iv. Applicability: All trading desks that rely on Sec.  351.4(a)
or Sec.  351.4(b) to conduct underwriting activity or market-making-
related activity, respectively.

Appendix B to Part 351 [Removed]

0
44. Appendix B to part 351 is removed.

0
45. Effective January 1, 2020 until December 31, 2020, appendix Z to
part 351 is added to read as follows:

Appendix Z to Part 351--Proprietary Trading and Certain Interests in
and Relationships With Covered Funds (Alternative Compliance)

    Note:  The content of this appendix reproduces the regulation
implementing Section 13 of the Bank Holding Company Act as of
November 13, 2019.

Subpart A--Authority and Definitions

Sec.  351.1   Authority, purpose, scope, and relationship to other
authorities.

    (a) Authority. This part is issued by the FDIC under section 13 of
the Bank Holding Company Act of 1956, as amended (12 U.S.C. 1851).
    (b) Purpose. Section 13 of the Bank Holding Company Act establishes
prohibitions and restrictions on proprietary trading and investments in
or relationships with covered funds by certain banking entities,
including any insured depository institution as defined in section
3(c)(2) of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)(2)) and
certain subsidiaries thereof for which the FDIC is the appropriate
Federal banking agency as defined in section 3(q) of the Federal
Deposit Insurance Act (12 U.S.C. 1813(q)). This part implements section
13 of the Bank Holding Company Act by defining terms used in the
statute and related terms, establishing prohibitions and restrictions
on proprietary trading and investments in or relationships with covered
funds, and explaining the statute's requirements.
    (c) Scope. This part implements section 13 of the Bank Holding
Company Act with respect to insured depository institutions for which
the FDIC is the appropriate Federal banking agency, as defined in
section 3(q) of the Federal Deposit Insurance Act, and certain
subsidiaries of the foregoing, but does not include such entities to
the extent they are not within the definition of banking entity in
Sec.  351.2(c).
    (d) Relationship to other authorities. Except as otherwise provided
in under section 13 of the Bank Holding Company Act, and
notwithstanding any other provision of law, the prohibitions and
restrictions under section 13 of Bank Holding Company Act shall apply
to the activities and investments of a banking entity, even if such
activities and investments are authorized for a banking entity under
other applicable provisions of law.
    (e) Preservation of authority. Nothing in this part limits in any
way the authority of the FDIC to impose on a banking entity identified
in paragraph (c) of this section additional requirements or
restrictions with respect to any activity, investment, or relationship
covered under section 13 of the Bank Holding Company Act or this part,
or additional penalties for violation of this part provided under any
other applicable provision of law.

Sec.  351.2   Definitions.

    Unless otherwise specified, for purposes of this part:

    (a) Affiliate has the same meaning as in section 2(k) of the Bank
Holding Company Act of 1956 (12 U.S.C. 1841(k)).
    (b) Bank holding company has the same meaning as in section 2 of
the Bank Holding Company Act of 1956 (12 U.S.C. 1841).
    (c) Banking entity. (1) Except as provided in paragraph (c)(2) of
this section, banking entity means:
    (i) Any insured depository institution;
    (ii) Any company that controls an insured depository institution;
    (iii) Any company that is treated as a bank holding company for
purposes of section 8 of the International Banking Act of 1978 (12
U.S.C. 3106); and
    (iv) Any affiliate or subsidiary of any entity described in
paragraphs (c)(1)(i), (ii), or (iii) of this section.
    (2) Banking entity does not include:
    (i) A covered fund that is not itself a banking entity under
paragraphs (c)(1)(i), (ii), or (iii) of this section;
    (ii) A portfolio company held under the authority contained in
section 4(k)(4)(H) or (I) of the BHC Act (12 U.S.C. 1843(k)(4)(H),
(I)), or any portfolio concern, as defined under 13 CFR 107.50, that is
controlled by a small business investment company, as defined in
section 103(3) of the Small Business Investment Act of 1958 (15 U.S.C.
662), so long as the portfolio company or portfolio concern is not
itself a banking entity under paragraphs (c)(1)(i), (ii), or (iii) of
this section; or
    (iii) The FDIC acting in its corporate capacity or as conservator
or receiver under the Federal Deposit Insurance Act or Title II of the
Dodd-Frank Wall Street Reform and Consumer Protection Act.
    (d) Board means the Board of Governors of the Federal Reserve
System.
    (e) CFTC means the Commodity Futures Trading Commission.
    (f) Dealer has the same meaning as in section 3(a)(5) of the
Exchange Act (15 U.S.C. 78c(a)(5)).
    (g) Depository institution has the same meaning as in section 3(c)
of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)).
    (h) Derivative. (1) Except as provided in paragraph (h)(2) of this
section, derivative means:
    (i) Any swap, as that term is defined in section 1a(47) of the
Commodity Exchange Act (7 U.S.C. 1a(47)), or security-based swap, as
that term is defined in section 3(a)(68) of the Exchange Act (15 U.S.C.
78c(a)(68));
    (ii) Any purchase or sale of a commodity, that is not an excluded
commodity, for deferred shipment or delivery that is intended to be
physically settled;
    (iii) Any foreign exchange forward (as that term is defined in
section 1a(24) of the Commodity Exchange Act (7 U.S.C. 1a(24)) or
foreign exchange swap (as that term is defined in section 1a(25) of the
Commodity Exchange Act (7 U.S.C. 1a(25));
    (iv) Any agreement, contract, or transaction in foreign currency
described in section 2(c)(2)(C)(i) of the Commodity Exchange Act (7
U.S.C. 2(c)(2)(C)(i));
    (v) Any agreement, contract, or transaction in a commodity other
than foreign currency described in section 2(c)(2)(D)(i) of the
Commodity Exchange Act (7 U.S.C. 2(c)(2)(D)(i)); and
    (vi) Any transaction authorized under section 19 of the Commodity
Exchange Act (7 U.S.C. 23(a) or (b));
    (2) A derivative does not include:
    (i) Any consumer, commercial, or other agreement, contract, or
transaction that the CFTC and SEC have further defined by joint
regulation, interpretation, guidance, or other action as not within the
definition of swap, as that term is defined in section 1a(47) of the
Commodity Exchange Act (7 U.S.C. 1a(47)), or security-based swap, as
that term is defined in section 3(a)(68) of the Exchange Act (15 U.S.C.
78c(a)(68)); or
    (ii) Any identified banking product, as defined in section 402(b)
of the Legal Certainty for Bank Products Act of 2000 (7 U.S.C. 27(b)),
that is subject to section 403(a) of that Act (7 U.S.C. 27a(a)).
    (i) Employee includes a member of the immediate family of the
employee.
    (j) Exchange Act means the Securities Exchange Act of 1934 (15
U.S.C. 78a et seq.).
    (k) Excluded commodity has the same meaning as in section 1a(19) of
the Commodity Exchange Act (7 U.S.C. 1a(19)).
    (l) FDIC means the Federal Deposit Insurance Corporation.
    (m) Federal banking agencies means the Board, the Office of the
Comptroller of the Currency, and the FDIC.
    (n) Foreign banking organization has the same meaning as in section
211.21(o) of the Board's Regulation K (12 CFR 211.21(o)), but does not
include a foreign bank, as defined in section 1(b)(7) of the
International Banking Act of 1978 (12 U.S.C. 3101(7)), that is
organized under the laws of the Commonwealth of Puerto Rico, Guam,
American Samoa, the United States Virgin Islands, or the Commonwealth
of the Northern Mariana Islands.
    (o) Foreign insurance regulator means the insurance commissioner,
or a similar official or agency, of any country other than the United
States that is engaged in the supervision of insurance companies under
foreign insurance law.
    (p) General account means all of the assets of an insurance company
except those allocated to one or more separate accounts.
    (q) Insurance company means a company that is organized as an
insurance company, primarily and predominantly engaged in writing
insurance or reinsuring risks underwritten by insurance companies,
subject to supervision as such by a state insurance regulator or a
foreign insurance regulator, and not operated for the purpose of
evading the provisions of section 13 of the BHC Act (12 U.S.C. 1851).
    (r) Insured depository institution, unless otherwise indicated, has
the same meaning as in section 3(c) of the Federal Deposit Insurance
Act (12 U.S.C. 1813(c)), but does not include:
    (1) An insured depository institution that is described in section
2(c)(2)(D) of the Bank Holding Company Act of 1956 (12 U.S.C.
1841(c)(2)(D)); or
    (2) An insured depository institution if it has, and if every
company that controls it has, total consolidated assets of $10 billion
or less and total trading assets and trading liabilities, on a
consolidated basis, that are 5 percent or less of total consolidated
assets.
    (s) Loan means any loan, lease, extension of credit, or secured or
unsecured receivable that is not a security or derivative.
    (t) Primary financial regulatory agency has the same meaning as in
section 2(12) of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (12 U.S.C. 5301(12)).
    (u) Purchase includes any contract to buy, purchase, or otherwise
acquire. For security futures products, purchase includes any contract,
agreement, or transaction for future delivery. With respect to a
commodity future, purchase includes any contract, agreement, or
transaction for future delivery. With respect to a derivative, purchase
includes the execution, termination (prior to its scheduled maturity
date), assignment, exchange, or similar transfer or conveyance of, or
extinguishing of rights or obligations under, a derivative, as the
context may require.
    (v) Qualifying foreign banking organization means a foreign banking
organization that qualifies as such under section 211.23(a), (c) or (e)
of the Board's Regulation K (12 CFR 211.23(a), (c), or (e)).
    (w) SEC means the Securities and Exchange Commission.
    (x) Sale and sell each include any contract to sell or otherwise
dispose of. For security futures products, such terms include any
contract, agreement,

or transaction for future delivery. With respect to a commodity future,
such terms include any contract, agreement, or transaction for future
delivery. With respect to a derivative, such terms include the
execution, termination (prior to its scheduled maturity date),
assignment, exchange, or similar transfer or conveyance of, or
extinguishing of rights or obligations under, a derivative, as the
context may require.
    (y) Security has the meaning specified in section 3(a)(10) of the
Exchange Act (15 U.S.C. 78c(a)(10)).
    (z) Security-based swap dealer has the same meaning as in section
3(a)(71) of the Exchange Act (15 U.S.C. 78c(a)(71)).
    (aa) Security future has the meaning specified in section 3(a)(55)
of the Exchange Act (15 U.S.C. 78c(a)(55)).
    (bb) Separate account means an account established and maintained
by an insurance company in connection with one or more insurance
contracts to hold assets that are legally segregated from the insurance
company's other assets, under which income, gains, and losses, whether
or not realized, from assets allocated to such account, are, in
accordance with the applicable contract, credited to or charged against
such account without regard to other income, gains, or losses of the
insurance company.
    (cc) State means any State, the District of Columbia, the
Commonwealth of Puerto Rico, Guam, American Samoa, the United States
Virgin Islands, and the Commonwealth of the Northern Mariana Islands.
    (dd) Subsidiary has the same meaning as in section 2(d) of the Bank
Holding Company Act of 1956 (12 U.S.C. 1841(d)).
    (ee) State insurance regulator means the insurance commissioner, or
a similar official or agency, of a State that is engaged in the
supervision of insurance companies under State insurance law.
    (ff) Swap dealer has the same meaning as in section 1(a)(49) of the
Commodity Exchange Act (7 U.S.C. 1a(49)).

