly
credit-worthy and liquid investments'' (Credit Suisse (Williams));
and high quality, highly liquid investments, including Treasury
securities and highly rated commercial paper (JPMC). In addition,
LSTA (Feb. 2012) requested inclusion of the following: (i) Short-
term highly liquid investments; (ii) direct obligations of, and
obligations fully guaranteed as to full and timely payment by, the
United States (or by any agency thereof to the extent such
obligations are backed by the full faith and credit of the United
States); (iii) demand deposits, time deposits or certificates of
deposit that are fully insured by the Federal Deposit Insurance
Corporation; (iv) corporate, non-extendable commercial paper; (v)
notes that are payable on demand or bankers' acceptances issued by
regulated U.S. financial institutions; (vi) investments in money
market funds or other regulated investment companies; time deposits
having maturities of not more than 90 days; (vii) repurchase
obligations with respect to direct obligations and guaranteed
obligations of the U.S. entered into with a regulated U.S. financial
institution; and (viii) other investments with a maturity one year
or less, with the requirement that each of the investments listed
have, at the time of the securitization's investment or contractual
commitment to invest therein, a rating of the highest required
investment category.
    \1877\ See Allen & Overy (on behalf of Foreign Bank Group); ASF
(Feb. 2012); GE (Feb. 2012); JPMC; RBC; SIFMA (Securitization) (Feb.
2012).
    \1878\ See Allen & Overy (on behalf of Foreign Bank Group); ASF
(Feb. 2012); GE (Feb. 2012); JPMC; RBC; SIFMA (Securitization) (Feb.
2012). For example, SIFMA (Securitization) (Feb. 2012) requested
inclusion of third party credit enhancements such as guarantees and
letters of credit. Commenters requested inclusion of the following
examples of credit enhancements: (i) External credit support of
borrower obligations under such loans, including a credit support
facilities, third party or parent guarantee, insurance policy,
letter of credit or other contractual commitment to make payments or
perform other obligations of the borrower under the loans (ASF (Feb.
2012)); and (ii) property guarantees, insurance policies, letters of
credit, or supporting obligations underlying or relating to any of
the loans (RBC).
    \1879\ See Allen & Overy (on behalf of Foreign Bank Group); AFME
et al.; ASF (Feb. 2012); Credit Suisse (Williams); GE (Feb. 2012);
GE (Aug. 2012); ICI (Feb. 2012); JPMC; RBC; SIFMA et al. (Covered
Funds) (Feb. 2012); SIFMA (Securitization) (Feb. 2012). Commenters
requested inclusion of the following examples of asset-backed
securities: (i) SUBI certificates (beneficial interests in titling
trusts typically used in lease securitizations) (AFME et al.; ASF
(Feb. 2012); GE (Aug. 2012); SIFMA (Securitization) (Feb. 2012));
(ii) ownership interests and bonds issued by CLOs (JPMC); a broad
array of receivables that support asset-backed commercial paper (ICI
(Feb. 2012)); certain notes, certificates or other instruments
backed by loans or financial assets that are negotiated by the
purchasing asset-backed commercial paper conduit (ASF (Feb. 2012);
GE (Feb. 2012)); municipal securities that are technically ABS,
including revenue bonds that involve the issuance of senior and
subordinate bonds (ASF (Feb. 2012)); ownership interests in credit
funds (as defined in their letter) (SIFMA et al. (Covered Funds)
(Feb. 2012)); any note, bond or security collateralized and payable
from pools of loans, leases (including lease residuals), extensions
of credit or secured or unsecured receivables (RBC); asset-backed
securities issued by intermediate vehicles in a securitization
collateralized predominantly by loans and financial assets, and
other similar instruments (Credit Suisse (Williams)); and asset-
backed securities backed by loans or receivables that are originated
by or owned by the sponsor of such securitization or which are
issued by an entity that is organized under the direction of the
same sponsor as the issuer of the covered fund (ASF (Feb. 2012)).
    \1880\ See ICI (Feb. 2012); Vanguard.
    \1881\ See Credit Suisse (Williams); SIFMA (Securitization)
(Feb. 2012).
    \1882\ See Allen & Overy (on behalf of Foreign Bank Group).
    \1883\ See Credit Suisse (Williams).
    \1884\ See ASF (Feb. 2012); GE (Feb. 2012); GE (Aug. 2012); RBC.
    \1885\ See GE (Aug. 2012).
    \1886\ See Allen & Overy (on behalf of Foreign Bank Group);
Credit Suisse (Williams); Japanese Bankers Ass'n.; LSTA (Feb. 2012);
SIFMA (Securitization) (Feb. 2012). Commenters requested inclusion
of the following examples of derivatives: (i) Credit derivatives
(without explanation) as a means of diversifying the portfolio
(Japanese Bankers Association); (ii) synthetic securities that
reference corporate credits or other debt (Credit Suisse (Covered
Fund)); (iii) credit instruments or other obligations that the
banking entity could originate or invest or deal in directly,
including tranched or untranched credit linked notes exposed to the
credit risk of such reference assets through a credit default swap
or other credit derivative entered into by the related ABS Issuer
(SIFMA (Securitization) (Feb. 2012)); (iv) any derivatives
structured as part of the securitization of loans (without
explanation) (Allen & Overy (on behalf of Foreign Bank Group)); (v)
hedge agreements (Credit Suisse (Williams)); and (vi) any
derivative, including a credit default swap, as and to the extent a
banking entity could use such derivative in managing its own
investment portfolio (SIFMA (Securitization) (Feb. 2012)).
    \1887\ See ASF (Feb. 2012); Cleary Gottlieb; Credit Suisse
(Williams); GE (Feb. 2012); GE (Aug. 2012); LSTA (Feb. 2012); LSTA
(July 2012).
---------------------------------------------------------------------------

    In response to comments, the final rule modifies the loan
securitization exclusion from the proposal to identify the types of
contractual rights or assets directly arising from those loans
supporting the asset-backed securities that a loan securitization
relying on such exclusion may hold. Under the final rule, a loan
securitization which is eligible for the loan securitization exclusion
may hold contractual rights or assets (i) designed to assure the
servicing or timely distribution of proceeds to security holders or
(ii) related or incidental to purchasing or otherwise acquiring, and
holding the loans (``servicing assets'').\1888\ The servicing assets
are permissible in an excluded loan securitization transaction only to
the extent that they arise from the structure of the loan
securitization or from the loans supporting a loan securitization. If
such servicing assets are sold and securitized in a separate
transaction, they will not qualify as

permissible holdings for the loan securitization exclusion.\1889\
---------------------------------------------------------------------------

    \1888\ See final rule Sec.  ----.10(c)(8)(i)(B). The use of the
term ``servicing assets'' is not meant to imply that servicing
assets are limited to those contractual rights or assets related to
the servicer and the performance of the servicer's obligations.
    \1889\ For example, under the final rule, mortgage insurance
policies supporting the mortgages in a loan securitization are
servicing assets permissible for purposes of Sec.  --
--.10(c)(8)(i)(B). However, a separate securitization of the
payments on those mortgage insurance policies would not qualify for
the loan securitization exclusion.
---------------------------------------------------------------------------

    In adopting this approach, the Agencies considered commenters'
concerns and determined to revise the condition to be more consistent
with the definition and treatment of servicing assets in other asset-
backed securitization regulations, such as the exemption from the
definition of ``investment company'' under rule 3a-7 promulgated under
the Investment Company Act.\1890\
---------------------------------------------------------------------------

    \1890\ The Agencies believe that for purposes of the final rule,
in the context of securitization, such related or incidental assets
in a loan securitization should support or further, and therefore,
be secondary to the loans held by the securitization vehicle.
---------------------------------------------------------------------------

    Although the Agencies have revised the proposal in response to
commenters' concerns, the final rule does not permit a loan
securitization to hold as servicing assets a number of instruments
specifically requested by commenters whether in their entirety or as a
percentage of the pool. Under the final rule, servicing assets do not
include securities or derivatives other than as specified in the rule.
    Under the final rule, a loan securitization which is eligible for
the loan securitization exclusion may hold securities if those
securities fall into one of three categories.\1891\ First, such loan
securitizations may hold securities that are cash equivalents. For
purposes of the exclusion for loan securitizations, the Agencies
interpret ``cash equivalents'' to mean high quality, highly liquid
short term investments whose maturity corresponds to the
securitization's expected or potential need for funds and whose
currency corresponds to either the underlying loans or the asset-backed
securities.\1892\ Depending on the specific funding needs of a
particular securitization, ``cash equivalents'' might include deposits
insured by the Federal Deposit Insurance Corporation, certificates of
deposit issued by a regulated U.S. financial institution, obligations
backed by the full faith and credit of the United States, investments
in registered money market funds, and commercial paper.\1893\ Second,
such loan securitizations may hold securities received in lieu of debts
previously contracted with respect to the loans supporting the asset-
backed securities. Finally, such loan securitizations may hold
securities that qualify as SUBIs or collateral certificates subject to
the provisions set forth in the rule for such intermediate asset-backed
securities.
---------------------------------------------------------------------------

    \1891\ See final rule Sec.  ----.10(c)(8)(iii).
    \1892\ If either the loans supporting the loan securitization or
the asset-backed securities issued by the loan securitization are
denominated in a foreign currency, for purposes of the exclusion a
loan securitization would be permitted to hold foreign currency,
cash equivalents denominated in foreign currency and foreign
exchange derivatives that comply with Sec.  ----.10(c)(8)(iv).
    \1893\ Servicing assets should not introduce significant
additional risks to the transaction, including foreign currency risk
or maturity risk. For instance, funds on deposit in an account that
is swept on a monthly basis should not be invested in securities
that mature in 90 days.
---------------------------------------------------------------------------

    The Agencies have specifically limited the types of securities held
as eligible assets in a loan securitization that may be excluded from
the definition of covered fund under the final rule, even in limited
amounts, in order to assure that the types of securities are cash
equivalents or otherwise related to the loan securitization and to
prevent the possible misuse of the loan securitization exclusion to
circumvent the restrictions on proprietary trading, investments in
covered funds and prohibitions in section 13(f) of the BHC Act.\1894\
The Agencies believe that types of securities other than those
specifically included in the final rule could be misused in such
manner, because without limitations on the types of securities in which
an excluded loan securitization may invest, a banking entity could
structure an excluded loan securitization with provisions to engage in
activities that are outside the scope of the definition of loan as
adopted and also to engage in impermissible proprietary trading.
Further, the Agencies do not believe that the use of thresholds with
respect to such other types of securities as an alternative is
appropriate because similarly, such a securitization would then involve
a securitization of non-loan assets, outside the scope of what the
Agencies believe the rule of construction was intended to cover. By
placing restrictions on the securities permitted to be held by an
excluded loan securitization, the potential for evasion is reduced.
Loan securitizations are intended, as contemplated by the rule of
construction, to permit banks to continue to engage in securitizations
of loans. Including all types of securities within the scope of
permitted assets in an excluded loan securitization would expand the
exclusion beyond the scope of the definition of loan in the final rule
that is intended to implement the rule of construction.
---------------------------------------------------------------------------

    \1894\ Commenters expressed concerns about the use of
securitization vehicles for evasion. See, e.g., AFR et al. (Feb.
2012); Occupy; Public Citizen.
---------------------------------------------------------------------------

iii. Derivatives
    Under the proposed loan securitization definition, an exempted loan
securitization would be permitted to hold interest rate or foreign
exchange derivatives that materially relate to the terms of any loans
supporting the asset-backed securities and any contractual rights or
assets directly arising from such loans so long as such derivatives are
used for hedging purposes with respect to the securitization
structure.\1895\ The Agencies indicated in the proposing release that
the proposed loan securitization definition would not allow an exempted
loan securitization to use credit default swaps.\1896\
---------------------------------------------------------------------------

    \1895\ See Joint Proposal, 76 FR 68,912.
    \1896\ Id.
---------------------------------------------------------------------------

    Commenters criticized the proposed limitations on the use of
derivatives included in the proposed loan securitization
definition.\1897\ In particular, one commenter indicated that the use
of credit derivatives such as credit default swaps is important in loan
securitizations to provide diversification of assets.\1898\ Another
commenter noted the use of such instruments to manage risks with
respect to corporate loan and debt books by accessing capital from a
broad group of capital markets investors and facilitates making
markets.\1899\ In contrast, two commenters generally supported the
limitations on the use of derivatives under the proposed loan
securitization definition and indicated that excluding credit default
swaps from the loan securitization definition was appropriate.\1900\
---------------------------------------------------------------------------

    \1897\ See AFME et al.; Allen & Overy (on behalf of Foreign Bank
Group); ASF (Feb. 2012) (requesting that an excluded loan
securitization be permitted to hold up to 10% of its assets in the
form of synthetic risk exposure to loans); Credit Suisse (Williams);
Japanese Bankers Ass'n.; LSTA (Feb. 2012) (for CLOs); SIFMA
(Securitization) (Feb. 2012).
    \1898\ See Japanese Bankers Ass'n. This commenter indicated that
credit derivatives are important in securitizations to provide
diversification when the desired mix of assets cannot be achieved.
    \1899\ See ASF (Feb. 2012). This commenter argued that for some
loan securitizations, investors may Seek a broader pool of credit
exposures than the bank has available or can obtain to securitize in
order to achieve risk diversification.
    \1900\ See AFR et al. (Feb. 2012); Public Citizen. One of these
commenters stated that the credit default exclusion was appropriate
because ``synthetic securitizations and resecuritizations were a key
contributor to financial contagion during the crisis.'' See AFR et
al. (Feb. 2012). Another commenter argued that the loan
securitization definition should not permit the use of derivatives.
See Occupy. This commenter argued that covered funds should only be
permitted to engage in hedging activity in accordance with the
proposed exemption for hedging activity. This commenter also argued
that the inclusion of derivatives in the loan securitization
definition exceeded the Agencies' statutory authority. Id. Two
senators indicated that ``complex securitizations'' including those
with ``synthetic features'' and ``embedded derivatives'' should not
be allowed to rely on the exclusion for loan securitizations. See
Sens. Merkley & Levin (Feb. 2012).