Subpart B--Proprietary Trading

Sec.  351.3   Prohibition on proprietary trading.

    (a) Prohibition. Except as otherwise provided in this subpart, a
banking entity may not engage in proprietary trading. Proprietary
trading means engaging as principal for the trading account of the
banking entity in any purchase or sale of one or more financial
instruments.
    (b) Definition of trading account. (1) Trading account means any
account that is used by a banking entity to:
    (i) Purchase or sell one or more financial instruments principally
for the purpose of:
    (A) Short-term resale;
    (B) Benefitting from actual or expected short-term price movements;
    (C) Realizing short-term arbitrage profits; or
    (D) Hedging one or more positions resulting from the purchases or
sales of financial instruments described in paragraphs (b)(1)(i)(A),
(B), or (C) of this section;
    (ii) Purchase or sell one or more financial instruments that are
both market risk capital rule covered positions and trading positions
(or hedges of other market risk capital rule covered positions), if the
banking entity, or any affiliate of the banking entity, is an insured
depository institution, bank holding company, or savings and loan
holding company, and calculates risk-based capital ratios under the
market risk capital rule; or
    (iii) Purchase or sell one or more financial instruments for any
purpose, if the banking entity:
    (A) Is licensed or registered, or is required to be licensed or
registered, to engage in the business of a dealer, swap dealer, or
security-based swap dealer, to the extent the instrument is purchased
or sold in connection with the activities that require the banking
entity to be licensed or registered as such; or
    (B) Is engaged in the business of a dealer, swap dealer, or
security-based swap dealer outside of the United States, to the extent
the instrument is purchased or sold in connection with the activities
of such business.
    (2) Rebuttable presumption for certain purchases and sales. The
purchase (or sale) of a financial instrument by a banking entity shall
be presumed to be for the trading account of the banking entity under
paragraph (b)(1)(i) of this section if the banking entity holds the
financial instrument for fewer than sixty days or substantially
transfers the risk of the financial instrument within sixty days of the
purchase (or sale), unless the banking entity can demonstrate, based on
all relevant facts and circumstances, that the banking entity did not
purchase (or sell) the financial instrument principally for any of the
purposes described in paragraph (b)(1)(i) of this section.
    (c) Financial instrument. (1) Financial instrument means:
    (i) A security, including an option on a security;
    (ii) A derivative, including an option on a derivative; or
    (iii) A contract of sale of a commodity for future delivery, or
option on a contract of sale of a commodity for future delivery.
    (2) A financial instrument does not include:
    (i) A loan;
    (ii) A commodity that is not:
    (A) An excluded commodity (other than foreign exchange or
currency);
    (B) A derivative;
    (C) A contract of sale of a commodity for future delivery; or
    (D) An option on a contract of sale of a commodity for future
delivery; or
    (iii) Foreign exchange or currency.
    (d) Proprietary trading. Proprietary trading does not include:
    (1) Any purchase or sale of one or more financial instruments by a
banking entity that arises under a repurchase or reverse repurchase
agreement pursuant to which the banking entity has simultaneously
agreed, in writing, to both purchase and sell a stated asset, at stated
prices, and on stated dates or on demand with the same counterparty;
    (2) Any purchase or sale of one or more financial instruments by a
banking entity that arises under a transaction in which the banking
entity lends or borrows a security temporarily to or from another party
pursuant to a written securities lending agreement under which the
lender retains the economic interests of an owner of such security, and
has the right to terminate the transaction and to recall the loaned
security on terms agreed by the parties;
    (3) Any purchase or sale of a security by a banking entity for the
purpose of liquidity management in accordance with a documented
liquidity management plan of the banking entity that:
    (i) Specifically contemplates and authorizes the particular
securities to be used for liquidity management purposes, the amount,
types, and risks of these securities that are consistent with liquidity
management, and the liquidity circumstances in which the particular
securities may or must be used;
    (ii) Requires that any purchase or sale of securities contemplated
and authorized by the plan be principally for the purpose of managing
the liquidity of the banking entity, and not for the purpose of short-
term resale, benefitting from actual or expected short-term price
movements, realizing short-term arbitrage profits, or hedging a
position taken for such short-term purposes;
    (iii) Requires that any securities purchased or sold for liquidity
management purposes be highly liquid and limited to securities the
market, credit, and other risks of which the banking entity does not
reasonably expect to give rise to appreciable profits

or losses as a result of short-term price movements;
    (iv) Limits any securities purchased or sold for liquidity
management purposes, together with any other instruments purchased or
sold for such purposes, to an amount that is consistent with the
banking entity's near-term funding needs, including deviations from
normal operations of the banking entity or any affiliate thereof, as
estimated and documented pursuant to methods specified in the plan;
    (v) Includes written policies and procedures, internal controls,
analysis, and independent testing to ensure that the purchase and sale
of securities that are not permitted under Sec. Sec.  351.6(a) or (b)
of this subpart are for the purpose of liquidity management and in
accordance with the liquidity management plan described in paragraph
(d)(3) of this section; and
    (vi) Is consistent with the FDIC's supervisory requirements,
guidance, and expectations regarding liquidity management;
    (4) Any purchase or sale of one or more financial instruments by a
banking entity that is a derivatives clearing organization or a
clearing agency in connection with clearing financial instruments;
    (5) Any excluded clearing activities by a banking entity that is a
member of a clearing agency, a member of a derivatives clearing
organization, or a member of a designated financial market utility;
    (6) Any purchase or sale of one or more financial instruments by a
banking entity, so long as:
    (i) The purchase (or sale) satisfies an existing delivery
obligation of the banking entity or its customers, including to prevent
or close out a failure to deliver, in connection with delivery,
clearing, or settlement activity; or
    (ii) The purchase (or sale) satisfies an obligation of the banking
entity in connection with a judicial, administrative, self-regulatory
organization, or arbitration proceeding;
    (7) Any purchase or sale of one or more financial instruments by a
banking entity that is acting solely as agent, broker, or custodian;
    (8) Any purchase or sale of one or more financial instruments by a
banking entity through a deferred compensation, stock-bonus, profit-
sharing, or pension plan of the banking entity that is established and
administered in accordance with the law of the United States or a
foreign sovereign, if the purchase or sale is made directly or
indirectly by the banking entity as trustee for the benefit of persons
who are or were employees of the banking entity; or
    (9) Any purchase or sale of one or more financial instruments by a
banking entity in the ordinary course of collecting a debt previously
contracted in good faith, provided that the banking entity divests the
financial instrument as soon as practicable, and in no event may the
banking entity retain such instrument for longer than such period
permitted by the FDIC.
    (e) Definition of other terms related to proprietary trading. For
purposes of this subpart:
    (1) Anonymous means that each party to a purchase or sale is
unaware of the identity of the other party(ies) to the purchase or
sale.
    (2) Clearing agency has the same meaning as in section 3(a)(23) of
the Exchange Act (15 U.S.C. 78c(a)(23)).
    (3) Commodity has the same meaning as in section 1a(9) of the
Commodity Exchange Act (7 U.S.C. 1a(9)), except that a commodity does
not include any security;
    (4) Contract of sale of a commodity for future delivery means a
contract of sale (as that term is defined in section 1a(13) of the
Commodity Exchange Act (7 U.S.C. 1a(13)) for future delivery (as that
term is defined in section 1a(27) of the Commodity Exchange Act (7
U.S.C. 1a(27))).
    (5) Derivatives clearing organization means:
    (i) A derivatives clearing organization registered under section 5b
of the Commodity Exchange Act (7 U.S.C. 7a-1);
    (ii) A derivatives clearing organization that, pursuant to CFTC
regulation, is exempt from the registration requirements under section
5b of the Commodity Exchange Act (7 U.S.C. 7a-1); or
    (iii) A foreign derivatives clearing organization that, pursuant to
CFTC regulation, is permitted to clear for a foreign board of trade
that is registered with the CFTC.
    (6) Exchange, unless the context otherwise requires, means any
designated contract market, swap execution facility, or foreign board
of trade registered with the CFTC, or, for purposes of securities or
security-based swaps, an exchange, as defined under section 3(a)(1) of
the Exchange Act (15 U.S.C. 78c(a)(1)), or security-based swap
execution facility, as defined under section 3(a)(77) of the Exchange
Act (15 U.S.C. 78c(a)(77)).
    (7) Excluded clearing activities means:
    (i) With respect to customer transactions cleared on a derivatives
clearing organization, a clearing agency, or a designated financial
market utility, any purchase or sale necessary to correct trading
errors made by or on behalf of a customer provided that such purchase
or sale is conducted in accordance with, for transactions cleared on a
derivatives clearing organization, the Commodity Exchange Act, CFTC
regulations, and the rules or procedures of the derivatives clearing
organization, or, for transactions cleared on a clearing agency, the
rules or procedures of the clearing agency, or, for transactions
cleared on a designated financial market utility that is neither a
derivatives clearing organization nor a clearing agency, the rules or
procedures of the designated financial market utility;
    (ii) Any purchase or sale in connection with and related to the
management of a default or threatened imminent default of a customer
provided that such purchase or sale is conducted in accordance with,
for transactions cleared on a derivatives clearing organization, the
Commodity Exchange Act, CFTC regulations, and the rules or procedures
of the derivatives clearing organization, or, for transactions cleared
on a clearing agency, the rules or procedures of the clearing agency,
or, for transactions cleared on a designated financial market utility
that is neither a derivatives clearing organization nor a clearing
agency, the rules or procedures of the designated financial market
utility;
    (iii) Any purchase or sale in connection with and related to the
management of a default or threatened imminent default of a member of a
clearing agency, a member of a derivatives clearing organization, or a
member of a designated financial market utility;
    (iv) Any purchase or sale in connection with and related to the
management of the default or threatened default of a clearing agency, a
derivatives clearing organization, or a designated financial market
utility; and
    (v) Any purchase or sale that is required by the rules or
procedures of a clearing agency, a derivatives clearing organization,
or a designated financial market utility to mitigate the risk to the
clearing agency, derivatives clearing organization, or designated
financial market utility that would result from the clearing by a
member of security-based swaps that reference the member or an
affiliate of the member.
    (8) Designated financial market utility has the same meaning as in
section 803(4) of the Dodd-Frank Act (12 U.S.C. 5462(4)).
    (9) Issuer has the same meaning as in section 2(a)(4) of the
Securities Act of 1933 (15 U.S.C. 77b(a)(4)).