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

    With respect to the use of derivatives, the Agencies are adopting
the loan securitization exclusion substantially as proposed with
certain modifications to reflect a restructuring of this provision in
order to more closely align the permissible uses of derivatives under
the loan securitization exclusion with the loans, the asset-backed
securities, or the contractual rights and other assets that a loan
securitization relying on the loan securitization exclusion may hold.
As adopted, for a loan securitization to be eligible for the loan
securitization exclusion, the loan securitization may hold only
interest rate or foreign exchange derivatives that meet the following
requirements: (i) The written terms of the derivatives directly relate
to either the loans or the asset-backed securities that such loan
securitization may hold under the other provisions of the loan
securitization exclusion; and (ii) the derivatives reduce interest rate
and/or foreign exchange risk with respect to risks related to either
such loans, the asset-backed securities or the contractual rights or
other assets that a loan securitization may hold.\1901\
---------------------------------------------------------------------------

    \1901\ See final rule Sec.  ----.10(c)(8)(iv).
---------------------------------------------------------------------------

    The first requirement that the written terms of the derivatives
``directly relate'' to either the loans or the asset-based securities
themselves is intended to quantitatively and qualitatively limit the
use of derivatives permitted under the loan securitization
exclusion.\1902\ The Agencies would expect that neither the total
notional amount of directly related interest rate derivatives nor the
total notional amount of directly related foreign exchange derivatives
would exceed the greater of either the outstanding principal balance of
the loans supporting the asset-backed securities or the outstanding
principal balance of the asset-backed securities.\1903\ Moreover, under
the loan securitization exclusion, the type of derivatives must be
related to the types of risks associated with the underlying assets and
may not be derivatives designed to supplement income based on general
economic scenarios, income management or unrelated risks.
---------------------------------------------------------------------------

    \1902\ Under the final rule, the Agencies expect that a loan
securitization relying on the loan securitization exclusion would
not have a significant amount of interest rate and foreign exchange
derivatives with respect to risks arising from contractual rights or
other assets.
    \1903\ For example, a $100 million securitization cannot be
hedged using an interest rate hedge with a notional amount of $200
million.
---------------------------------------------------------------------------

    The second requirement that derivatives reduce the interest rate
and/or foreign exchange risks related to either such loans, contractual
rights or other assets, or such asset-backed securities is intended to
permit the use of derivatives to hedge interest rate and/or foreign
exchange risks that result from a mismatch between the loans and the
asset-backed securities.\1904\
---------------------------------------------------------------------------

    \1904\ The derivatives permitted in a securitization that may
rely on the loan securitization exclusion would permit a
securitization to hedge the risk resulting from differences between
the income received by the issuing entity and the amounts due under
the terms of the asset-backed securities. For example, fixed rate
loans could support floating rate asset-backed securities; loans
with an interest rate determined by reference to the Prime Rate
could support asset-backed securities with an interest rate
determined by reference to LIBOR; or Euro-denominated loans could
support U.S. Dollar-denominated asset-backed securities.
---------------------------------------------------------------------------

    The Agencies believe that the statutory rule of construction should
be implemented in a manner that does not limit or restrict the sale and
securitization of loans. The Agencies further believe that the sale and
securitization of credit exposures other than ``loans'' as defined in
the rule, such as through securities or derivatives, could be abused.
The derivatives that may be held in a loan securitization for purposes
of the exclusion may not be used for speculative purposes. Consistent
with the proposal, the loan securitization exclusion does not permit a
loan securitization relying on such exclusion to hold credit default
swaps or other types of derivatives whether or not they are related
either to the underlying loans or the asset-backed securities.\1905\
Under the final rule, a synthetic securitization in which the asset-
backed securities are supported by cash flow from derivatives, such as
credit default swaps and total return swaps, would not be permitted to
rely on the loan securitization exclusion because such derivatives are
excluded from the final rule's definition of loan specifically, as a
derivative. Similarly, a loan securitization that relies on the loan
securitization exclusion would not be permitted to hold a credit
default swap or total return swap that references a loan that is held
by the loan securitization. Under the final rule as adopted, an
excluded loan securitization would not be able to hold derivatives that
would relate to risks to counterparties or issuers of the underlying
assets referenced by these derivatives because the operation of
derivatives, such as these, that expand potential exposures beyond the
loans and other assets, would not in the Agencies' view be consistent
with the limited exclusion contained in the rule of construction under
section 13(g)(2) of the BHC Act, and could be used to circumvent the
restrictions on proprietary trading and prohibitions in section 13(f)
of the BHC Act. The Agencies believe that the use of derivatives by an
issuing entity for asset-backed securities that is excluded from the
definition of covered fund under the loan securitization exclusion
should be narrowly tailored to hedging activities that reduce the
interest rate and/or foreign exchange risks directly related to the
asset-backed securities or the loans supporting the asset-backed
securities because the use of derivatives for purposes other than
reducing interest rate risk and foreign exchange risks would introduce
credit risk without necessarily relating to or involving a reduction of
interest rate risk or foreign exchange risk.
---------------------------------------------------------------------------

    \1905\ Loan securitizations excluded from the covered fund
definition may only hold certain directly related derivatives as
specified in Sec.  ----.11(c)(8)(iv) and as discussed in this Part.
---------------------------------------------------------------------------

    On the other hand, while the Agencies are not expanding the types
of permitted derivatives to be held in a loan securitization, the
Agencies in the final rule are not restricting the use of all
derivatives under the loan securitization exclusion as requested by
certain commenters. The Agencies believe that a loan securitization
that is excluded from the definition of covered fund should be allowed
to engage in activities that reduce interest rate and foreign exchange
risk because the hedging of such risks is consistent with the prudent
risk management of interest rate and currency risk in a loan portfolio
while at the same time avoiding the potential for additional risk
arising from other types of derivatives.\1906\ The Agencies do not
believe that the exemption for hedging activity applicable to market
making and underwriting under the final rule is the appropriate measure
for permitted derivatives in a loan securitization that would be
excluded from definition of covered fund \1907\ because the hedging
exemptions for market making and underwriting are not tailored to the
hedging requirements of a securitization transaction.\1908\ The
Agencies also do not believe that they lack the statutory authority to
permit a loan securitization

relying on the loan securitization exclusion to use derivatives, as
suggested by one commenter,\1909\ because the Agencies believe that the
permitted derivatives relate directly to loans that are permitted and
have limited the quality and quantity of derivatives that an excluded
loan securitization is permitted to hold directly to the reduction of
risks that result from the loans and the loan securitization.
---------------------------------------------------------------------------

    \1906\ See AFR et al. (Feb. 2012); Occupy; Public Citizen.
    \1907\ See Occupy. This commenter argued that covered funds
should only be permitted to engage in hedging activity in accordance
with the proposed exemption for hedging activity.
    \1908\ For example, a banking entity may hold an ownership
interest in a covered fund in order to hedge employee compensation
risks. Because securitizations do not have employees, such a hedging
exemption would not be applicable to a securitization structure.
    \1909\ See Occupy.
---------------------------------------------------------------------------

    While loan securitizations that include non-loan assets are not
excluded from the definition of covered fund, banking entities are not
prohibited from owning interests or sponsoring these covered funds
under the final rule. Under the final rule, these securitizations would
be covered funds, and banking entities engaged with these covered funds
would be subject to the limitations on ownership interests and
relationships with these covered funds imposed by section 13 of the BHC
Act.
iv. SUBIs and Collateral Certificates
    Commenters also argued that, under the proposed exemption for loan
securitizations, securitizations that are backed by certain
intermediate asset-backed securities would not satisfy the conditions
for the exemption and therefore would be subject to the covered fund
prohibitions.\1910\ For example, commenters noted that, in a
securitization of leases with respect to equipment where a titling
trust is used to hold ownership of the equipment, a titling trust will
typically own the equipment and the right to payment on the leases, and
then will issue a security or other instrument, often referred to as a
special unit of beneficial interest (SUBI), that represents an
ownership interest in the titling trust to the securitization
issuer.\1911\ As another example, certain securitizations frequently
use a master trust structure allowing the trust to issue more than one
series of asset-backed security collectively backed by a common
revolving pool of assets. In such a structure, a master trust may hold
assets (such as loans) and issue a collateral certificate supported by
those assets to an issuing trust that issues asset-backed securities to
investors. The assets held by the master trust are typically a pool of
revolving accounts that may be paid in full each month (e.g., credit
card receivables) or a revolving pool of short-term loans that are
replaced with new loans as they mature (e.g., floor plan loans).\1912\
One commenter opposed the inclusion of securitizations backed by
intermediate asset-backed securities, arguing that each step should be
viewed separately to ensure compliance to prevent the inclusion of
impermissible assets such as prohibited derivatives.\1913\
---------------------------------------------------------------------------

    \1910\ See AFME et al.; Allen & Overy (on behalf of Foreign Bank
Group); ASF (Feb. 2012); Credit Suisse (Williams); GE (Aug. 2012);
PNC; RBC; SIFMA (Securitization) (Feb. 2012).
    \1911\ See SIFMA (Securitization) (Feb. 2012).
    \1912\ See, e.g., ASF (Feb. 2012). UK RMBS master trusts also
use a master trust structure. See AFME et al.; ASF (Feb. 2012);
SIFMA (Securitization) (Feb. 2012).
    \1913\ See Occupy.
---------------------------------------------------------------------------

    In response to comments, the Agencies are modifying the proposal to
provide that a securitization backed by certain intermediate asset-
backed securities will qualify for the loan securitization exclusion.
The Agencies recognize that securitization structures that use these
types of intermediate asset-backed securities are essentially loan
securitization transactions, because the intermediate asset-backed
securities in the asset pool are created solely for the purpose of
facilitating a securitization \1914\ and once created, are issued
directly into a securitization vehicle rather than to any third party
investor.
---------------------------------------------------------------------------

    \1914\ The use of SUBIs, for example, allows the sponsor to
avoid administrative expenses in retitling the physical property
underlying the leases.
---------------------------------------------------------------------------

    Under the final rule, a loan securitization that is excluded from
the definition of covered fund may include SUBIs or collateral
certificates, provided that four conditions are met.\1915\ First, the
special purpose vehicle issuing the SUBI or collateral certificate
itself must meet the conditions of the loan securitization exclusion,
as adopted in the final rule.\1916\ Under this provision, for example,
the special purpose vehicle, in addition to the issuing entity, may
hold an interest rate or foreign exchange derivative or other assets
only if the derivative or asset is permitted to be held in accordance
with the requirements for derivatives in respect of the loan
securitization exclusion. Second, the SUBI or collateral certificate
must be used for the sole purpose of transferring economic risks and
benefits of the loans (and other permissible assets) \1917\ to the
issuing entity for the securitization and may not directly or
indirectly transfer any interest in any other economic or financial
exposures. Third, the SUBI or collateral certificate must be created
solely to satisfy legal requirements or otherwise facilitate the
structuring of the loan securitization. Fourth, the special purpose
vehicle issuing the SUBI or collateral certificate and the issuing
entity for the excluded loan securitization transaction must be
established under the direction of the same entity that initiated the
loan securitization transaction. The Agencies believe that the fourth
condition will ensure that the resecuritizations of asset-backed
securities purchased in the secondary market, which the Agencies do not
believe would constitute a loan securitization, will not be able to use
these special provisions tailored only for transactions utilizing SUBIs
and collateral certificates in order to fall within the loan
securitization exclusion.
---------------------------------------------------------------------------

    \1915\ See final rule Sec.  ----.10(c)(8)(v).
    \1916\ The provision will allow for the existing practice of a
master trust to hold a collateral certificate issued by a legacy
master trust.
    \1917\ This would include a collateral certificate issued by a
legacy master trust that meets the requirements of the loan
securitization exclusion.
---------------------------------------------------------------------------

    The Agencies believe that these conditions provide that only
securitizations backed by SUBIs and collateral certificates involving
loans--and not other types of securities or other types of assets--will
be able to use the loan securitization exclusion. These conditions are
intended to assure that for purposes of the loan securitization
exclusion that only SUBI and collateral certificates that essentially
represent the underlying loans are included consistent with the terms
and the purpose of section 13 of the BHC Act, while also not adversely
affecting securitization of ``loans'' as defined in the final
rule.\1918\ The Agencies believe that the limitation of the types of
asset-backed securities permitted in an excluded loan securitization
(only SUBIs and collateral certificates) and the restrictions placed on
those SUBIs and collateral certificates that are permitted in an
excluded loan securitization will avoid loan securitizations that
contain other types of assets from being excluded from the definition
of covered fund.
---------------------------------------------------------------------------

    \1918\ See, e.g., rule 190 under the Securities Act. See also,
e.g., ASF (Feb. 2012) (noting that certain rules under the
Securities Act and staff interpretations have carved out SUBIs and
collateral certificates from certain disclosure and other
requirements).
---------------------------------------------------------------------------

v. Impermissible Assets
    As discussed above, commenters on the loan securitization proposals
argued that various types of assets should be included within the
definition of loan or otherwise permitted to be held by the loan
securitization that would be entitled to rely on the proposed
exemptions.
    After considering comments, the Agencies have determined to retain
the narrower scope of the permitted assets in a loan securitization
that is eligible for the loan securitization exclusion.

The Agencies have revised the language regarding loan securitizations
from the proposal to specify certain types of assets or holdings that a
loan securitization would not be able to hold if it were eligible to
rely on the exclusion from the definition of covered fund for loan
securitizations.\1919\ The Agencies recognize that securitization
structures vary significantly and, accordingly, the loan securitization
exclusion as adopted in the final rule accommodates a wider range of
securitization practices. The Agencies believe that these limitations
provide that only securitizations backed by loans--and not securities,
derivatives or other types of assets--will be able to use the loan
securitization exclusion consistent with the terms and the purpose of
section 13 of the BHC Act.\1920\ The Agencies believe that the
limitation of the types of assets permitted in an excluded loan
securitization will avoid loan securitizations that contain other types
of assets from being excluded from the definition of covered fund.
---------------------------------------------------------------------------

    \1919\ See final rule Sec.  ----.10(c)(8)(ii).
    \1920\ The Agencies discuss earlier in this Part the permissible
assets an excluded loan securitization may hold and the Agencies'
belief that excluding loan securitizations as defined in the final
rule is consistent with the terms and the purpose of section 13 of
the BHC Act, including the rule of construction in section 13(g)(2).
See, e.g., supra note 1866 and accompanying and following text.
---------------------------------------------------------------------------

    Under the final rule, in order to be excluded from the definition
of covered fund, a loan securitization may not hold (i) a security,
including an asset-backed security, or an interest in an equity or debt
security (unless specifically permitted, such as with respect to a SUBI
or collateral certificate as described above), (ii) a derivative other
than an interest rate or foreign exchange derivative that meets the
requirements described above,\1921\ or (iii) a commodity forward
contract.\1922\ The Agencies have determined that a loan securitization
relying on the loan securitization exclusion may not include a
commodity forward contract because a commodity forward contract is not
a loan.\1923\
---------------------------------------------------------------------------

    \1921\ See final rule Sec.  ----.10(c)(8)(iv); See also 7 U.S.C.
27(a)-(b).
    \1922\ See the discussion above in Part IV.B.1.c.8 of this
SUPPLEMENTARY INFORMATION.
    \1923\ For a discussion of commodity forward contracts, See
Further Definition of ``Swap,'' ``Security-Based Swap,'' and
``Security-Based Swap Agreement;'' Mixed Swaps; Security-Based Swap
Agreement Recordkeeping, 77 FR 48208 (Aug. 13, 2012) (Release Nos.
33-9338 and 34-67453, July 18, 2012).
---------------------------------------------------------------------------

9. Asset-Backed Commercial Paper Conduits
    Under the proposed rule, certain securitization vehicles, including
ABCP conduits, would not have been covered by the loan securitization
exclusion and, therefore, would have been deemed to be a covered
fund.\1924\ ABCP is a type of liability that is typically issued by a
special purpose vehicle (commonly referred to as a ``conduit'')
sponsored by a financial institution or other entity. The short term
asset-backed securities issued by the conduit are supported by a
managed pool of assets, which may change over the life of the entity.
Depending on the type of ABCP conduit, the securitized assets
ultimately supporting the short term asset-backed securities may
consist of a wide range of assets including automobile loans,
commercial loans, trade receivables, credit card receivables, student
loans, and other loans in addition to asset-backed securities supported
by such assets. The term of ABCP typically is short, and the
liabilities are ``rolled'' (i.e., replaced or refinanced) at regular
intervals. Thus, ABCP conduits generally fund longer-term assets with
shorter-term liabilities.\1925\ In this regard, in the proposing
release, the Agencies requested comment on the proposed rule's
definition of ``covered fund'' with respect to asset-backed securities
and/or securitization vehicles \1926\ and received numerous comments
requesting a variety of exemptions for ABCP conduits.\1927\
---------------------------------------------------------------------------

    \1924\ See proposed rule Sec.  ----.13(d).
    \1925\ Structured investment vehicles (``SIVs'') and securities
arbitrage ABCP programs both purchase securities (rather than
receivables and loans). SIVs typically lack liquidity facilities
covering all of these liabilities issued by the SIV, while
securities arbitrage ABCP programs typically have such liquidity
coverage, though the terms are more limited than those of the ABCP
conduits eligible for the exclusion pursuant to the final rule.
    \1926\ See Joint Proposal, 76 FR 68,899.
    \1927\ See, e.g., ASF (Feb. 2012); BoA; Capital Group; Eaton
Vance; Fidelity; ICI (Feb. 2012); Japanese Bankers Ass'n.; PNC; RBC.
---------------------------------------------------------------------------

    A number of commenters requested that the final rule exclude ABCP
conduits from the definition of covered fund \1928\ or that the
Agencies use their authority under section 13(d)(1)(J) of the BHC Act
\1929\ to similar effect.\1930\ One commenter argued that ABCP conduits
do not have the characteristics of a private equity fund or hedge
fund,\1931\ even though they typically rely on the exemptions set forth
in section 3(c)(1) or 3(c)(7) of the Investment Company Act. Another
commenter argued that the proposed rule's definition of covered fund
would negatively impact asset-backed securitizations (including ABCP
conduits), and suggested that the Agencies define covered funds, in
part, as those that both (i) rely on section 3(c)(1) or 3(c)(7) of the
Investment Company Act and (ii) have the traditional characteristics of
private equity funds or hedge funds.\1932\ Another commenter stated
that the rule of construction set forth in section 13(g)(2) of the BHC
Act \1933\ is a clear indication that section 13 of the BHC Act was not
intended to apply to securitization vehicles such as ABCP
conduits.\1934\ Another commenter stated that the lending that occurs
through ABCP conduits is the type of activity that Congress and the
Executive Branch have urged banks to expand in order to support
economic growth and job creation,\1935\ while another commenter stated
that ABCP conduits provide low cost, reliable financing for registered
investment companies, which poses little risk to the safety and
soundness of banks because federal law requires registered investment
companies to maintain prescribed asset coverage in connection with
borrowings.\1936\
---------------------------------------------------------------------------

    \1928\ See, e.g., ICI (Feb. 2012); PNC et al.; SIFMA (May 2012).
    \1929\ See 12 U.S.C. 1851(d)(1)(J).
    \1930\ See ICI (Feb. 2012).
    \1931\ See PNC.
    \1932\ See Barclays.
    \1933\ See 12 U.S.C. 1851(g)(2).
    \1934\ See ICI (Feb. 2012).
    \1935\ See Credit Suisse (Williams).
    \1936\ See Eaton Vance.
---------------------------------------------------------------------------

    Two commenters contended that, while certain issuers of asset-
backed securities may rely on section 3(c)(5) of the Investment Company
Act or rule 3a-7 thereunder, and, therefore, not be brought under the
proposed rule's definition of covered fund, ABCP conduits typically
cannot rely on this section or rule either because to do so would be
too restrictive (in the case of section 3(c)(5)) or because they cannot
meet the rule's requirements.\1937\
---------------------------------------------------------------------------

    \1937\ See RBC; ASF (Feb. 2012).
---------------------------------------------------------------------------

    One commenter, employing ABCP conduits as an example, stated that
failing to exempt securitization vehicles from the covered fund
prohibitions would preclude banking entities from engaging in
activities that have long been recognized as permissible activities for
banking entities and that are vital to the normal functioning of the
securitization markets, and will have a significant and negative impact
on the securitization markets and on the ability of banking entities
and other companies to provide credit to their customers.\1938\ This
commenter further stated that ABCP conduits are an efficient and

attractive way for banking entities to lend their own credit-worthiness
to expand the pool of possible lenders willing to finance key economic
activity while maintaining a low cost of funding for consumers, and
because of the liquidity support provided by the sponsoring banking
entity, the sponsoring banking entity to the ABCP conduit has full
exposure to the assets acquired by or securing the amounts lent by the
ABCP conduit and the banking entity subjects those assets and the
obligors to the same analysis as it would engage in if the bank were
lending directly against those assets.\1939\ Another commenter stated
that the provision of credit to companies to finance receivables
through ABCP conduits is an area of traditional banking activity that
should be distinguished from the type of high-risk, conflict-ridden
financial activities that Congress sought to restrict under section 13
of the BHC Act.\1940\
---------------------------------------------------------------------------

    \1938\ See Credit Suisse (Williams).
    \1939\ Id.
    \1940\ See ICI (Feb. 2012). This commenter emphasized the
importance of the ABCP conduit market to money market funds, noting
that as of November 2011, taxable money market funds held $126
billion of the $348.1 billion of securities issued by ABCP conduits
outstanding, which represented approximately 5.4% of taxable money
market funds' total assets. Another commenter noted that
approximately $66.7 billion of automobile loans and leases, $52.1
billion of student loans, $22.3 billion of credit card charges,
$49.4 billion of loans to commercial borrowers and $50.7 billion of
trade receivables were financed by the U.S. ABCP conduit market as
of October 31, 2011, and that the total outstanding amount of
securities sold by ABCP conduits in the U.S. market was $344.5
billion as of January 18, 2012. See ASF (Feb. 2012).
---------------------------------------------------------------------------

    To this end, commenters proposed several means to exclude ABCP
conduits from the proposed rule's restrictions and requirements,
including an expansion of the loan securitization exemption to treat
two-step securitization transactions as a single loan
securitization,\1941\ a separate exclusion for ABCP conduits,\1942\ an
expansion of the definition of loan,\1943\ or as part of a broad
exclusion for all issuers of asset-backed securities.\1944\ In order to
allow ABCP conduits to qualify as loan securitizations, commenters
suggested that the loan securitization exclusion should permit a
limited amount of securities purchased in the secondary market.\1945\
Commenters also proposed changes to the permissible assets such as
allowing a loan securitization to hold liquidity and support
commitments, asset-backed securities and certain financial assets in
addition to loans that by their terms convert to cash within a finite
period of time.\1946\ Another commenter argued that the loan
securitization exemption should allow banking entities to sponsor,
control, and invest in ABCP conduits that facilitate the securitization
of customer loans and receivables.\1947\ In contrast, one commenter
supported the restriction of the loan securitization exemption to the
plain meaning of what constitutes a loan and advocated that the
Agencies not include ABCP conduits under the exemption.\1948\
---------------------------------------------------------------------------