    (10) Market risk capital rule covered position and trading position
means a financial instrument that is both a covered position and a
trading position, as those terms are respectively defined:
    (i) In the case of a banking entity that is a bank holding company,
savings and loan holding company, or insured depository institution,
under the market risk capital rule that is applicable to the banking
entity; and
    (ii) In the case of a banking entity that is affiliated with a bank
holding company or savings and loan holding company, other than a
banking entity to which a market risk capital rule is applicable, under
the market risk capital rule that is applicable to the affiliated bank
holding company or savings and loan holding company.
    (11) Market risk capital rule means the market risk capital rule
that is contained in subpart F of 12 CFR part 3, 12 CFR parts 208 and
225, or 12 CFR part 324, as applicable.
    (12) Municipal security means a security that is a direct
obligation of or issued by, or an obligation guaranteed as to principal
or interest by, a State or any political subdivision thereof, or any
agency or instrumentality of a State or any political subdivision
thereof, or any municipal corporate instrumentality of one or more
States or political subdivisions thereof.
    (13) Trading desk means the smallest discrete unit of organization
of a banking entity that purchases or sells financial instruments for
the trading account of the banking entity or an affiliate thereof.

Sec.  351.4   Permitted underwriting and market making-related
activities.

    (a) Underwriting activities--(1) Permitted underwriting activities.
The prohibition contained in Sec.  351.3(a) does not apply to a banking
entity's underwriting activities conducted in accordance with this
paragraph (a).
    (2) Requirements. The underwriting activities of a banking entity
are permitted under paragraph (a)(1) of this section only if:
    (i) The banking entity is acting as an underwriter for a
distribution of securities and the trading desk's underwriting position
is related to such distribution;
    (ii) The amount and type of the securities in the trading desk's
underwriting position are designed not to exceed the reasonably
expected near term demands of clients, customers, or counterparties,
and reasonable efforts are made to sell or otherwise reduce the
underwriting position within a reasonable period, taking into account
the liquidity, maturity, and depth of the market for the relevant type
of security;
    (iii) The banking entity has established and implements, maintains,
and enforces an internal compliance program required by subpart D of
this part that is reasonably designed to ensure the banking entity's
compliance with the requirements of paragraph (a) of this section,
including reasonably designed written policies and procedures, internal
controls, analysis and independent testing identifying and addressing:
    (A) The products, instruments or exposures each trading desk may
purchase, sell, or manage as part of its underwriting activities;
    (B) Limits for each trading desk, based on the nature and amount of
the trading desk's underwriting activities, including the reasonably
expected near term demands of clients, customers, or counterparties, on
the:
    (1) Amount, types, and risk of its underwriting position;
    (2) Level of exposures to relevant risk factors arising from its
underwriting position; and
    (3) Period of time a security may be held;
    (C) Internal controls and ongoing monitoring and analysis of each
trading desk's compliance with its limits; and
    (D) Authorization procedures, including escalation procedures that
require review and approval of any trade that would exceed a trading
desk's limit(s), demonstrable analysis of the basis for any temporary
or permanent increase to a trading desk's limit(s), and independent
review of such demonstrable analysis and approval;
    (iv) The compensation arrangements of persons performing the
activities described in this paragraph (a) are designed not to reward
or incentivize prohibited proprietary trading; and
    (v) The banking entity is licensed or registered to engage in the
activity described in this paragraph (a) in accordance with applicable
law.
    (3) Definition of distribution. For purposes of this paragraph (a),
a distribution of securities means:
    (i) An offering of securities, whether or not subject to
registration under the Securities Act of 1933, that is distinguished
from ordinary trading transactions by the presence of special selling
efforts and selling methods; or
    (ii) An offering of securities made pursuant to an effective
registration statement under the Securities Act of 1933.
    (4) Definition of underwriter. For purposes of this paragraph (a),
underwriter means:
    (i) A person who has agreed with an issuer or selling security
holder to:
    (A) Purchase securities from the issuer or selling security holder
for distribution;
    (B) Engage in a distribution of securities for or on behalf of the
issuer or selling security holder; or
    (C) Manage a distribution of securities for or on behalf of the
issuer or selling security holder; or
    (ii) A person who has agreed to participate or is participating in
a distribution of such securities for or on behalf of the issuer or
selling security holder.
    (5) Definition of selling security holder. For purposes of this
paragraph (a), selling security holder means any person, other than an
issuer, on whose behalf a distribution is made.
    (6) Definition of underwriting position. For purposes of this
paragraph (a), underwriting position means the long or short positions
in one or more securities held by a banking entity or its affiliate,
and managed by a particular trading desk, in connection with a
particular distribution of securities for which such banking entity or
affiliate is acting as an underwriter.
    (7) Definition of client, customer, and counterparty. For purposes
of this paragraph (a), the terms client, customer, and counterparty, on
a collective or individual basis, refer to market participants that may
transact with the banking entity in connection with a particular
distribution for which the banking entity is acting as underwriter.
    (b) Market making-related activities--(1) Permitted market making-
related activities. The prohibition contained in Sec.  351.3(a) does
not apply to a banking entity's market making-related activities
conducted in accordance with this paragraph (b).
    (2) Requirements. The market making-related activities of a banking
entity are permitted under paragraph (b)(1) of this section only if:
    (i) The trading desk that establishes and manages the financial
exposure routinely stands ready to purchase and sell one or more types
of financial instruments related to its financial exposure and is
willing and available to quote, purchase and sell, or otherwise enter
into long and short positions in those types of financial instruments
for its own account, in commercially reasonable amounts and throughout
market cycles on a basis appropriate for the liquidity, maturity, and
depth of the market for the relevant types of financial instruments;
    (ii) The amount, types, and risks of the financial instruments in
the trading

desk's market-maker inventory are designed not to exceed, on an ongoing
basis, the reasonably expected near term demands of clients, customers,
or counterparties, based on:
    (A) The liquidity, maturity, and depth of the market for the
relevant types of financial instrument(s); and
    (B) Demonstrable analysis of historical customer demand, current
inventory of financial instruments, and market and other factors
regarding the amount, types, and risks, of or associated with financial
instruments in which the trading desk makes a market, including through
block trades;
    (iii) The banking entity has established and implements, maintains,
and enforces an internal compliance program required by subpart D of
this part that is reasonably designed to ensure the banking entity's
compliance with the requirements of paragraph (b) of this section,
including reasonably designed written policies and procedures, internal
controls, analysis and independent testing identifying and addressing:
    (A) The financial instruments each trading desk stands ready to
purchase and sell in accordance with paragraph (b)(2)(i) of this
section;
    (B) The actions the trading desk will take to demonstrably reduce
or otherwise significantly mitigate promptly the risks of its financial
exposure consistent with the limits required under paragraph
(b)(2)(iii)(C) of this section; the products, instruments, and
exposures each trading desk may use for risk management purposes; the
techniques and strategies each trading desk may use to manage the risks
of its market making-related activities and inventory; and the process,
strategies, and personnel responsible for ensuring that the actions
taken by the trading desk to mitigate these risks are and continue to
be effective;
    (C) Limits for each trading desk, based on the nature and amount of
the trading desk's market making-related activities, that address the
factors prescribed by paragraph (b)(2)(ii) of this section, on:
    (1) The amount, types, and risks of its market-maker inventory;
    (2) The amount, types, and risks of the products, instruments, and
exposures the trading desk may use for risk management purposes;
    (3) The level of exposures to relevant risk factors arising from
its financial exposure; and
    (4) The period of time a financial instrument may be held;
    (D) Internal controls and ongoing monitoring and analysis of each
trading desk's compliance with its limits; and
    (E) Authorization procedures, including escalation procedures that
require review and approval of any trade that would exceed a trading
desk's limit(s), demonstrable analysis that the basis for any temporary
or permanent increase to a trading desk's limit(s) is consistent with
the requirements of this paragraph (b), and independent review of such
demonstrable analysis and approval;
    (iv) To the extent that any limit identified pursuant to paragraph
(b)(2)(iii)(C) of this section is exceeded, the trading desk takes
action to bring the trading desk into compliance with the limits as
promptly as possible after the limit is exceeded;
    (v) The compensation arrangements of persons performing the
activities described in this paragraph (b) are designed not to reward
or incentivize prohibited proprietary trading; and
    (vi) The banking entity is licensed or registered to engage in
activity described in this paragraph (b) in accordance with applicable
law.
    (3) Definition of client, customer, and counterparty. For purposes
of paragraph (b) of this section, the terms client, customer, and
counterparty, on a collective or individual basis refer to market
participants that make use of the banking entity's market making-
related services by obtaining such services, responding to quotations,
or entering into a continuing relationship with respect to such
services, provided that:
    (i) A trading desk or other organizational unit of another banking
entity is not a client, customer, or counterparty of the trading desk
if that other entity has trading assets and liabilities of $50 billion
or more as measured in accordance with Sec.  351.20(d)(1) of subpart D,
unless:
    (A) The trading desk documents how and why a particular trading
desk or other organizational unit of the entity should be treated as a
client, customer, or counterparty of the trading desk for purposes of
paragraph (b)(2) of this section; or
    (B) The purchase or sale by the trading desk is conducted
anonymously on an exchange or similar trading facility that permits
trading on behalf of a broad range of market participants.
    (4) Definition of financial exposure. For purposes of this
paragraph (b), financial exposure means the aggregate risks of one or
more financial instruments and any associated loans, commodities, or
foreign exchange or currency, held by a banking entity or its affiliate
and managed by a particular trading desk as part of the trading desk's
market making-related activities.
    (5) Definition of market-maker inventory. For the purposes of this
paragraph (b), market-maker inventory means all of the positions in the
financial instruments for which the trading desk stands ready to make a
market in accordance with paragraph (b)(2)(i) of this section, that are
managed by the trading desk, including the trading desk's open
positions or exposures arising from open transactions.