    \1941\ See AFME et al.; Allen & Overy (on behalf of Foreign Bank
Group); ASF (Feb. 2012); PNC; SIFMA (Securitization) (Feb. 2012).
    \1942\ See ASF (Feb. 2012); Capital Group (alleging that ABCP
does not pose the risks that the rule is meant to combat); GE (Feb.
2012). One commenter proposed an exemption for ABCP conduits that
included a requirement of 100% liquidity support from a regulated,
affiliated entity, and such liquidity support may be conditional or
unconditional. See RBC.
    \1943\ See Credit Suisse (Williams) (alleging that ABCP conduits
acquire ownership of loans indirectly through the purchase of
variable funding notes, trust certificates, asset-backed securities,
repurchase agreements and other instruments that may be considered
securities, all of which economically are consistent with providing
funding or extensions of credit to customers); ICI (Feb. 2012)
(requesting that the definition of loan include the broad array of
receivables that back ABCP).
    \1944\ See AFME et al.; SIFMA (Securitization) (Feb. 2012).
    \1945\ See ASF (Feb. 2012) (requesting that ABCP conduits be
permitted to own asset-backed securities purchased on the secondary
market only if the aggregate principal amount of such securities
does not exceed 5% of the aggregate principal or face amount of all
assets held by the ABCP conduit in order to diversify their asset
base and avoid the negative consequences of divestiture of such
assets); RBC (requesting that loan securitizations be permitted to
hold cash equivalents and assets, other than loans, which, by their
terms, convert to cash within a finite period of time so long as
such assets comprise no more than 10% of their total assets based on
book value).
    \1946\ See ASF (Feb. 2012) (arguing that the loans, receivables,
leases, or other assets purchased by the ABCP conduit might have fit
the definition of loan in the proposed rules but for the proposal's
express assertion that the definition of loan does not include any
asset-backed security that is issued in connection with a loan
securitization or otherwise backed by loans). See Joint Proposal, 76
FR 68,865; GE (Feb. 2012); RBC.
    \1947\ See PNC.
    \1948\ See Public Citizen.
---------------------------------------------------------------------------

    In addition to the effect the proposed rule's definition of covered
fund would have on ABCP conduits, commenters also noted that section
13(f) of the BHC Act \1949\ would prohibit certain transactions between
a banking entity sponsor and a covered fund securitization.\1950\ Two
commenters requested a specific exemption from Sec.  ----.16 of the
proposed rule for ABCP conduits based on the interpretation that the
proposed rule subjects covered funds exempted under the loan
securitization exemption or other exemptions to Sec.  ----.16.\1951\
Commenters argued that without liquidity and credit support, ABCP
conduits are not viable,\1952\ cannot effectively operate,\1953\ could
not function,\1954\ or would not be marketable.\1955\ One commenter
argued that prohibiting a banking entity from providing liquidity
facilities to ABCP conduits is tantamount to requiring the banking
entity to wind down the operation of such ABCP conduits.\1956\
---------------------------------------------------------------------------

    \1949\ See 12 U.S.C. 1851(f); See also Sec.  ----.16 of the
proposed rule.
    \1950\ See, e.g., Allen & Overy (on behalf of Foreign Bank
Group); Credit Suisse (Williams); Fidelity; IIB/EBF; JPMC; PNC; RBC;
SIFMA (Securitization) (Feb. 2012).
    \1951\ See ICI (Feb. 2012); Fidelity.
    \1952\ See JPMC.
    \1953\ See ASF (Mar. 2012).
    \1954\ See Allen & Overy (on behalf of Foreign Bank Group).
    \1955\ See ASF (Feb. 2012); Fidelity.
    \1956\ See ASF (Mar. 2012).
---------------------------------------------------------------------------

    In response to the comments received and in light of the rule of
construction contained in section 13(g)(2) of the BHC Act, the Agencies
have determined in the final rule to exclude from the definition of
covered fund an ABCP conduit that is a ``qualifying asset-backed
commercial paper conduit'' as defined in the final rule is excluded
from the definition of covered fund.\1957\
---------------------------------------------------------------------------

    \1957\ See final rule Sec.  ----.10(c)(9)(i). The rule of
construction contained in section 13(g)(2) of the BHC Act provides
that nothing in section 13 of the BHC Act shall be construed to
limit or restrict the ability of a banking entity or nonbank
financial company supervised by the Board to sell or securitize
loans in a manner that is otherwise permitted by law. As noted above
and explained below, a qualifying asset-backed commercial paper
conduit under the final rule is an ABCP conduit that holds only (i)
loans or other assets that would be permissible in a loan
securitization and (ii) asset-backed securities that are supported
solely by assets permissible for a loan securitization and are
acquired by the conduit as part of an initial issuance directly from
the issuer or directly from an underwriter engaged in the
distribution of the securities.
---------------------------------------------------------------------------

    Under the final rule, a qualifying asset-backed commercial paper
conduit is an ABCP conduit that holds only (i) loans or other assets
that would be permissible in a loan securitization \1958\ and (ii)
asset-backed securities that are supported solely by assets permissible
for a loan securitization and are acquired by the conduit as part of an
initial issuance directly from the issuer or directly from an
underwriter engaged in the distribution of the securities.\1959\ In
addition, a qualifying asset-backed commercial paper conduit must issue
only asset-backed securities, comprising of a residual and securities
with a term of 397 days or less and in addition, a ``regulated
liquidity provider,'' as defined in the final rule, must provide a
legally binding commitment to provide full and unconditional liquidity
coverage with respect to all the outstanding short term asset-backed

securities issued by the qualifying asset-backed commercial paper
conduit in the event that funds are required to redeem the maturing
securities.\1960\
---------------------------------------------------------------------------

    \1958\ See final rule Sec.  ----.10(c)(8).
    \1959\ See final rule Sec.  ----.10(c)(9)(i)(B).
    \1960\ See final rule Sec.  ----.10(c)(9)(ii) and (iii).
---------------------------------------------------------------------------

    Under the final rule, a regulated liquidity provider is (i) a
depository institution as defined in section 3 of the Federal Deposit
Insurance Act; \1961\ (ii) a bank holding company or a subsidiary
thereof; \1962\ (iii) a savings and loan holding company,\1963\
provided all or substantially all of the holding company's activities
are permissible for a financial holding company,\1964\ or a subsidiary
thereof; (iv) a foreign bank whose home country supervisor as defined
in section 211.21 of the Federal Reserve Board's Regulation K \1965\
has adopted capital standards consistent with the Capital Accord of the
Basel Committee on Banking Supervision, as amended, and that is subject
to such standards, or a subsidiary thereof or (v) a sovereign
nation.\1966\ In order for a sovereign nation to qualify as a regulated
liquidity provider, the liquidity provided must be unconditionally
guaranteed by the sovereign, which would include its departments and
ministries, including the central bank.
---------------------------------------------------------------------------

    \1961\ See 12 U.S.C. 1813.
    \1962\ See 12 U.S.C. 1841.
    \1963\ See 12 U.S.C. 1467a.
    \1964\ See 12 U.S. C. 1843(k).
    \1965\ See 12 CFR 211.21.
    \1966\ See final rule Sec.  ----.10(c)(9)(iii).
---------------------------------------------------------------------------

    In this regard, under the final rule, the exclusion from the
definition of covered fund in respect of ABCP conduits is only
available to an issuer of short-term asset-backed securities supported
by loans and certain asset-backed securities supported by loans that
were issued or initially sold to the ABCP conduit, and the short term
asset-backed securities issued by the ABCP conduit are supported by a
liquidity facility that provides 100 percent liquidity coverage from a
regulated liquidity provider. The exclusion, therefore, is not
available to ABCP conduits that lack 100 percent liquidity coverage.
The liquidity coverage may be provided in the form of a lending
facility, an asset purchase agreement, a repurchase agreement, or
similar arrangement and 100 percent liquidity coverage means that, in
the event the qualifying asset-backed commercial paper conduit is
unable for any reason to repay maturing asset-backed securities issued
by the issuing entity, the total amount for which the regulated
liquidity provider may be obligated is equal to 100 percent of the
amount of asset-backed securities outstanding plus accrued and unpaid
interest. In addition, amounts due pursuant to the required liquidity
coverage may not be subject to the credit performance of the asset-
backed securities held by the qualifying asset-backed commercial paper
conduit or reduced by the amount of credit support provided to the
qualifying asset-backed commercial paper conduit. Under the final rule,
liquidity coverage that only funds an amount determined by reference to
the amount of performing loans, receivables, or asset-backed securities
will not be permitted to satisfy the liquidity requirement for a
qualifying asset-backed commercial paper conduit.
    As discussed above, the final rule defines a qualifying asset-
backed commercial paper conduit as having certain elements. First, a
qualifying asset-backed commercial paper conduit must issue only a
residual interest and short-term asset-backed securities. This
requirement distinguishes ABCP conduits from covered funds that issue
partnership interests and mitigates the potential that a qualifying
ABCP conduit would be used for evasion of the covered fund
prohibitions. The Agencies chose a maximum term of 397 days for these
securities because this time frame corresponds to the maximum maturity
of securities allowed to be purchased by money market funds under Rule
2a-7 of the Investment Company Act.
    Second, the asset-backed securities issued by the ABCP conduit must
be supported only by loans and certain asset-backed securities that
meet the requirements of the loan securitization exclusion. By placing
restrictions on the assets permitted to be held by an excluded loan
securitization, the potential for evasion of the covered fund
prohibitions is reduced. The exclusion for qualifying ABCP conduits is
intended, as contemplated by the rule of construction in section
13(g)(2) of the BHC Act, to permit banks to continue to engage in
securitizations of loans. Including all types of securities and other
assets within the scope of permitted assets in a qualifying ABCP
conduit, as with loan securitizations, would expand the exclusion
beyond the scope of the definition of loan in the final rule that is
intended to implement the rule of construction.
    Third, the asset-backed securities supporting a qualifying asset-
backed commercial paper conduit must be purchased as part of the
initial issuance of such asset-backed securities. Asset-backed
securities purchased by an ABCP conduit in the secondary market will
not be permitted because such a purchase would not be part of an
initial issuance and the banking entity that established and manages
the ABCP conduit would not have participated in the negotiation of the
terms of such asset-backed securities. Without a more direct connection
between the banking entity and the ABCP conduit, the purchase of such
asset-backed securities in the secondary market would resemble
investments in securities.
    Fourth, under the final rule, the ABCP conduit exclusion will not
be available to ABCP conduits that lack 100 percent liquidity coverage.
The Agencies believe that the 100 percent liquidity coverage
requirement distinguishes the conduits eligible for the exemption,
which sometimes hold and securitize a customer's loans through an
intervening special-purpose vehicle instead of holding the loans
directly, and are supported by a 100 percent liquidity guarantee, from
other types of conduits with partial liquidity guarantees (such as
structured investment vehicles) that have sometimes been operated by
banking entities for the purpose of financing portfolios of securities
acquired or retained as part of their activities in the securities
markets.
    The Agencies recognize that ABCP conduits that do not satisfy the
elements of the ABCP conduit exclusion may be covered funds and
therefore would be subject to section 13(f) of the BHC Act.\1967\ As a
result of section 13(f) of the BHC Act, which prohibits certain
transactions between banking entities and a covered fund securitization
that the banking entity sponsors or for which it provides investment
management services, the banking entity would be prohibited from
providing liquidity support for the ABCP conduit.
---------------------------------------------------------------------------

    \1967\ See 12 U.S.C. 1851(f); See also Sec.  ----.16 of the
proposed rule.
---------------------------------------------------------------------------