Sec.  351.5   Permitted risk-mitigating hedging activities.

    (a) Permitted risk-mitigating hedging activities. The prohibition
contained in Sec.  351.3(a) does not apply to the risk-mitigating
hedging activities of a banking entity in connection with and related
to individual or aggregated positions, contracts, or other holdings of
the banking entity and designed to reduce the specific risks to the
banking entity in connection with and related to such positions,
contracts, or other holdings.
    (b) Requirements. The risk-mitigating hedging activities of a
banking entity are permitted under paragraph (a) of this section only
if:
    (1) The banking entity has established and implements, maintains
and enforces an internal compliance program required by subpart D of
this part that is reasonably designed to ensure the banking entity's
compliance with the requirements of this section, including:
    (i) Reasonably designed written policies and procedures regarding
the positions, techniques and strategies that may be used for hedging,
including documentation indicating what positions, contracts or other
holdings a particular trading desk may use in its risk-mitigating
hedging activities, as well as position and aging limits with respect
to such positions, contracts or other holdings;
    (ii) Internal controls and ongoing monitoring, management, and
authorization procedures, including relevant escalation procedures; and
    (iii) The conduct of analysis, including correlation analysis, and
independent testing designed to ensure that the positions, techniques
and strategies that may be used for hedging may reasonably be expected
to demonstrably reduce or otherwise significantly mitigate the
specific, identifiable risk(s) being hedged, and such correlation
analysis demonstrates that the hedging activity demonstrably reduces or
otherwise significantly mitigates the specific, identifiable risk(s)
being hedged;
    (2) The risk-mitigating hedging activity:

    (i) Is conducted in accordance with the written policies,
procedures, and internal controls required under this section;
    (ii) At the inception of the hedging activity, including, without
limitation, any adjustments to the hedging activity, is designed to
reduce or otherwise significantly mitigate and demonstrably reduces or
otherwise significantly mitigates one or more specific, identifiable
risks, including market risk, counterparty or other credit risk,
currency or foreign exchange risk, interest rate risk, commodity price
risk, basis risk, or similar risks, arising in connection with and
related to identified positions, contracts, or other holdings of the
banking entity, based upon the facts and circumstances of the
identified underlying and hedging positions, contracts or other
holdings and the risks and liquidity thereof;
    (iii) Does not give rise, at the inception of the hedge, to any
significant new or additional risk that is not itself hedged
contemporaneously in accordance with this section;
    (iv) Is subject to continuing review, monitoring and management by
the banking entity that:
    (A) Is consistent with the written hedging policies and procedures
required under paragraph (b)(1) of this section;
    (B) Is designed to reduce or otherwise significantly mitigate and
demonstrably reduces or otherwise significantly mitigates the specific,
identifiable risks that develop over time from the risk-mitigating
hedging activities undertaken under this section and the underlying
positions, contracts, and other holdings of the banking entity, based
upon the facts and circumstances of the underlying and hedging
positions, contracts and other holdings of the banking entity and the
risks and liquidity thereof; and
    (C) Requires ongoing recalibration of the hedging activity by the
banking entity to ensure that the hedging activity satisfies the
requirements set out in paragraph (b)(2) of this section and is not
prohibited proprietary trading; and
    (3) The compensation arrangements of persons performing risk-
mitigating hedging activities are designed not to reward or incentivize
prohibited proprietary trading.
    (c) Documentation requirement--(1) A banking entity must comply
with the requirements of paragraphs (c)(2) and (3) of this section with
respect to any purchase or sale of financial instruments made in
reliance on this section for risk-mitigating hedging purposes that is:
    (i) Not established by the specific trading desk establishing or
responsible for the underlying positions, contracts, or other holdings
the risks of which the hedging activity is designed to reduce;
    (ii) Established by the specific trading desk establishing or
responsible for the underlying positions, contracts, or other holdings
the risks of which the purchases or sales are designed to reduce, but
that is effected through a financial instrument, exposure, technique,
or strategy that is not specifically identified in the trading desk's
written policies and procedures established under paragraph (b)(1) of
this section or under Sec.  351.4(b)(2)(iii)(B) of this subpart as a
product, instrument, exposure, technique, or strategy such trading desk
may use for hedging; or
    (iii) Established to hedge aggregated positions across two or more
trading desks.
    (2) In connection with any purchase or sale identified in paragraph
(c)(1) of this section, a banking entity must, at a minimum, and
contemporaneously with the purchase or sale, document:
    (i) The specific, identifiable risk(s) of the identified positions,
contracts, or other holdings of the banking entity that the purchase or
sale is designed to reduce;
    (ii) The specific risk-mitigating strategy that the purchase or
sale is designed to fulfill; and
    (iii) The trading desk or other business unit that is establishing
and responsible for the hedge.
    (3) A banking entity must create and retain records sufficient to
demonstrate compliance with the requirements of this paragraph (c) for
a period that is no less than five years in a form that allows the
banking entity to promptly produce such records to the FDIC on request,
or such longer period as required under other law or this part.

Sec.  351.6   Other permitted proprietary trading activities.

    (a) Permitted trading in domestic government obligations. The
prohibition contained in Sec.  351.3(a) does not apply to the purchase
or sale by a banking entity of a financial instrument that is:
    (1) An obligation of, or issued or guaranteed by, the United
States;
    (2) An obligation, participation, or other instrument of, or issued
or guaranteed by, an agency of the United States, the Government
National Mortgage Association, the Federal National Mortgage
Association, the Federal Home Loan Mortgage Corporation, a Federal Home
Loan Bank, the Federal Agricultural Mortgage Corporation or a Farm
Credit System institution chartered under and subject to the provisions
of the Farm Credit Act of 1971 (12 U.S.C. 2001 et seq.);
    (3) An obligation of any State or any political subdivision
thereof, including any municipal security; or
    (4) An obligation of the FDIC, or any entity formed by or on behalf
of the FDIC for purpose of facilitating the disposal of assets acquired
or held by the FDIC in its corporate capacity or as conservator or
receiver under the Federal Deposit Insurance Act or Title II of the
Dodd-Frank Wall Street Reform and Consumer Protection Act.
    (b) Permitted trading in foreign government obligations--(1)
Affiliates of foreign banking entities in the United States. The
prohibition contained in Sec.  351.3(a) does not apply to the purchase
or sale of a financial instrument that is an obligation of, or issued
or guaranteed by, a foreign sovereign (including any multinational
central bank of which the foreign sovereign is a member), or any agency
or political subdivision of such foreign sovereign, by a banking
entity, so long as:
    (i) The banking entity is organized under or is directly or
indirectly controlled by a banking entity that is organized under the
laws of a foreign sovereign and is not directly or indirectly
controlled by a top-tier banking entity that is organized under the
laws of the United States;
    (ii) The financial instrument is an obligation of, or issued or
guaranteed by, the foreign sovereign under the laws of which the
foreign banking entity referred to in paragraph (b)(1)(i) of this
section is organized (including any multinational central bank of which
the foreign sovereign is a member), or any agency or political
subdivision of that foreign sovereign; and
    (iii) The purchase or sale as principal is not made by an insured
depository institution.
    (2) Foreign affiliates of a U.S. banking entity. The prohibition
contained in Sec.  351.3(a) does not apply to the purchase or sale of a
financial instrument that is an obligation of, or issued or guaranteed
by, a foreign sovereign (including any multinational central bank of
which the foreign sovereign is a member), or any agency or political
subdivision of that foreign sovereign, by a foreign entity that is
owned or controlled by a banking entity organized or established under
the laws of the United States or any State, so long as:
    (i) The foreign entity is a foreign bank, as defined in section
211.2(j) of the Board's Regulation K (12 CFR 211.2(j)), or is regulated
by the foreign sovereign as a securities dealer;