    Similarly, while some commenters requested that the loan
securitization exclusion permit the holding of a limited amount of
securities purchased in the secondary market, the final rule does not
provide for this in the context of ABCP conduits. The Agencies believe
that the limitations on the types of securities that a qualifying
asset-backed commercial paper conduit may invest in are needed to avoid
the possibility that a banking entity could use a qualifying asset-
backed commercial paper conduit to securitize non-loan assets or to
engage in proprietary trading of such securities prohibited under the
final rule. Thus this limitation reduces the potential for evasion of
the covered fund provisions of section 13 of the BHC Act. In developing
the exclusion from the definition of covered fund for qualifying asset-
backed commercial paper conduits

in the final rule, the Agencies considered the factors set forth in
sections 13(g)(2) and 13(h)(2) of the BHC Act. The final rule includes
conditions designed to ensure that an ABCP conduit established and
managed by a banking entity serves as a means of facilitating that
banking entity's loan securitization activity rather than financing
that banking entity's capital market investments. The final rule
distinguishes between qualifying asset-backed commercial paper conduits
and other ABCP conduits in order to adhere to the tenets of section 13
of the BHC Act while accommodating the market practices discussed by
the commenters by facilitating reasonable access to credit by consumers
and businesses through the issuance of ABCP backed by consumer and
business receivables. As discussed above, the Agencies understand that
some existing ABCP conduits may need to be restructured to conform to
the requirements of the ABCP conduit exclusion.
    To the extent that the definition of covered fund, the loan
securitization exclusion and the ABCP conduit exclusion do not
eliminate the applicability of the final rule provisions to certain
covered funds, there may be adverse effects on the provision of capital
to customers,\1968\ to securitization markets,\1969\ and to the
creation of new securitization products to meet investor demands that
Congress may not have contemplated. \1970\ However, financial
institutions that are not banking entities and therefore are not
subject to the restrictions on ownership can continue to engage in
activities relating to securitization, including those securitizations
that fall under the definition of covered fund. Furthermore, new
securitizations may be structured so as to qualify for the loan
securitization exclusion or other exclusions under the final rule. For
these reasons, the impact on securitizations that are not excluded
under the final rule may be mitigated.
---------------------------------------------------------------------------

    \1968\ See, e.g., ASF (Feb. 2012).
    \1969\ See Credit Suisse (Williams) (employing ABCP conduits as
an example); ASF (Feb. 2012) (describing the constriction of the
market for asset-backed securities if banking entities are
restricted from owning debt classes of new asset backed securities).
    \1970\ See RBC; ASF (Feb. 2012).
---------------------------------------------------------------------------

    The Agencies believe that the final rule excludes from the
definition of covered fund typical structures used in the most common
loan securitizations representing a significant majority of the current
securitization market, such as residential mortgages, commercial
mortgages, student loans, credit card receivables, auto loans, auto
leases and equipment leases. Additionally, the Agencies believe that
esoteric asset classes supported by loans may also be able to rely on
the loan securitization exclusion, such as time share loans, container
leases and servicer advances.
10. Covered Bonds
    Several commenters called for covered bond structures to be
excluded from the definition of covered fund.\1971\ They indicated that
the proposed rule may interfere with and restrict non-U.S. banks'
ability to establish or issue covered bonds. As described by several
commenters, covered bonds are full recourse debt instruments typically
issued by a non-U.S. entity that are fully secured or ``covered'' by a
pool of high-quality collateral (e.g., residential or commercial
mortgage loans or public sector loans).\1972\ Certain of these covered
bond structures utilize a special purpose vehicle (``SPV'') that holds
a collateral pool. As such, under the proposed rule, an SPV could be a
covered fund that relies on the exclusion in section 3(c)(1) or 3(c)(7)
of the Investment Company Act.
---------------------------------------------------------------------------

    \1971\ See Allen & Overy (on behalf of Foreign Bank Group);
UKRCBC; FSA (Apr. 2012); ASF (Feb. 2012).
    \1972\ See AFME et al.; Allen & Overy (on behalf of Foreign Bank
Group); ASF (Feb. 2012); FSA (Apr. 2012); UKRCBC.
---------------------------------------------------------------------------

    According to one commenter, the majority of covered bonds are
issued under specific legislative frameworks which define permitted
characteristics for covered bond issuances, including the kinds and
quality of collateral that may be included in cover pools, the specific
legal framework for issuance of covered bonds, and the procedures for
resolution in the event that the issuer becomes insolvent.\1973\ Some
commenters expressed concern about the possibility that certain covered
bond structures could fall within the definition of covered fund, as
proposed. In particular, commenters expressed concern about covered
bond structures in the United Kingdom that also would be relevant in
principle with respect to covered bond structures used in other
European Union (``EU'') jurisdictions (e.g., the Netherlands and Italy)
and certain non-EU jurisdictions (e.g., Canada, Australia, and New
Zealand).\1974\ Another commenter indicated that covered bonds issued
by certain French entities that hold a revolving pool of loans may be
impacted by the proposed rule.\1975\
---------------------------------------------------------------------------

    \1973\ See UKRCBC. For example, a commenter indicated that in
the European Union, Article 52(4) of the EU UCITS Directive sets out
the defining characteristics of covered bonds, and this directive is
implemented by specific legislative frameworks.
    \1974\ See UKRCBC; FSA (Apr. 2012). One commenter argued that
there are two main models used for covered bond structures in
Europe--the integrated model (where the collateral pool continues to
be owned directly by the bank issuer and is segregated by special
legislation) and the structured model (where the pool is transferred
to a special purpose vehicle and is segregated by operation of legal
principles). See UKRCBC.
    \1975\ See Allen & Overy (on behalf of Foreign Bank Group).
---------------------------------------------------------------------------

    Certain commenters argued that in order to achieve the intended
economic effect of providing recourse to both the bank issuing covered
bonds and to the collateral pool, the issuing bank may enter into a
number of agreements with the SPV that holds the collateral. This
includes transactions where the bank takes on credit exposure to the
SPV (e.g., through derivatives and securities lending, provision of
loans, and/or investments in securities of the SPV).\1976\ The issuing
bank typically also provides asset and liability management services to
the SPV and may also repurchase certain assets from the SPV.\1977\
Commenters also contended that under certain legislative frameworks,
the SPV issues the covered bonds and holds the collateral, and a
sponsoring bank lends money to the SPV.\1978\ According to commenters,
the broad definition of covered fund in the proposed rule could capture
an SPV that holds the collateral, so transactions between an SPV and
the issuing bank or sponsor bank may be prohibited.\1979\ These
commenters argued that including covered bond structures in the
definition of covered fund is inconsistent with the legislative intent
of the rule, would have a negative and disproportionate effect on
foreign banks, markets and economies and would give rise to potential
conflicts with such foreign legislative frameworks.\1980\
---------------------------------------------------------------------------

    \1976\ See FSA (Apr. 2012).
    \1977\ See UKRCBC.
    \1978\ See Allen & Overy (on behalf of Foreign Bank Group).
    \1979\ See Allen & Overy (on behalf of Foreign Bank Group);
UKRCBC; FSA (Apr. 2012).
    \1980\ See Allen & Overy (on behalf of Foreign Bank Group);
UKRCBC; FSA (Apr. 2012); ASF (Feb. 2012); AFME et al. For a
discussion of possible economic effects, See FSA (Feb. 2012);
UKRCBC; Allen & Overy (on behalf of Foreign Bank Group).
---------------------------------------------------------------------------

    According to certain commenters, SPVs whose sole function is as
part of an offering of covered bonds should be excluded from the
definition of covered fund in the final rule. These commenters provided
that the proposed rule was not clear on whether these SPVs, which
effectively function as collateral devices for the covered bond, would
be excluded from the definition of covered fund.\1981\ One commenter
indicated that the key concern was primarily due to the wide definition
of

covered fund in the proposed rule.\1982\ Other commenters indicated
that the final rule should not apply to covered bond transactions
because they are not traditionally recognized or regulated as asset-
backed securities transactions, and they are not the type of
transactions that the rule was intended to address.\1983\
---------------------------------------------------------------------------

    \1981\ See ASF (Feb. 2012); AFME et al.; UKRCBC.
    \1982\ See UKRCBC.
    \1983\ See, e.g., AFME et al.
---------------------------------------------------------------------------

    As a result of comments received on covered bond vehicles, the
final rule specifically excludes from the definition of covered fund
certain entities that own or hold a dynamic or fixed pool of assets
that covers the payment obligations of covered bonds. In order to
qualify for the exclusion, the assets or holdings in the cover pool
must satisfy the conditions in the loan securitization exclusion,
except for the requirement that the securities they issue are asset-
backed securities (the ``permitted cover pool'').\1984\ The Agencies
believe this approach is consistent with the rule of construction
contained in section 13(g)(2) of the BHC Act. The rule of construction
in section 13(g)(2) of the BHC Act specifically refers to the ``sale
and securitization of loans'' and the Agencies would not want a banking
entity to use an excluded cover pool to engage in proprietary trading
of such securities prohibited under the final rule. The Agencies
believe this restriction reduces the potential for evasion of the final
rule.
---------------------------------------------------------------------------

    \1984\ See final rule Sec.  ----.10(c)(10).
---------------------------------------------------------------------------

    By placing restrictions on the assets permitted to be held by a
cover pool, the potential for evasion of the covered fund prohibitions
is reduced. The exclusion for cover pools is intended, as contemplated
by the rule of construction in section 13(g)(2) of the BHC Act, to
permit banking entities to continue to engage in lending activities and
the financing those lending activities. Including all types of
securities and other assets within the scope of permitted assets in a
cover pools would expand the exclusion beyond the scope of the
definition of loan in the final rule that is intended to implement the
rule of construction. Additionally, because the exclusion for cover
pools is only available to foreign banking organizations, allowing such
cover pools to hold securities would provide unequal treatment of
covered bonds as compared to a loan securitization sponsored by a U.S.
banking entity.
    Under the definition of covered bond in the final rule, the debt
obligation may be issued directly by a foreign banking organization or
by an entity that owns a permitted cover pool. In both cases, the
payment obligations of the debt obligation must be fully and
unconditionally guaranteed. If the debt obligation is issued by a
foreign banking organization, such debt obligation will be a ``covered
bond'' under the final rule if the payment obligations are fully and
unconditionally guaranteed by an entity that owns a permitted cover
pool.\1985\ If the debt obligation is issued by an entity that owns a
permitted cover pool, such debt obligation will be a ``covered bond''
under the final rule if (i) the payment obligations are fully and
unconditionally guaranteed by a foreign banking organization and (ii)
the issuer of the debt obligation is a wholly-owned subsidiary (as
defined) by such foreign banking organization.\1986\ Thus, under the
final rule, a covered bond structure in which an entity holds the cover
pool and issues securities that are fully and unconditionally
guaranteed by a foreign banking organization may also be able to rely
on the loan securitization exclusion if it meets all of the
requirements of that exclusion.
---------------------------------------------------------------------------

    \1985\ See final rule Sec.  ----.10(c)(10)(ii)(A).
    \1986\ See final rule Sec.  ----.10(c)(10)(ii)(B). As discussed
above in the section describing the wholly-owned subsidiary
exclusion from the definition of covered fund, the Agencies are
permitting 0.5 of a wholly-owned subsidiary to be owned by an
unaffiliated party for the purpose of establishing corporate
separateness or addressing bankruptcy, insolvency, or similar
concerns.
---------------------------------------------------------------------------

    The Agencies recognize that many covered bond programs may involve
foreign covered bond programs (and their related cover pools) that are
permitted by their respective laws to own residential mortgage-backed
securities and other non-loan assets. As a result, the exclusion for
covered bonds in the final rule may not be available to many of the
existing cover pools that support outstanding covered bonds. The
Agencies recognize that this approach may not exclude all foreign
covered bond programs. Although certain commenters argued that
including covered bond structures in the definition of covered fund is
inconsistent with the legislative intent of the rule,\1987\ the
Agencies believe that the exclusion for qualifying covered bonds,
including the limitations on the types of securities that a loan
securitization can hold, is consistent with the rule of construction
contained in section 13(g)(2) of the BHC Act and appropriate for the
reasons discussed directly above and under ``Definition of Loan.'' The
Agencies also recognize that commenters argued that including covered
bonds as covered funds could have a negative and disproportionate
effect on foreign banks, markets and economies and would give rise to
potential conflicts with such foreign legislative frameworks.\1988\ The
Agencies note that, although they do not know the composition of the
cover pools, the Agencies believe that foreign banking organizations
should be able to look at the composition of their cover pools to
evaluate how to meet the requirements of the exclusion--and thus to
avoid or mitigate the adverse effects commenters asserted would occur--
as they determine appropriate.
---------------------------------------------------------------------------

    \1987\ See supra note 1980 and accompanying text.
    \1988\ Id.
---------------------------------------------------------------------------