    (ii) The financial instrument is an obligation of, or issued or
guaranteed by, the foreign sovereign under the laws of which the
foreign entity is organized (including any multinational central bank
of which the foreign sovereign is a member), or any agency or political
subdivision of that foreign sovereign; and
    (iii) The financial instrument is owned by the foreign entity and
is not financed by an affiliate that is located in the United States or
organized under the laws of the United States or of any State.
    (c) Permitted trading on behalf of customers--(1) Fiduciary
transactions. The prohibition contained in Sec.  351.3(a) does not
apply to the purchase or sale of financial instruments by a banking
entity acting as trustee or in a similar fiduciary capacity, so long
as:
    (i) The transaction is conducted for the account of, or on behalf
of, a customer; and
    (ii) The banking entity does not have or retain beneficial
ownership of the financial instruments.
    (2) Riskless principal transactions. The prohibition contained in
Sec.  351.3(a) does not apply to the purchase or sale of financial
instruments by a banking entity acting as riskless principal in a
transaction in which the banking entity, after receiving an order to
purchase (or sell) a financial instrument from a customer, purchases
(or sells) the financial instrument for its own account to offset a
contemporaneous sale to (or purchase from) the customer.
    (d) Permitted trading by a regulated insurance company. The
prohibition contained in Sec.  351.3(a) does not apply to the purchase
or sale of financial instruments by a banking entity that is an
insurance company or an affiliate of an insurance company if:
    (1) The insurance company or its affiliate purchases or sells the
financial instruments solely for:
    (i) The general account of the insurance company; or
    (ii) A separate account established by the insurance company;
    (2) The purchase or sale is conducted in compliance with, and
subject to, the insurance company investment laws, regulations, and
written guidance of the State or jurisdiction in which such insurance
company is domiciled; and
    (3) The appropriate Federal banking agencies, after consultation
with the Financial Stability Oversight Council and the relevant
insurance commissioners of the States and foreign jurisdictions, as
appropriate, have not jointly determined, after notice and comment,
that a particular law, regulation, or written guidance described in
paragraph (d)(2) of this section is insufficient to protect the safety
and soundness of the covered banking entity, or the financial stability
of the United States.
    (e) Permitted trading activities of foreign banking entities. (1)
The prohibition contained in Sec.  351.3(a) does not apply to the
purchase or sale of financial instruments by a banking entity if:
    (i) The banking entity is not organized or directly or indirectly
controlled by a banking entity that is organized under the laws of the
United States or of any State;
    (ii) The purchase or sale by the banking entity is made pursuant to
paragraph (9) or (13) of section 4(c) of the BHC Act; and
    (iii) The purchase or sale meets the requirements of paragraph
(e)(3) of this section.
    (2) A purchase or sale of financial instruments by a banking entity
is made pursuant to paragraph (9) or (13) of section 4(c) of the BHC
Act for purposes of paragraph (e)(1)(ii) of this section only if:
    (i) The purchase or sale is conducted in accordance with the
requirements of paragraph (e) of this section; and
    (ii)(A) With respect to a banking entity that is a foreign banking
organization, the banking entity meets the qualifying foreign banking
organization requirements of section 211.23(a), (c) or (e) of the
Board's Regulation K (12 CFR 211.23(a), (c) or (e)), as applicable; or
    (B) With respect to a banking entity that is not a foreign banking
organization, the banking entity is not organized under the laws of the
United States or of any State and the banking entity, on a fully-
consolidated basis, meets at least two of the following requirements:
    (1) Total assets of the banking entity held outside of the United
States exceed total assets of the banking entity held in the United
States;
    (2) Total revenues derived from the business of the banking entity
outside of the United States exceed total revenues derived from the
business of the banking entity in the United States; or
    (3) Total net income derived from the business of the banking
entity outside of the United States exceeds total net income derived
from the business of the banking entity in the United States.
    (3) A purchase or sale by a banking entity is permitted for
purposes of this paragraph (e) if:
    (i) The banking entity engaging as principal in the purchase or
sale (including any personnel of the banking entity or its affiliate
that arrange, negotiate or execute such purchase or sale) is not
located in the United States or organized under the laws of the United
States or of any State;
    (ii) The banking entity (including relevant personnel) that makes
the decision to purchase or sell as principal is not located in the
United States or organized under the laws of the United States or of
any State;
    (iii) The purchase or sale, including any transaction arising from
risk-mitigating hedging related to the instruments purchased or sold,
is not accounted for as principal directly or on a consolidated basis
by any branch or affiliate that is located in the United States or
organized under the laws of the United States or of any State;
    (iv) No financing for the banking entity's purchases or sales is
provided, directly or indirectly, by any branch or affiliate that is
located in the United States or organized under the laws of the United
States or of any State; and
    (v) The purchase or sale is not conducted with or through any U.S.
entity, other than:
    (A) A purchase or sale with the foreign operations of a U.S. entity
if no personnel of such U.S. entity that are located in the United
States are involved in the arrangement, negotiation, or execution of
such purchase or sale;
    (B) A purchase or sale with an unaffiliated market intermediary
acting as principal, provided the purchase or sale is promptly cleared
and settled through a clearing agency or derivatives clearing
organization acting as a central counterparty; or
    (C) A purchase or sale through an unaffiliated market intermediary
acting as agent, provided the purchase or sale is conducted anonymously
on an exchange or similar trading facility and is promptly cleared and
settled through a clearing agency or derivatives clearing organization
acting as a central counterparty.
    (4) For purposes of this paragraph (e), a U.S. entity is any entity
that is, or is controlled by, or is acting on behalf of, or at the
direction of, any other entity that is, located in the United States or
organized under the laws of the United States or of any State.
    (5) For purposes of this paragraph (e), a U.S. branch, agency, or
subsidiary of a foreign banking entity is considered to be located in
the United States; however, the foreign bank that operates or controls
that branch, agency, or subsidiary is not considered to be located in
the United States solely by virtue of operating or controlling the U.S.
branch, agency, or subsidiary.
    (6) For purposes of this paragraph (e), unaffiliated market
intermediary means

an unaffiliated entity, acting as an intermediary, that is:
    (i) A broker or dealer registered with the SEC under section 15 of
the Exchange Act or exempt from registration or excluded from
regulation as such;
    (ii) A swap dealer registered with the CFTC under section 4s of the
Commodity Exchange Act or exempt from registration or excluded from
regulation as such;
    (iii) A security-based swap dealer registered with the SEC under
section 15F of the Exchange Act or exempt from registration or excluded
from regulation as such; or
    (iv) A futures commission merchant registered with the CFTC under
section 4f of the Commodity Exchange Act or exempt from registration or
excluded from regulation as such.

Sec.  351.7   Limitations on permitted proprietary trading activities.

    (a) No transaction, class of transactions, or activity may be
deemed permissible under Sec. Sec.  351.4 through 351.6 if the
transaction, class of transactions, or activity would:
    (1) Involve or result in a material conflict of interest between
the banking entity and its clients, customers, or counterparties;
    (2) Result, directly or indirectly, in a material exposure by the
banking entity to a high-risk asset or a high-risk trading strategy; or
    (3) Pose a threat to the safety and soundness of the banking entity
or to the financial stability of the United States.
    (b) Definition of material conflict of interest. (1) For purposes
of this section, a material conflict of interest between a banking
entity and its clients, customers, or counterparties exists if the
banking entity engages in any transaction, class of transactions, or
activity that would involve or result in the banking entity's interests
being materially adverse to the interests of its client, customer, or
counterparty with respect to such transaction, class of transactions,
or activity, and the banking entity has not taken at least one of the
actions in paragraph (b)(2) of this section.
    (2) Prior to effecting the specific transaction or class or type of
transactions, or engaging in the specific activity, the banking entity:
    (i) Timely and effective disclosure. (A) Has made clear, timely,
and effective disclosure of the conflict of interest, together with
other necessary information, in reasonable detail and in a manner
sufficient to permit a reasonable client, customer, or counterparty to
meaningfully understand the conflict of interest; and
    (B) Such disclosure is made in a manner that provides the client,
customer, or counterparty the opportunity to negate, or substantially
mitigate, any materially adverse effect on the client, customer, or
counterparty created by the conflict of interest; or
    (ii) Information barriers. Has established, maintained, and
enforced information barriers that are memorialized in written policies
and procedures, such as physical separation of personnel, or functions,
or limitations on types of activity, that are reasonably designed,
taking into consideration the nature of the banking entity's business,
to prevent the conflict of interest from involving or resulting in a
materially adverse effect on a client, customer, or counterparty. A
banking entity may not rely on such information barriers if, in the
case of any specific transaction, class or type of transactions or
activity, the banking entity knows or should reasonably know that,
notwithstanding the banking entity's establishment of information
barriers, the conflict of interest may involve or result in a
materially adverse effect on a client, customer, or counterparty.
    (c) Definition of high-risk asset and high-risk trading strategy.
For purposes of this section:
    (1) High-risk asset means an asset or group of related assets that
would, if held by a banking entity, significantly increase the
likelihood that the banking entity would incur a substantial financial
loss or would pose a threat to the financial stability of the United
States.
    (2) High-risk trading strategy means a trading strategy that would,
if engaged in by a banking entity, significantly increase the
likelihood that the banking entity would incur a substantial financial
loss or would pose a threat to the financial stability of the United
States.

Sec. Sec.  351.8-351.9   [Reserved]

Subpart C--Covered Funds Activities and Investments

Sec.  351.10   Prohibition on acquiring or retaining an ownership
interest in and having certain relationships with a covered fund.

    (a) Prohibition. (1) Except as otherwise provided in this subpart,
a banking entity may not, as principal, directly or indirectly, acquire
or retain any ownership interest in or sponsor a covered fund.
    (2) Paragraph (a)(1) of this section does not include acquiring or
retaining an ownership interest in a covered fund by a banking entity:
    (i) Acting solely as agent, broker, or custodian, so long as;
    (A) The activity is conducted for the account of, or on behalf of,
a customer; and
    (B) The banking entity and its affiliates do not have or retain
beneficial ownership of such ownership interest;
    (ii) Through a deferred compensation, stock-bonus, profit-sharing,
or pension plan of the banking entity (or an affiliate thereof) that is
established and administered in accordance with the law of the United
States or a foreign sovereign, if the ownership interest is held or
controlled directly or indirectly by the banking entity as trustee for
the benefit of persons who are or were employees of the banking entity
(or an affiliate thereof);
    (iii) In the ordinary course of collecting a debt previously
contracted in good faith, provided that the banking entity divests the
ownership interest as soon as practicable, and in no event may the
banking entity retain such ownership interest for longer than such
period permitted by the FDIC; or
    (iv) On behalf of customers as trustee or in a similar fiduciary
capacity for a customer that is not a covered fund, so long as:
    (A) The activity is conducted for the account of, or on behalf of,
the customer; and
    (B) The banking entity and its affiliates do not have or retain
beneficial ownership of such ownership interest.
    (b) Definition of covered fund. (1) Except as provided in paragraph
(c) of this section, covered fund means:
    (i) An issuer that would be an investment company, as defined in
the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.), but for
section 3(c)(1) or 3(c)(7) of that Act (15 U.S.C. 80a-3(c)(1) or (7));
    (ii) Any commodity pool under section 1a(10) of the Commodity
Exchange Act (7 U.S.C. 1a(10)) for which:
    (A) The commodity pool operator has claimed an exemption under 17
CFR 4.7; or
    (B)(1) A commodity pool operator is registered with the CFTC as a
commodity pool operator in connection with the operation of the
commodity pool;
    (2) Substantially all participation units of the commodity pool are
owned by qualified eligible persons under 17 CFR 4.7(a)(2) and (3); and
    (3) Participation units of the commodity pool have not been
publicly offered to persons who are not qualified

eligible persons under 17 CFR 4.7(a)(2) and (3); or
    (iii) For any banking entity that is, or is controlled directly or
indirectly by a banking entity that is, located in or organized under
the laws of the United States or of any State, an entity that:
    (A) Is organized or established outside the United States and the
ownership interests of which are offered and sold solely outside the
United States;
    (B) Is, or holds itself out as being, an entity or arrangement that
raises money from investors primarily for the purpose of investing in
securities for resale or other disposition or otherwise trading in
securities; and
    (C)(1) Has as its sponsor that banking entity (or an affiliate
thereof); or
    (2) Has issued an ownership interest that is owned directly or
indirectly by that banking entity (or an affiliate thereof).
    (2) An issuer shall not be deemed to be a covered fund under
paragraph (b)(1)(iii) of this section if, were the issuer subject to
U.S. securities laws, the issuer could rely on an exclusion or
exemption from the definition of ``investment company'' under the
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) other than the
exclusions contained in section 3(c)(1) and 3(c)(7) of that Act.
    (3) For purposes of paragraph (b)(1)(iii) of this section, a U.S.
branch, agency, or subsidiary of a foreign banking entity is located in
the United States; however, the foreign bank that operates or controls
that branch, agency, or subsidiary is not considered to be located in
the United States solely by virtue of operating or controlling the U.S.
branch, agency, or subsidiary.
    (c) Notwithstanding paragraph (b) of this section, unless the
appropriate Federal banking agencies, the SEC, and the CFTC jointly
determine otherwise, a covered fund does not include:
    (1) Foreign public funds. (i) Subject to paragraphs (ii) and (iii)
below, an issuer that:
    (A) Is organized or established outside of the United States;
    (B) Is authorized to offer and sell ownership interests to retail
investors in the issuer's home jurisdiction; and
    (C) Sells ownership interests predominantly through one or more
public offerings outside of the United States.
    (ii) With respect to a banking entity that is, or is controlled
directly or indirectly by a banking entity that is, located in or
organized under the laws of the United States or of any State and any
issuer for which such banking entity acts as sponsor, the sponsoring
banking entity may not rely on the exemption in paragraph (c)(1)(i) of
this section for such issuer unless ownership interests in the issuer
are sold predominantly to persons other than:
    (A) Such sponsoring banking entity;
    (B) Such issuer;
    (C) Affiliates of such sponsoring banking entity or such issuer;
and
    (D) Directors and employees of such entities.
    (iii) For purposes of paragraph (c)(1)(i)(C) of this section, the
term ``public offering'' means a distribution (as defined in Sec.
351.4(a)(3) of subpart B) of securities in any jurisdiction outside the
United States to investors, including retail investors, provided that:
    (A) The distribution complies with all applicable requirements in
the jurisdiction in which such distribution is being made;
    (B) The distribution does not restrict availability to investors
having a minimum level of net worth or net investment assets; and
    (C) The issuer has filed or submitted, with the appropriate
regulatory authority in such jurisdiction, offering disclosure
documents that are publicly available.
    (2) Wholly-owned subsidiaries. An entity, all of the outstanding
ownership interests of which are owned directly or indirectly by the
banking entity (or an affiliate thereof), except that:
    (i) Up to five percent of the entity's outstanding ownership
interests, less any amounts outstanding under paragraph (c)(2)(ii) of
this section, may be held by employees or directors of the banking
entity or such affiliate (including former employees or directors if
their ownership interest was acquired while employed by or in the
service of the banking entity); and
    (ii) Up to 0.5 percent of the entity's outstanding ownership
interests may be held by a third party if the ownership interest is
acquired or retained by the third party for the purpose of establishing
corporate separateness or addressing bankruptcy, insolvency, or similar
concerns.
    (3) Joint ventures. A joint venture between a banking entity or any
of its affiliates and one or more unaffiliated persons, provided that
the joint venture:
    (i) Is comprised of no more than 10 unaffiliated co-venturers;
    (ii) Is in the business of engaging in activities that are
permissible for the banking entity or affiliate, other than investing
in securities for resale or other disposition; and
    (iii) Is not, and does not hold itself out as being, an entity or
arrangement that raises money from investors primarily for the purpose
of investing in securities for resale or other disposition or otherwise
trading in securities.
    (4) Acquisition vehicles. An issuer:
    (i) Formed solely for the purpose of engaging in a bona fide merger
or acquisition transaction; and
    (ii) That exists only for such period as necessary to effectuate
the transaction.
    (5) Foreign pension or retirement funds. A plan, fund, or program
providing pension, retirement, or similar benefits that is:
    (i) Organized and administered outside the United States;
    (ii) A broad-based plan for employees or citizens that is subject
to regulation as a pension, retirement, or similar plan under the laws
of the jurisdiction in which the plan, fund, or program is organized
and administered; and
    (iii) Established for the benefit of citizens or residents of one
or more foreign sovereigns or any political subdivision thereof.
    (6) Insurance company separate accounts. A separate account,
provided that no banking entity other than the insurance company
participates in the account's profits and losses.
    (7) Bank owned life insurance. A separate account that is used
solely for the purpose of allowing one or more banking entities to
purchase a life insurance policy for which the banking entity or
entities is beneficiary, provided that no banking entity that purchases
the policy:
    (i) Controls the investment decisions regarding the underlying
assets or holdings of the separate account; or
    (ii) Participates in the profits and losses of the separate account
other than in compliance with applicable supervisory guidance regarding
bank owned life insurance.
    (8) Loan securitizations. (i) Scope. An issuing entity for asset-
backed securities that satisfies all the conditions of this paragraph
(c)(8) and the assets or holdings of which are comprised solely of:
    (A) Loans as defined in Sec.  351.2(s) of subpart A;
    (B) Rights or other assets designed to assure the servicing or
timely distribution of proceeds to holders of such securities and
rights or other assets that are related or incidental to purchasing or
otherwise acquiring and holding the loans, provided that each asset
meets the requirements of paragraph (c)(8)(iii) of this section;
    (C) Interest rate or foreign exchange derivatives that meet the
requirements of paragraph (c)(8)(iv) of this section; and
    (D) Special units of beneficial interest and collateral
certificates that meet the requirements of paragraph (c)(8)(v) of this
section.

    (ii) Impermissible assets. For purposes of this paragraph (c)(8),
the assets or holdings of the issuing entity shall not include any of
the following:
    (A) A security, including an asset-backed security, or an interest
in an equity or debt security other than as permitted in paragraph
(c)(8)(iii) of this section;
    (B) A derivative, other than a derivative that meets the
requirements of paragraph (c)(8)(iv) of this section; or
    (C) A commodity forward contract.
    (iii) Permitted securities. Notwithstanding paragraph (c)(8)(ii)(A)
of this section, the issuing entity may hold securities if those
securities are:
    (A) Cash equivalents for purposes of the rights and assets in
paragraph (c)(8)(i)(B) of this section; or
    (B) Securities received in lieu of debts previously contracted with
respect to the loans supporting the asset-backed securities.
    (iv) Derivatives. The holdings of derivatives by the issuing entity
shall be limited to interest rate or foreign exchange derivatives that
satisfy all of the following conditions:
    (A) The written terms of the derivative directly relate to the
loans, the asset-backed securities, or the contractual rights of other
assets described in paragraph (c)(8)(i)(B) of this section; and
    (B) The derivatives reduce the interest rate and/or foreign
exchange risks related to the loans, the asset-backed securities, or
the contractual rights or other assets described in paragraph
(c)(8)(i)(B) of this section.
    (v) Special units of beneficial interest and collateral
certificates. The assets or holdings of the issuing entity may include
collateral certificates and special units of beneficial interest issued
by a special purpose vehicle, provided that:
    (A) The special purpose vehicle that issues the special unit of
beneficial interest or collateral certificate meets the requirements in
this paragraph (c)(8);
    (B) The special unit of beneficial interest or collateral
certificate is used for the sole purpose of transferring to the issuing
entity for the loan securitization the economic risks and benefits of
the assets that are permissible for loan securitizations under this
paragraph (c)(8) and does not directly or indirectly transfer any
interest in any other economic or financial exposure;
    (C) The special unit of beneficial interest or collateral
certificate is created solely to satisfy legal requirements or
otherwise facilitate the structuring of the loan securitization; and
    (D) The special purpose vehicle that issues the special unit of
beneficial interest or collateral certificate and the issuing entity
are established under the direction of the same entity that initiated
the loan securitization.
    (9) Qualifying asset-backed commercial paper conduits. (i) An
issuing entity for asset-backed commercial paper that satisfies all of
the following requirements:
    (A) The asset-backed commercial paper conduit holds only:
    (1) Loans and other assets permissible for a loan securitization
under paragraph (c)(8)(i) of this section; and
    (2) Asset-backed securities supported solely by assets that are
permissible for loan securitizations under paragraph (c)(8)(i) of this
section and acquired by the asset-backed commercial paper conduit as
part of an initial issuance either directly from the issuing entity of
the asset-backed securities or directly from an underwriter in the
distribution of the asset-backed securities;
    (B) The asset-backed commercial paper conduit issues only asset-
backed securities, comprised of a residual interest and securities with
a legal maturity of 397 days or less; and
    (C) A regulated liquidity provider has entered into a legally
binding commitment to provide full and unconditional liquidity coverage
with respect to all of the outstanding asset-backed securities issued
by the asset-backed commercial paper conduit (other than any residual
interest) in the event that funds are required to redeem maturing
asset-backed securities.
    (ii) For purposes of this paragraph (c)(9), a regulated liquidity
provider means:
    (A) A depository institution, as defined in section 3(c) of the
Federal Deposit Insurance Act (12 U.S.C. 1813(c));
    (B) A bank holding company, as defined in section 2(a) of the Bank
Holding Company Act of 1956 (12 U.S.C. 1841(a)), or a subsidiary
thereof;
    (C) A savings and loan holding company, as defined in section 10a
of the Home Owners' Loan Act (12 U.S.C. 1467a), provided all or
substantially all of the holding company's activities are permissible
for a financial holding company under section 4(k) of the Bank Holding
Company Act of 1956 (12 U.S.C. 1843(k)), or a subsidiary thereof;
    (D) A foreign bank whose home country supervisor, as defined in
Sec.  211.21(q) of the Board's Regulation K (12 CFR 211.21(q)), has
adopted capital standards consistent with the Capital Accord for the
Basel Committee on banking Supervision, as amended, and that is subject
to such standards, or a subsidiary thereof; or
    (E) The United States or a foreign sovereign.
    (10) Qualifying covered bonds--(i) Scope. An entity owning or
holding a dynamic or fixed pool of loans or other assets as provided in
paragraph (c)(8) of this section for the benefit of the holders of
covered bonds, provided that the assets in the pool are comprised
solely of assets that meet the conditions in paragraph (c)(8)(i) of
this section.
    (ii) Covered bond. For purposes of this paragraph (c)(10), a
covered bond means:
    (A) A debt obligation issued by an entity that meets the definition
of foreign banking organization, the payment obligations of which are
fully and unconditionally guaranteed by an entity that meets the
conditions set forth in paragraph (c)(10)(i) of this section; or
    (B) A debt obligation of an entity that meets the conditions set
forth in paragraph (c)(10)(i) of this section, provided that the
payment obligations are fully and unconditionally guaranteed by an
entity that meets the definition of foreign banking organization and
the entity is a wholly-owned subsidiary, as defined in paragraph (c)(2)
of this section, of such foreign banking organization.
    (11) SBICs and public welfare investment funds. An issuer:
    (i) That is a small business investment company, as defined in
section 103(3) of the Small Business Investment Act of 1958 (15 U.S.C.
662), or that has received from the Small Business Administration
notice to proceed to qualify for a license as a small business
investment company, which notice or license has not been revoked; or
    (ii) The business of which is to make investments that are:
    (A) Designed primarily to promote the public welfare, of the type
permitted under paragraph (11) of section 5136 of the Revised Statutes
of the United States (12 U.S.C. 24), including the welfare of low- and
moderate-income communities or families (such as providing housing,
services, or jobs); or
    (B) Qualified rehabilitation expenditures with respect to a
qualified rehabilitated building or certified historic structure, as
such terms are defined in section 47 of the Internal Revenue Code of
1986 or a similar State historic tax credit program.
    (12) Registered investment companies and excluded entities. An
issuer:
    (i) That is registered as an investment company under section 8 of
the Investment Company Act of 1940 (15 U.S.C. 80a-8), or that is formed
and