11. Certain Permissible Public Welfare and Similar Funds
    Section 13(d)(1)(E) of the BHC Act permits a banking entity to make
and retain: (i) investments in one or more small business investment
companies (``SBICs''), as defined in section 103(3) of the Small
Business Investment Act of 1958 (SBA) (15 U.S.C. 662) \1989\; (ii)
investments that are designed primarily to promote the public welfare,
of the type permitted under paragraph (11) of section 5136 of the
Revised Statutes of the United States (12 U.S.C. 24); and (iii)
investments that are qualified rehabilitation expenditures with respect
to a qualified rehabilitated building or certified historic structure,
as such terms are defined in section 47 of the Internal Revenue Code of
1986 or a similar State historic tax credit program.\1990\ The proposed
rule permitted banking entities to invest in and act as sponsor \1991\
to these entities, but did not explicitly exclude them from the
definition of covered fund.\1992\
---------------------------------------------------------------------------

    \1989\ The Agencies note that section 13(d)(1)(E) of the BHC Act
incorrectly provides that the term ``small business investment
company'' is defined in section 102 of the SBA, while the definition
is in fact contained in section 103(3) of the SBA as codified at 15
U.S.C. 662. The statute includes the correct citation to 15 U.S.C.
662. The Agencies are correcting this technical error in the final
rule by updating the reference to section 102 to section 103(3).
    \1990\ See 12 U.S.C. 1851(d)(1)(E).
    \1991\ The proposal implemented a proposed determination by the
Agencies under 13(d)(1)(J) ``that a banking entity may not only
invest in such entities as provided under section 13(d)(1)(E) of the
BHC Act, but also may sponsor an entity described in that paragraph
and that such activity, since it generally would facilitate
investment in small businesses and support the public welfare, would
promote and protect the safety and soundness of banking entities and
the financial stability of the United States.'' Joint Proposal, 76
FR 68,908 n.292.
    \1992\ See proposed rule Sec.  ----.13(a).
---------------------------------------------------------------------------

    Commenters generally supported the proposed exemption for
investments in and sponsorship of funds designed to promote the public
welfare, SBICs, and other tax credit funds given the valuable funding
and assistance these investments provide in facilitating community and
economic priorities and

the role these investments play in the ability of banking entities,
especially community and regional banks, to achieve their financial and
Community Reinvestment Act (``CRA'') goals. However, commenters raised
some issues with respect to the proposed exemption and sought
clarification on its application to specific investments.\1993\ Of
primary concern to commenters was the impact of the prohibition in
section 13(f) of the BHC Act on the ability of a banking entity
sponsoring a tax credit fund or its affiliate to guarantee certain
obligations of the fund in order to provide assurance to investors that
the investment has been properly structured to enable the investor to
receive the tax benefits on which the investment are sold.\1994\ Some
commenters noted that failure to address this issue in the final rule
would damage a large segment of this market and therefore urged the
Agencies to exempt these investments from the application of section
13(f) or, in the alternative, from the definition of covered
fund.\1995\
---------------------------------------------------------------------------

    \1993\ See Novogradac (LIHTC); Novogradac (NMTC); Novogradac
(RETC); PNC; Raymond James; SIFMA et al. (Covered Funds) (Feb.
2012); SBIA.
    \1994\ See AHIC; Novogradac (LIHTC); Novogradac (NMTC);
Novogradac (RETC); SBIA; Union Bank; U.S. Bancorp.
    \1995\ See ABA (Keating); Lone Star; Novogradac (LIHTC);
Novogradac (NMTC); Novogradac (RETC); SVB; U.S. Bancorp.
---------------------------------------------------------------------------

    In addition, commenters requested clarification that specific types
of public welfare, SBIC, and other tax credit investments would be
eligible for the exemption, including Low Income Housing Tax Credits,
Renewable Energy Tax Credits, New Markets Tax Credits, and Rural
Business Investment Companies.\1996\ One commenter requested that
applicants for an SBIC license that have received permission from the
Small Business Administration to file a formal SBIC license application
be viewed the same as an SBIC.\1997\ Other commenters sought coverage
of investments in non-SBIC funds that provide capital to small and
middle-market companies,\1998\ investments in any state administered
tax credit program,\1999\ and investments outside the United States
that are of the type permitted under paragraph (11) of section 5136 of
the Revised Statutes of the United States (12 U.S.C. 24).\2000\
---------------------------------------------------------------------------

    \1996\ See NCHSA; SBIA; Novogradac (LIHTC); Novogradac (NMTC);
Novogradac (RETC).
    \1997\ See SBIA; See also SEC Rule 3c-2.
    \1998\ See ABA (Keating); PNC.
    \1999\ See USAA.
    \2000\ See JPMC; SIFMA et al. (Covered Funds) (Feb. 2012).
---------------------------------------------------------------------------

    In light of the comments received, the final rule excludes from the
definition of covered fund an issuer that is an SBIC (or that has
received from the Small Business Administration notice to proceed to
qualify for a license as an SBIC, which notice or license has not been
revoked) or the business of which is to make investments that are: (i)
designed primarily to promote the public welfare, of the type permitted
under paragraph (11) of section 5136 of the Revised Statutes of the
United States (12 U.S.C. 24), including the welfare of low- and
moderate-income communities or families (such as providing housing,
services, or jobs); or (ii) qualified rehabilitation expenditures with
respect to a qualified rehabilitated building or certified historic
structure, as such terms are defined in section 47 of the Internal
Revenue Code of 1986 or a similar State historic tax credit
program.\2001\
---------------------------------------------------------------------------

    \2001\ See final rule Sec.  ----.10(c)(11). This provision would
cover any issuer that engages in the business of making tax credit
investments (e.g., Low Income Housing Tax Credit, New Markets Tax
Credit, Renewable Energy Tax Credit, Rural Business Investment
Company) that are either designed to promote the public welfare of
the type permitted under 12 U.S.C. 24(Eleventh) or are qualified
rehabilitation expenditures with respect to a qualified
rehabilitated building or certified historic structure, as provided
for under Sec.  ----.10(c)(11).
---------------------------------------------------------------------------

    By excluding SBICs and other public interest funds from the
definition of covered fund--rather than provide a permitted activity
exemption as proposed--the Agencies addressed commenters' concerns
regarding the burdens imposed by section 13(f). The Agencies believe
that excluding these investments from the definition of covered fund
addresses the issues many commenters raised with respect to the
application of section 13(f) of the BHC Act, and gives effect to the
statutory exemption of these investments in a way that appropriately
facilitates national community and economic development objectives. The
Agencies believe that permitting a banking entity to sponsor and invest
in these types of public interest entities will result in banking
entities being able to provide valuable expertise and services to these
entities and to provide funding and assistance to small businesses and
low- and moderate-income communities. The Agencies believe that
providing the exclusion will also allow banking entities to continue to
provide capital to community-improving projects and in some instances
promote capital formation.
12. Registered Investment Companies and Excluded Entities
    The proposed rule did not specifically include registered
investment companies (including mutual funds) or business development
companies within the definition of covered fund.\2002\ As explained
above, the statute references funds that rely on section 3(c)(1) or
3(c)(7) of the Investment Company Act. Registered investment companies
and business development companies do not rely on either section
3(c)(1) or 3(c)(7) of the Investment Company Act and are instead
registered or regulated in accordance with the Investment Company Act.
---------------------------------------------------------------------------

    \2002\ See proposed rule Sec.  ----.10(b)(1).
---------------------------------------------------------------------------

    Many commenters argued that registered investment companies and
business development companies would be treated as covered funds under
the proposed definition if commodity pools are treated as covered
funds.\2003\ A few commenters argued that the final rule should
specifically provide that all SEC-registered funds are excluded from
the definition of covered fund (and the definition of banking entity)
to avoid any uncertainty about whether section 13 applies to these
types of funds.\2004\
---------------------------------------------------------------------------

    \2003\ See, e.g., Arnold & Porter; BoA; Goldman (Covered Funds);
ICI (Feb. 2012); Putnam; TCW; Vanguard. According to these
commenters, a registered investment company may use security or
commodity futures, swaps, or other commodity interests in various
ways to manage its investment portfolio and be swept into the broad
definition of ``commodity pool'' contained in the Commodity Exchange
Act.
    \2004\ See Arnold & Porter; Goldman (Covered Funds); See also
SIFMA et al. (Covered Funds) (Feb. 2012); SIFMA et al. (Mar. 2012);
ABA (Keating); BoA; ICI (Feb. 2012); JPMC (requesting clarification
that registered investment companies are not banking entities); TCW.
---------------------------------------------------------------------------

    Commenters also requested that the final rule exclude from the
definition of covered fund entities formed to establish registered
investment companies during the seeding period. These commenters
contended that, during the early stages of forming and seeding a
registered investment company, an entity relying on section 3(c)(1) or
(3)(c)(7) may be created to facilitate the development of a track
record for the registered investment company so that it may be marketed
to unaffiliated investors.\2005\
---------------------------------------------------------------------------

    \2005\ See ICI (Feb. 2012); TCW.
---------------------------------------------------------------------------

    Section 13's definition of private equity fund and hedge fund by
reference to section 3(c)(1) and 3(c)(7) of the Investment Company Act
appears to reflect Congress' concerns about banking entities' exposure
to and relationships with investment funds that explicitly are excluded
from SEC

regulation as investment companies. The Agencies do not believe it
would be appropriate to treat as a covered fund registered investment
companies and business development companies, which are regulated by
the SEC as investment companies. The Agencies believe that the proposed
rule's inclusion of commodity pools would have resulted in some
registered investment companies and business development companies
being covered funds, a result the Agencies did not intend. The
Agencies, in addition to narrowing the commodity pools that will be
included as covered funds as discussed above, have also modified the
final rule to exclude SEC-registered investment companies and business
development companies from the definition of covered fund.\2006\
---------------------------------------------------------------------------

    \2006\ See final rule Sec.  ----.10(c)(12).
---------------------------------------------------------------------------

    The Agencies also recognize that an entity that becomes a
registered investment company or business development company might,
during its seeding period, rely on section 3(c)(1) or 3(c)(7). The
Agencies have determined to exclude these seeding vehicles from the
covered fund definition for the same reasons the Agencies determined to
exclude entities that are operating as registered investment companies
or business development companies as discussed above.
    In order to prevent banking entities from purporting to use this
exclusion for vehicles that the banking entity does not reasonably
expect to become a registered investment company or business
development company, the exclusion is available only with respect to a
vehicle that the banking entity operates (i) pursuant to a written
plan, developed in accordance with the banking entity's compliance
program, that reflects the banking entity's determination that the
vehicle will become a registered investment company or business
development company within the time period provided by the final rule
for seeding a covered fund; (ii) consistently with the leverage
requirements under the Investment Company Act of 1940 that are
applicable to registered investment companies and SEC-regulated
business development companies.\2007\ A banking entity that seeds a
covered fund for any purpose other than to register it as an investment
company or establish a business development company must comply with
the requirements of section 13(d)(1)(G) of the BHC Act and Sec.  --
--.11 of the final rule as described above. The Agencies will monitor
this seeding activity for attempts to use this exclusion to evade the
requirements governing the ownership of and relationships with covered
funds under section 13 of the BHC Act and the final rule.\2008\
---------------------------------------------------------------------------

    \2007\ See final rule Sec. Sec.  ----.10(c)(12)(i);
10(c)(12)(iii); ----.20(e).
    \2008\ The Agencies also note that banking entities with more
than $10 billion in total consolidated assets as reported on
December 31 of the previous two calendar years must maintain records
that include, among other things, documentation of the exclusions or
exemptions other than sections 3(c)(1) and 3(c)(7) of the Investment
Company Act of 1940 relied on by each fund sponsored by the banking
entity in determining that such fund is not a covered fund. See
final rule Sec.  ----.20(e).
---------------------------------------------------------------------------

13. Other Excluded Entities
    Section 13(h)(2) permits the Agencies to include similar funds
within the definition of covered fund, but the proposal did not contain
a process for excluding from the definition of covered fund other
entities that do not engage in the investment activities contemplated
by section 13. Many commenters argued that the breadth of entities that
may be required to rely on the exclusions in section 3(c)(1) or 3(c)(7)
of the Investment Company Act could result in additional unidentified
entities becoming subject to the definition of covered fund.\2009\ In
order to ensure that the final rule effectively addresses the full
scope of entities that may inadvertently be included within the
definition of covered fund, a number of commenters urged that the final
rule include a mechanism to exclude other entities from the term
``covered fund'' by rule or order if the Agencies determine such an
exclusion is appropriate.\2010\
---------------------------------------------------------------------------