operated pursuant to a written plan to become a registered investment
company as described in Sec.  351.20(e)(3) of subpart D and that
complies with the requirements of section 18 of the Investment Company
Act of 1940 (15 U.S.C. 80a-18);
    (ii) That may rely on an exclusion or exemption from the definition
of ``investment company'' under the Investment Company Act of 1940 (15
U.S.C. 80a-1 et seq.) other than the exclusions contained in section
3(c)(1) and 3(c)(7) of that Act; or
    (iii) That has elected to be regulated as a business development
company pursuant to section 54(a) of that Act (15 U.S.C. 80a-53) and
has not withdrawn its election, or that is formed and operated pursuant
to a written plan to become a business development company as described
in Sec.  351.20(e)(3) of subpart D and that complies with the
requirements of section 61 of the Investment Company Act of 1940 (15
U.S.C. 80a-60).
    (13) Issuers in conjunction with the FDIC's receivership or
conservatorship operations. An issuer that is an entity formed by or on
behalf of the FDIC for the purpose of facilitating the disposal of
assets acquired in the FDIC's capacity as conservator or receiver under
the Federal Deposit Insurance Act or Title II of the Dodd-Frank Wall
Street Reform and Consumer Protection Act.
    (14) Other excluded issuers. (i) Any issuer that the appropriate
Federal banking agencies, the SEC, and the CFTC jointly determine the
exclusion of which is consistent with the purposes of section 13 of the
BHC Act.
    (ii) A determination made under paragraph (c)(14)(i) of this
section will be promptly made public.
    (d) Definition of other terms related to covered funds. For
purposes of this subpart:
    (1) Applicable accounting standards means U.S. generally accepted
accounting principles, or such other accounting standards applicable to
a banking entity that the FDIC determines are appropriate and that the
banking entity uses in the ordinary course of its business in preparing
its consolidated financial statements.
    (2) Asset-backed security has the meaning specified in Section
3(a)(79) of the Exchange Act (15 U.S.C. 78c(a)(79)).
    (3) Director has the same meaning as provided in section
215.2(d)(1) of the Board's Regulation O (12 CFR 215.2(d)(1)).
    (4) Issuer has the same meaning as in section 2(a)(22) of the
Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(22)).
    (5) Issuing entity means with respect to asset-backed securities
the special purpose vehicle that owns or holds the pool assets
underlying asset-backed securities and in whose name the asset-backed
securities supported or serviced by the pool assets are issued.
    (6) Ownership interest--(i) Ownership interest means any equity,
partnership, or other similar interest. An ``other similar interest''
means an interest that:
    (A) Has the right to participate in the selection or removal of a
general partner, managing member, member of the board of directors or
trustees, investment manager, investment adviser, or commodity trading
advisor of the covered fund (excluding the rights of a creditor to
exercise remedies upon the occurrence of an event of default or an
acceleration event);
    (B) Has the right under the terms of the interest to receive a
share of the income, gains or profits of the covered fund;
    (C) Has the right to receive the underlying assets of the covered
fund after all other interests have been redeemed and/or paid in full
(excluding the rights of a creditor to exercise remedies upon the
occurrence of an event of default or an acceleration event);
    (D) Has the right to receive all or a portion of excess spread (the
positive difference, if any, between the aggregate interest payments
received from the underlying assets of the covered fund and the
aggregate interest paid to the holders of other outstanding interests);
    (E) Provides under the terms of the interest that the amounts
payable by the covered fund with respect to the interest could be
reduced based on losses arising from the underlying assets of the
covered fund, such as allocation of losses, write-downs or charge-offs
of the outstanding principal balance, or reductions in the amount of
interest due and payable on the interest;
    (F) Receives income on a pass-through basis from the covered fund,
or has a rate of return that is determined by reference to the
performance of the underlying assets of the covered fund; or
    (G) Any synthetic right to have, receive, or be allocated any of
the rights in paragraphs (d)(6)(i)(A) through (F) of this section.
    (ii) Ownership interest does not include: Restricted profit
interest. An interest held by an entity (or an employee or former
employee thereof) in a covered fund for which the entity (or employee
thereof) serves as investment manager, investment adviser, commodity
trading advisor, or other service provider so long as:
    (A) The sole purpose and effect of the interest is to allow the
entity (or employee or former employee thereof) to share in the profits
of the covered fund as performance compensation for the investment
management, investment advisory, commodity trading advisory, or other
services provided to the covered fund by the entity (or employee or
former employee thereof), provided that the entity (or employee or
former employee thereof) may be obligated under the terms of such
interest to return profits previously received;
    (B) All such profit, once allocated, is distributed to the entity
(or employee or former employee thereof) promptly after being earned
or, if not so distributed, is retained by the covered fund for the sole
purpose of establishing a reserve amount to satisfy contractual
obligations with respect to subsequent losses of the covered fund and
such undistributed profit of the entity (or employee or former employee
thereof) does not share in the subsequent investment gains of the
covered fund;
    (C) Any amounts invested in the covered fund, including any amounts
paid by the entity (or employee or former employee thereof) in
connection with obtaining the restricted profit interest, are within
the limits of Sec.  351.12 of this subpart; and
    (D) The interest is not transferable by the entity (or employee or
former employee thereof) except to an affiliate thereof (or an employee
of the banking entity or affiliate), to immediate family members, or
through the intestacy, of the employee or former employee, or in
connection with a sale of the business that gave rise to the restricted
profit interest by the entity (or employee or former employee thereof)
to an unaffiliated party that provides investment management,
investment advisory, commodity trading advisory, or other services to
the fund.
    (7) Prime brokerage transaction means any transaction that would be
a covered transaction, as defined in section 23A(b)(7) of the Federal
Reserve Act (12 U.S.C. 371c(b)(7)), that is provided in connection with
custody, clearance and settlement, securities borrowing or lending
services, trade execution, financing, or data, operational, and
administrative support.
    (8) Resident of the United States means a person that is a ``U.S.
person'' as defined in rule 902(k) of the SEC's Regulation S (17 CFR
230.902(k)).
    (9) Sponsor means, with respect to a covered fund:
    (i) To serve as a general partner, managing member, or trustee of a
covered fund, or to serve as a commodity pool operator with respect

to a covered fund as defined in (b)(1)(ii) of this section;
    (ii) In any manner to select or to control (or to have employees,
officers, or directors, or agents who constitute) a majority of the
directors, trustees, or management of a covered fund; or
    (iii) To share with a covered fund, for corporate, marketing,
promotional, or other purposes, the same name or a variation of the
same name, except as permitted under Sec.  351.11(a)(6).
    (10) Trustee. (i) For purposes of paragraph (d)(9) of this section
and Sec.  351.11 of subpart C, a trustee does not include:
    (A) A trustee that does not exercise investment discretion with
respect to a covered fund, including a trustee that is subject to the
direction of an unaffiliated named fiduciary who is not a trustee
pursuant to section 403(a)(1) of the Employee's Retirement Income
Security Act (29 U.S.C. 1103(a)(1)); or
    (B) A trustee that is subject to fiduciary standards imposed under
foreign law that are substantially equivalent to those described in
paragraph (d)(10)(i)(A) of this section;
    (ii) Any entity that directs a person described in paragraph
(d)(10)(i) of this section, or that possesses authority and discretion
to manage and control the investment decisions of a covered fund for
which such person serves as trustee, shall be considered to be a
trustee of such covered fund.

Sec.  351.11   Permitted organizing and offering, underwriting, and
market making with respect to a covered fund.