    \2009\ See also FSOC study.
    \2010\ See SIFMA et al. (Covered Funds) (Feb. 2012); Credit
Suisse (Williams); GE (Feb. 2012).
---------------------------------------------------------------------------

    As evidenced by the extensive comments discussed above identifying
the many types of corporate structures and other vehicles (not just
investment funds) that rely on sections 3(c)(1) and 3(c)(7) but do not
engage in investment activities of the type contemplated by section 13,
the scope of an overly broad definition of covered fund may impose
significant burdens on banking entities that are in conflict with the
purposes of section 13 of the BHC Act. In response to commenters'
concerns and to address the potential that the final rule's definition
of covered fund might encompass entities that do not engage in the
investment activities contemplated by section 13, the final rule
includes a provision that provides that the Agencies may jointly
determine to exclude an issuer from the definition of covered fund if
the exclusion is consistent with the purposes of section 13 of the BHC
Act.\2011\
---------------------------------------------------------------------------

    \2011\ See final rule Sec.  ----.10(c)(14).
---------------------------------------------------------------------------

    As noted above, the statute permits the Agencies to act by rule to
modify the definition of covered fund. After issuing the proposed rule
and receiving comment on it, the final rule provides that the Agencies
may act jointly to provide an exclusion.\2012\ The Agencies are working
to establish a process within which to evaluate requests for exclusions
and expect to provide additional guidance on this matter as the
Agencies gain experience with the final rule.\2013\ As a result, the
definition of covered fund would remain unified and consistent. The
final rule also provides that a determination by the Agencies to
exclude an entity from the definition of covered fund will be promptly
made public in order to ensure that both banking entities and the
public may understand what entities are and are not included within the
definition of covered fund.
---------------------------------------------------------------------------

    \2012\ As discussed above, the Agencies also may determine
jointly that an entity excluded from the definition of covered fund
under Sec.  ----.10(c) is in fact a covered fund, and consequently
banking entities' investments in and transactions with such fund
would be subject to limitations and/or divestiture. The Agencies
intend to utilize this authority to monitor for and address, as
appropriate, instances of evasion. See, e.g., 12 U.S.C. 1851(e)(2).
    \2013\ A joint determination specified under Sec.  --
--.10(c)(14) may take a variety of forms.
---------------------------------------------------------------------------

d. Entities Not Specifically Excluded From the Definition of Covered
Fund
    In addition to the entities identified above which are excluded
from the definition of covered fund under the final rule, commenters
argued that a number of other entities such as financial market
utilities, venture capital funds, credit funds, cash management
vehicles or cash collateral pools may also be an investment company but
for the exclusion contained in section 3(c)(1) or 3(c)(7) of the
Investment Company Act and requested that these entities expressly be
excluded from the final rule's definition of covered fund. The Agencies
have considered carefully the comments received on each of these
entities but, for the reasons explained below, have declined to provide
a separate exclusion for them from the definition of covered fund at
this time. As discussed below, some of these entities are not covered
funds for various reasons or may, with relatively little cost, conform
to the terms of an exclusion or exemption from the definition of
covered fund. As noted above, to the extent that one of these entities
qualifies for one or more of the

other exclusions from the definition of covered fund, that entity would
not be a covered fund under the final rule. Any entity that would be a
covered fund would still be able to rely on the conformance period in
order to come into compliance with the requirements of section 13 and
the final rule.
    A number of commenters requested that certain existing covered
funds be either excluded from the definition of covered fund or
grandfathered and not be subject to the limitations of section 13 of
the BHC Act.\2014\ The Agencies note, however, that section 13
specifically addresses a banking entity's preexisting investments in
covered funds by providing a conformance period, which banking entities
may use to bring their activities and investments into compliance with
the requirements of section 13 and the final rule. To the extent that
section 13 could be interpreted to permit the Agencies to take a
different approach, despite addressing banking entities' preexisting
covered fund investments directly, the Agencies believe it would be
inconsistent with the purposes of section 13 to permit banking entities
to continue to hold ownership interests in covered funds beyond the
conformance period provided by the statute. Section 13's prohibition on
banking entities' investments in and relationships with covered funds
and the requirement that banking entities divest or conform these
investments appear to reflect the statutory purpose that banking
entities be limited in their ability to continue to be exposed to these
investments outside of the statutorily-provided conformance period. The
Agencies believe that permitting banking entities to hold ownership
interests indefinitely beyond the conformance period provided by the
statute appears inconsistent with this purpose.
---------------------------------------------------------------------------

    \2014\ See, e.g., PNC; SVB; SIFMA (Securitization) (Feb. 2012);
AFME et al.; BoA. See also, e.g., Credit Suisse (Williams).
---------------------------------------------------------------------------

1. Financial Market Utilities
    Several commenters contended that financial market utilities
(``FMUs'') could be covered funds because they might rely on section
3(c)(1) or 3(c)(7) for an exclusion from the definition of investment
company under the Investment Company Act and may not qualify for an
alternative exemption.\2015\ These commenters argued that banking
entities have long been investors in domestic and foreign FMUs, such as
securities clearing agencies, derivatives clearing organizations,
securities exchanges, derivatives boards of trade and alternative
trading systems. These commenters expressed concern that, unless FMUs
are expressly excluded from the definition of covered fund, banking
entities could be prohibited from entering into any new covered
transactions with related FMUs and would be required to divest their
investments in FMUs, thereby disrupting the operations of those FMUs
and financial markets generally.
---------------------------------------------------------------------------

    \2015\ See SIFMA et al. (Covered Funds) (Feb. 2012); Credit
Suisse (Williams).
---------------------------------------------------------------------------

    After carefully considering commenters' concerns, the Agencies
believe that FMUs are not investment vehicles of the type section 13 of
the BHC Act was designed to address, but rather entities that generally
engage in other activities, including acting as central counterparties
that reduce counterparty risk in clearing and settlement activities.
Congress recognized, in the Payment, Clearing, and Settlement
Supervision Act of 2010 (title VIII of the Dodd-Frank Act),\2016\ that
properly designed, operated, and supervised financial market utilities
as defined in that Act mitigate systemic risk and promote financial
stability.\2017\
---------------------------------------------------------------------------

    \2016\ 12 USC 5461 et seq.
    \2017\ See id.
---------------------------------------------------------------------------

    However, the Agencies have not provided an exclusion from the
covered fund definition for FMUs because these kinds of entities do not
generally appear to rely on section 3(c)(1) or 3(c)(7) of the
Investment Company Act, and therefore do not appear to need an
exclusion. For example, section 3(b)(1) of the Investment Company Act
excludes from the definition of investment company--and thus from the
definition of a covered fund--entities primarily engaged in a business
other than that of an investment company.\2018\ If an FMU is primarily
engaged in a business other than those that would make it an investment
company, for example, if the FMU is primarily engaged in transferring,
clearing, or settling payments, securities, or other financial
transactions among or between financial institutions,\2019\ the FMU
could rely on the exclusion to the definition of investment company
provided by section 3(b)(1) and would not need to rely on section
3(c)(1) or 3(c)(7) and, as such, would not be a covered fund.
---------------------------------------------------------------------------

    \2018\ Section 3(b)(1) of the Investment Company Act excludes
from the definition of investment company ``[a]ny issuer primarily
engaged, directly or through a wholly-owned subsidiary or
subsidiaries, in a business or businesses other than that of
investing, reinvesting, owning, holding, or trading in securities.''
    \2019\ See 12 U.S.C. 1562(6); 12 CFR Part 234.
---------------------------------------------------------------------------

2. Cash Collateral Pools
    Some commenters expressed concern that cash collateral pools, which
are part of securities lending programs, could be included in the
definition of covered fund.\2020\ According to these commenters,
banking entities, including bank custodians acting as lending agent for
customer's securities lending activities, typically manage these pools
as fiduciaries for their customers.\2021\ These commenters argued that
collateral pools are part of a banks' traditional custody and advisory
services and have been an integral part of any lending agent's role
(whether custodial or non-custodial) for years.\2022\
---------------------------------------------------------------------------

    \2020\ See RMA; State Street (Feb. 2012); See also BNY Mellon et
al.
    \2021\ See RMA; State Street (Feb. 2012).
    \2022\ See RMA; BNY Mellon et al. (citing Comptroller's
Handbook: Custody Services (Jan. 2002)).
---------------------------------------------------------------------------

    Cash collateral pools are typically formed when, as part of a
securities lending program, a customer of a bank authorizes the bank to
take securities from the customer's account and lend them in the open
market. The agent bank then lends those securities and receives
collateral in return from the borrower; a securities lending customer
of a bank typically elects to have cash collateral provided by a
borrower pooled by the agent bank with other cash collateral provided
to other clients.\2023\ These investment pools may exist in the form of
trusts, partnerships, limited liability companies, or separate accounts
maintained by more than one party and these structures may rely on
sections 3(c)(1) and 3(c)(7) of the Investment Company Act to avoid
being an investment company.\2024\ While their ownership interest may
be nominal in amount, the agent banks may hold a general partnership,
limited liability company membership or trustee interest in the cash
collateral pool.\2025\ As part of these arrangements, custodian banks
routinely offer borrower default indemnifications to the securities
lender in a securities lending transactions.
---------------------------------------------------------------------------

    \2023\ See RMA.
    \2024\ See RMA.
    \2025\ See RMA.
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    Commenters raised concerns that these indemnification agreements
could be considered a covered transaction prohibited by section 13(f)
of the BHC Act.\2026\ Since some cash collateral

pools are established outside of the United States, commenters
requested that the final rule permit banking entities to have interests
in and relationships with both U.S. and non-U.S. cash collateral
pools.\2027\ These commenters suggested that cash collateral pools be
excluded from the definition of covered fund or, in the alternative,
that the Agencies make clear that cash collateral pools managed by
agent banks qualify for the exemption in Sec.  ----.11 of the proposed
rule for organizing and offering a covered fund and that the prime
brokerage exemption from the restrictions of section 13(f) would permit
the indemnification and income or settlement services agent banks
typically provide to the pools.\2028\ These commenters also suggested
that the Agencies use their authority under section 13(d)(1)(J) to
provide an exemption for banking entities to continue to have interests
in and provide services to these types of pools.\2029\
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    \2026\ See State Street; RMA. Commenters also argued that as
part of offering pooled cash collateral management, agent banks have
traditionally provided short-term extensions of credit and
contractual income and settlement services to lending clients and
cash collateral pools to facilitate trade settlement and related
cash collateral investment activities. See RMA. One commenter
further argued that if banks are required to ``outsource'' cash
collateral pools and/or the related short-term credit services
provided to the pools, ``participation in securities lending
programs would only be cost effective for the largest lending
clients'' and, as a result, ``many small and intermediate securities
lending clients would be denied the incremental revenue securities
lending can provide''; ``securities lending programs could lose
significant diversification in lending clients, lendable assets,
borrowers and agent banks''; and, as a result of lost revenues,
``the actual costs of [] custodial or other services provided to
clients that no longer participate in lending would increase.'' Id.
    \2027\ See RMA.
    \2028\ See RMA.
    \2029\ See RMA.
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    After carefully considering comments received, the final rule does
not provide a specific exclusion from the definition of covered fund
for cash collateral pools. The Agencies have determined to provide
specific exclusions for entities that do not function as investment
funds, consistent with the intent of section 13's restrictions, or in
response to other unique considerations (e.g., to provide consistent
treatment for certain foreign and domestic pension plans). These
considerations do not support a separate exclusion for cash collateral
pools.
    The Agencies note, however, that some cash collateral pools may not
be covered funds because they rely on an exclusion from the definition
of investment company other than those contained in section 3(c)(1) or
3(c)(7) of the Investment Company Act.\2030\ Banking entities may
determine to register cash collateral pools with the SEC as investment
companies or to operate them as separate accounts to exclude the pools
from the covered fund definition or, if the pools remain covered funds,
to organize and offer them in compliance with the requirements of Sec.
----.11 of the final rule.
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    \2030\ For instance, the Agencies understand that a banking
entity may set up a cash collateral pool in reliance on the
exclusion contained in section 3(c)(3) of the Investment Company
Act, or may be able to structure these pools as SEC-registered money
market funds operated in accordance with rule 2a-7 under the
Investment Company Act.
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    In response to comments received on the proposal, the Agencies note
that the provision of a borrower default indemnification by a banking
entity to a lending client in connection with securities lending
transactions involving a covered fund is not a covered transaction
subject to 13(f) or a guarantee of the performance or obligations of a
covered fund prohibited under Sec.  ----.11 of the final rule. Those
restrictions apply to transactions with the covered fund or guarantees
of the covered fund's performance. Borrower default indemnifications
are provided to the bank's securities lending customer, not to the cash
collateral pool.
3. Pass-through REITS
    Some banking entities may issue real estate investment trust
(``REIT'') preferred securities to the public directly from a
subsidiary that qualifies for the exclusion in section 3(c)(5) or
section 3(c)(6) of the Investment Company Act. These entities would not
be considered a ``covered fund'' because they may rely on an exclusion
from the definition of an investment company other than the exclusion
in section 3(c)(1) or 3(c)(7) of the Investment Company Act.\2031\
However, in order to meet the demands of customers and avoid
undesirable tax consequences, some banking entities structure their
REIT offerings by using a passive, pass-through statutory trust between
the banking entity and the REIT to issue REIT preferred securities to
the public.\2032\ Because the pass-through trust holds the preferred
securities of the underlying REIT (which would itself not be a covered
fund), as well as provides administrative and ministerial functions for
the REIT (including passing through dividends from the underlying
REIT), the pass-through trust may not itself rely on the exclusion
contained in section 3(c)(5) or 3(c)(6) and, thus, typically relies on
section 3(c)(1) or 3(c)(7).\2033\
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    \2031\ See PNC.
    \2032\ See PNC.
    \2033\ See ABA (Keating); PNC.
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    Some commenters urged the Agencies to provide an exclusion for
pass-through REITS from the definition of covered fund.\2034\ These
commenters argued that because the pass-through trust exists as a
corporate convenience as part of issuing REIT preferred securities to
the banking entity and its customers, it is not the type of entity that
the covered fund prohibition in section 13 of the BHC Act was intended
to address. These commenters also argued that pass-through REITs enable
banking entities to offer preferable tax treatment to holders of the
REIT preferred securities and that if pass-through REITs were included
as covered funds, because of the limitations on covered transactions
contained in section 13(f), the minority interests in the preferred
securities issued by the REIT would no longer be able to be included in
a banking entity's tier 1 capital, thereby negatively impacting the
safety and soundness of the banking entity.\2035\
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    \2034\ See ABA (Keating); PNC.
    \2035\ See PNC; ABA (Keating). These commenters argued that most
REIT preferred securities contain a conditional exchange provision
that allows the primary regulator to direct that the preferred
securities be automatically exchanged for preferred shares of the
bank or parent BHC upon occurrence of a conditional exchange event.
Because this arrangement involves the purchase of securities issued
by an affiliate or the purchase of assets, it would be prohibited
under section 13(f) of the BHC Act if the pass-through REIT were a
covered fund.
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    The Agencies are not providing a specific exclusion from the
definition of covered fund for pass-through REITs because the Agencies
are concerned that such an exclusion could enable banking entities to
structure non-loan securitization transactions using a pass-through
entity in a manner inconsistent with the final rule's treatment of
similar vehicles that invest in securities. Furthermore, banking
entities have alternative manners in which they may issue or hold REIT
preferred securities, including through REITs directly, which do not
raise the same concerns about evasion.\2036\
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    \2036\ The Agencies recognize that banking entities may have
relied on pass-through REIT structures to issue preferred securities
in the past and prohibiting such transactions may pose
inefficiencies. Furthermore, it may not be possible to unwind or
conform past issuances without significant effort by the banking
entity and negotiation with the holders of the preferred securities.
As noted above, in these circumstances, section 13 provides a
conformance period which banking entities may take advantage of in
order to bring their activities and investments into compliance with
the requirements of section 13 and the final rule.
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4. Municipal Securities Tender Option Bond Transactions
    The Agencies received a number of comments addressing how the final
rule should treat municipal securities tender option bond vehicles. A
number of commenters argued that issuers of municipal securities tender
option bonds would fall under the definition of covered fund in the
proposed rule because these issuers typically rely on the exclusion
contained in section

3(c)(1) or 3(c)(7) of the Investment Company Act.\2037\ According to
commenters, a typical tender option bond transaction consists of the
deposit of a single issue of highly-rated, long-term municipal bonds in
a trust and the issuance by the trust of two classes of securities: A
floating rate, puttable security (the ``floaters''), and an inverse
floating rate security (the ``residual'') with no tranching involved.
According to commenters, the holders of the floaters have the right,
generally on a daily or weekly basis, to put the floaters for purchase
at par. The put right is supported by a liquidity facility delivered by
a highly-rated provider (in many cases, the banking entity sponsoring
the trust) and allows the floaters to be treated as a short-term
security. The floaters are in large part purchased and held by money
market mutual funds. The residual is held by a longer-term investor (in
many cases the banking entity sponsoring the trust, or an insurance
company, mutual fund, or hedge fund). According to commenters, the
residual investors take all of the market and structural risk related
to the tender option bonds structure, with the investors in floaters
taking only limited, well-defined insolvency and default risks
associated with the underlying municipal bonds generally equivalent to
the risks associated with investing in the municipal bonds directly.
According to commenters, the structure of tender option bond
transactions is governed by certain provisions of the Internal Revenue
Code in order to preserve the tax-exempt treatment of the underlying
municipal securities.
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    \2037\ See, e.g., Ashurst; SIFMA (Municipal Securities) (Feb.
2012); Citigroup (Jan. 2012); Cadwalader (Municipal Securities);
Vanguard; ICI (Feb. 2012); ASF (Feb. 2012); Fidelity; Wells Fargo
(Covered Funds). Commenters also noted that tender option bond
programs as currently structured may not meet the requirements of
section 3(a)(5) of the Investment Company Act or rule 3a-7
thereunder, or any other exclusion or exemption under the Investment
Company Act. See Ashurst; RBC; ASF (Feb. 2012).
---------------------------------------------------------------------------

    Many commenters requested a specific exclusion for municipal tender
option bond vehicles from the definition of a covered fund.\2038\ These
commenters argued that, without an exclusion from the definition of
covered fund, banking entities would be prohibited from owning or
sponsoring tender option bonds and from providing credit enhancement,
liquidity support, remarketing, and other services required in
connection with a tender option bond program.\2039\ Commenters argued
that tender option bond vehicles should be excluded because section
13(d)(1)(A) of the BHC Act already allows banking entities to own and
dispose of municipal securities directly,\2040\ tender option bonds are
economically similar to repurchase agreements, which are expressly
excluded from the proprietary trading restrictions of the proposed
rule, and, because they are safe and low risk are similar to the types
of transactions that the proposed rule would have exempted.\2041\
Commenters also argued that tender option bonds are different from
other covered funds that rely on the exclusion contained in section
3(c)(1) or 3(c)(7) of the Investment Company Act \2042\ and play an
important role in the municipal bond markets.\2043\ Commenters
requested that the Agencies use their authority under section
13(d)(1)(J) of the BHC Act to exclude tender option bonds because they
argued that tender option bonds promote the safety and soundness of
banking entities and the financial stability of the United States by
providing for a deeper, richer pool of potential investors, a larger
and more liquid market for municipal securities that results in lower
borrowing costs for municipalities and other issuers of municipal
securities, and greater efficiency and risk diversification.\2044\
Commenters also suggested a number of other ways to exclude tender
option bonds, including defining ownership interest to exclude any
interest in a tender option bond transaction; \2045\ defining banking
entity to exclude tender option bond issuers; \2046\ expanding the loan
securitization exclusion to include tender option bond issuers; \2047\
and revising the definition of sponsor to exclude sponsors of tender
option bond vehicles.\2048\ One commenter urged the Commission to
consider amending the exemption under rule 3a-7 under the Investment
Company Act or providing formal guidance regarding the status of tender
option bond programs.\2049\ In addition, some commenters requested an
exclusion for tender option bond transactions from the provisions of
section 13(f) of the BHC Act.\2050\
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    \2038\ See, e.g., ASF (Feb. 2012); BDA (Feb. 2012); Eaton Vance;
Fidelity; ICI (Feb. 2012); RBC; SIFMA (Municipal Securities) (Feb.
2012); SIFMA (May 2012); State Street (Feb. 2012); Vanguard.
    \2039\ See Ashurst; ASF (Feb. 2012).
    \2040\ See ASF (Feb. 2012); SIFMA (Municipal Securities) (Feb.
13, 2012); Citigroup (Jan. 2012). See also Cadwalader (Municipal
Securities) (alleging that the legislative history of section 13 of
the BHC Act suggests that the exemption relating to municipal
securities should not be construed to apply only to the section of
the rule pertaining to the proprietary trading prohibitions); BDA
(Feb. 2012) (arguing that any fund or trust the assets of which are
entirely invested in any of the obligations that are excluded from
the proprietary trading prohibitions should also be excluded from
the definition of covered fund).
    \2041\ See, e.g., Ashurst; Cadwalader (Municipal Securities);
Eaton Vance; Nuveen Asset Mgmt.; SIFMA (Municipal Securities) (Feb.
13, 2012); State Street (Feb. 2012); Vanguard; Wells Fargo (Covered
Funds); Citigroup (Jan. 2012).
    \2042\ See, e.g., ASF (Feb. 2012); State Street (Feb. 2012);
Citigroup (Jan. 2012); Vanguard; Wells Fargo (Covered Funds);
Cadwalader (Municipal Securities); Ashurst.
    \2043\ See Cadwalader (Municipal Securities); ICI (Feb. 2012);
Ashurst; ASF (Feb. 2012).
    \2044\ See Cadwalader (Municipal Securities).
    \2045\ See RBC.
    \2046\ See ICI (Feb. 2012).
    \2047\ See ASF (Feb. 2012).
    \2048\ See RBC.
    \2049\ See Ashurst.
    \2050\ See, e.g., RBC; ASF (Mar. 2012); ASF (Feb. 2012).
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    After carefully considering the comments received, the final rule
does not provide a specific exclusion from the definition of covered
fund or from the prohibitions and requirements of the final rule for
tender option bond vehicles.\2051\ The Agencies have determined to
provide specific exclusions for entities that they believe fall within
the rule of construction contained in section 13(g)(2) of the BHC Act,
which expressly relates to the sale and securitization of loans,\2052\
do not function as investment funds, consistent with the intent of
section 13's restrictions, or in response to other unique
considerations. The Agencies do not believe that these considerations
support a separate exclusion for tender option bond vehicles, which
have municipal securities as underlying assets and not loans.
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    \2051\ The Agencies received a variety of requests requesting
specific treatment of tender option bond transactions. See, e.g.,
supra notes 2045-2050. As discussed above, the Agencies believe
that, in light of the comments received, tender option bond vehicles
do not fall within the rule of construction contained in section
13(g)(2) of the BHC Act and, as a result, the final rule does not
provide such treatment.
    \2052\ See 12 U.S.C. 1851(g)(2).
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    The Agencies recognize commenters' concerns about the treatment of
tender option bonds under the final rule, as discussed above. However,
as there is no corresponding rule of construction in section 13 of the
BHC Act for financial instruments other than loans, the Agencies do not
believe that the resecuritization of municipal debt instruments should
be treated differently than the resecuritization of other debt
instruments.\2053\ Notwithstanding the statutory treatment of municipal
securities for purposes of the proprietary trading restrictions, the
Agencies also do not believe that tender option bond vehicles fall
within the rule

of construction contained in section 13(g)(2) of the BHC Act, because,
in light of commenters' descriptions of these vehicles, tender option
bond vehicles are more in the nature of other types of bond repackaging
securitizations and other non-excluded securitization vehicles.\2054\
The final rule, however, does not prevent a banking entity from owning
or otherwise participating in a tender option bond vehicle; it requires
that these activities be conducted in the same manner as with other
covered funds.
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    \2053\ For these same reasons, and based on the definitions of
sponsor and banking entity in section 13, the Agencies have not
modified those definitions in the final rule to exclude sponsors of
tender options bonds and tender bond issuers, respectively, as some
commenters requested. See supra notes 2046 and 2048 and accompanying
text.
    \2054\ Commenters also argued that to the extent tender option
bond programs are not excluded from the definition of covered fund,
the definition of ownership interest should exclude any interest in
a tender option bond program (See RBC) or that where a third party