    (a) Organizing and offering a covered fund in general.
Notwithstanding Sec.  351.10(a) of this subpart, a banking entity is
not prohibited from acquiring or retaining an ownership interest in, or
acting as sponsor to, a covered fund in connection with, directly or
indirectly, organizing and offering a covered fund, including serving
as a general partner, managing member, trustee, or commodity pool
operator of the covered fund and in any manner selecting or controlling
(or having employees, officers, directors, or agents who constitute) a
majority of the directors, trustees, or management of the covered fund,
including any necessary expenses for the foregoing, only if:
    (1) The banking entity (or an affiliate thereof) provides bona fide
trust, fiduciary, investment advisory, or commodity trading advisory
services;
    (2) The covered fund is organized and offered only in connection
with the provision of bona fide trust, fiduciary, investment advisory,
or commodity trading advisory services and only to persons that are
customers of such services of the banking entity (or an affiliate
thereof), pursuant to a written plan or similar documentation outlining
how the banking entity or such affiliate intends to provide advisory or
similar services to its customers through organizing and offering such
fund;
    (3) The banking entity and its affiliates do not acquire or retain
an ownership interest in the covered fund except as permitted under
Sec.  351.12 of this subpart;
    (4) The banking entity and its affiliates comply with the
requirements of Sec.  351.14 of this subpart;
    (5) The banking entity and its affiliates do not, directly or
indirectly, guarantee, assume, or otherwise insure the obligations or
performance of the covered fund or of any covered fund in which such
covered fund invests;
    (6) The covered fund, for corporate, marketing, promotional, or
other purposes:
    (i) Does not share the same name or a variation of the same name
with the banking entity (or an affiliate thereof), except that a
covered fund may share the same name or a variation of the same name
with a banking entity that is an investment adviser to the covered fund
if:
    (A) The investment adviser is not an insured depository
institution, a company that controls an insured depository institution,
or a company that is treated as a bank holding company for purposes of
section 8 of the International Banking Act of 1978 (12 U.S.C. 3106);
and
    (B) The investment adviser does not share the same name or a
variation of the same name as an insured depository institution, a
company that controls an insured depository institution, or a company
that is treated as a bank holding company for purposes of section 8 of
the International Banking Act of 1978 (12 U.S.C. 3106); and
    (ii) Does not use the word ``bank'' in its name;
    (7) No director or employee of the banking entity (or an affiliate
thereof) takes or retains an ownership interest in the covered fund,
except for any director or employee of the banking entity or such
affiliate who is directly engaged in providing investment advisory,
commodity trading advisory, or other services to the covered fund at
the time the director or employee takes the ownership interest; and
    (8) The banking entity:
    (i) Clearly and conspicuously discloses, in writing, to any
prospective and actual investor in the covered fund (such as through
disclosure in the covered fund's offering documents):
    (A) That ``any losses in [such covered fund] will be borne solely
by investors in [the covered fund] and not by [the banking entity] or
its affiliates; therefore, [the banking entity's] losses in [such
covered fund] will be limited to losses attributable to the ownership
interests in the covered fund held by [the banking entity] and any
affiliate in its capacity as investor in the [covered fund] or as
beneficiary of a restricted profit interest held by [the banking
entity] or any affiliate'';
    (B) That such investor should read the fund offering documents
before investing in the covered fund;
    (C) That the ``ownership interests in the covered fund are not
insured by the FDIC, and are not deposits, obligations of, or endorsed
or guaranteed in any way, by any banking entity'' (unless that happens
to be the case); and
    (D) The role of the banking entity and its affiliates and employees
in sponsoring or providing any services to the covered fund; and
    (ii) Complies with any additional rules of the appropriate Federal
banking agencies, the SEC, or the CFTC, as provided in section 13(b)(2)
of the BHC Act, designed to ensure that losses in such covered fund are
borne solely by investors in the covered fund and not by the covered
banking entity and its affiliates.
    (b) Organizing and offering an issuing entity of asset-backed
securities. (1) Notwithstanding Sec.  351.10(a) of this subpart, a
banking entity is not prohibited from acquiring or retaining an
ownership interest in, or acting as sponsor to, a covered fund that is
an issuing entity of asset-backed securities in connection with,
directly or indirectly, organizing and offering that issuing entity, so
long as the banking entity and its affiliates comply with all of the
requirements of paragraph (a)(3) through (8) of this section.
    (2) For purposes of this paragraph (b), organizing and offering a
covered fund that is an issuing entity of asset-backed securities means
acting as the securitizer, as that term is used in section 15G(a)(3) of
the Exchange Act (15 U.S.C. 78o-11(a)(3)) of the issuing entity, or
acquiring or retaining an ownership interest in the issuing entity as
required by section 15G of that Act (15 U.S.C. 78o-11) and the
implementing regulations issued thereunder.
    (c) Underwriting and market making in ownership interests of a
covered fund. The prohibition contained in Sec.  351.10(a) of this
subpart does not apply to a banking entity's underwriting activities or
market making-related

activities involving a covered fund so long as:
    (1) Those activities are conducted in accordance with the
requirements of Sec.  351.4(a) or Sec.  351.4(b) of subpart B,
respectively;
    (2) With respect to any banking entity (or any affiliate thereof)
that: Acts as a sponsor, investment adviser or commodity trading
advisor to a particular covered fund or otherwise acquires and retains
an ownership interest in such covered fund in reliance on paragraph (a)
of this section; acquires and retains an ownership interest in such
covered fund and is either a securitizer, as that term is used in
section 15G(a)(3) of the Exchange Act (15 U.S.C. 78o-11(a)(3)), or is
acquiring and retaining an ownership interest in such covered fund in
compliance with section 15G of that Act (15 U.S.C. 78o-11) and the
implementing regulations issued thereunder each as permitted by
paragraph (b) of this section; or, directly or indirectly, guarantees,
assumes, or otherwise insures the obligations or performance of the
covered fund or of any covered fund in which such fund invests, then in
each such case any ownership interests acquired or retained by the
banking entity and its affiliates in connection with underwriting and
market making related activities for that particular covered fund are
included in the calculation of ownership interests permitted to be held
by the banking entity and its affiliates under the limitations of Sec.
351.12(a)(2)(ii) and Sec.  351.12(d) of this subpart; and
    (3) With respect to any banking entity, the aggregate value of all
ownership interests of the banking entity and its affiliates in all
covered funds acquired and retained under Sec.  351.11 of this subpart,
including all covered funds in which the banking entity holds an
ownership interest in connection with underwriting and market making
related activities permitted under this paragraph (c), are included in
the calculation of all ownership interests under Sec.
351.12(a)(2)(iii) and Sec.  351.12(d) of this subpart.

Sec.  351.12   Permitted investment in a covered fund.

    (a) Authority and limitations on permitted investments in covered
funds. (1) Notwithstanding the prohibition contained in Sec.  351.10(a)
of this subpart, a banking entity may acquire and retain an ownership
interest in a covered fund that the banking entity or an affiliate
thereof organizes and offers pursuant to Sec.  351.11, for the purposes
of:
    (i) Establishment. Establishing the fund and providing the fund
with sufficient initial equity for investment to permit the fund to
attract unaffiliated investors, subject to the limits contained in
paragraphs (a)(2)(i) and (iii) of this section; or
    (ii) De minimis investment. Making and retaining an investment in
the covered fund subject to the limits contained in paragraphs
(a)(2)(ii) and (iii) of this section.
    (2) Investment limits--(i) Seeding period. With respect to an
investment in any covered fund made or held pursuant to paragraph
(a)(1)(i) of this section, the banking entity and its affiliates:
    (A) Must actively seek unaffiliated investors to reduce, through
redemption, sale, dilution, or other methods, the aggregate amount of
all ownership interests of the banking entity in the covered fund to
the amount permitted in paragraph (a)(2)(i)(B) of this section; and
    (B) Must, no later than 1 year after the date of establishment of
the fund (or such longer period as may be provided by the Board
pursuant to paragraph (e) of this section), conform its ownership
interest in the covered fund to the limits in paragraph (a)(2)(ii) of
this section;
    (ii) Per-fund limits. (A) Except as provided in paragraph
(a)(2)(ii)(B) of this section, an investment by a banking entity and
its affiliates in any covered fund made or held pursuant to paragraph
(a)(1)(ii) of this section may not exceed 3 percent of the total number
or value of the outstanding ownership interests of the fund.
    (B) An investment by a banking entity and its affiliates in a
covered fund that is an issuing entity of asset-backed securities may
not exceed 3 percent of the total fair market value of the ownership
interests of the fund measured in accordance with paragraph (b)(3) of
this section, unless a greater percentage is retained by the banking
entity and its affiliates in compliance with the requirements of
section 15G of the Exchange Act (15 U.S.C. 78o-11) and the implementing
regulations issued thereunder, in which case the investment by the
banking entity and its affiliates in the covered fund may not exceed
the amount, number, or value of ownership interests of the fund
required under section 15G of the Exchange Act and the implementing
regulations issued thereunder.
    (iii) Aggregate limit. The aggregate value of all ownership
interests of the banking entity and its affiliates in all covered funds
acquired or retained under this section may not exceed 3 percent of the
tier 1 capital of the banking entity, as provided under paragraph (c)
of this section, and shall be calculated as of the last day of each
calendar quarter.
    (iv) Date of establishment. For purposes of this section, the date
of establishment of a covered fund shall be:
    (A) In general. The date on which the investment adviser or similar
entity to the covered fund begins making investments pursuant to the
written investment strategy for the fund;
    (B) Issuing entities of asset-backed securities. In the case of an
issuing entity of asset-backed securities, the date on which the assets
are initially transferred into the issuing entity of asset-backed
securities.
    (b) Rules of construction--(1) Attribution of ownership interests
to a covered banking entity. (i) For purposes of paragraph (a)(2) of
this section, the amount and value of a banking entity's permitted
investment in any single covered fund shall include any ownership
interest held under Sec.  351.12 directly by the banking entity,
including any affiliate of the banking entity.
    (ii) Treatment of registered investment companies, SEC-regulated
business development companies and foreign public funds. For purposes
of paragraph (b)(1)(i) of this section, a registered investment
company, SEC-regulated business development companies or foreign public
fund as described in Sec.  351.10(c)(1) of this subpart will not be
considered to be an affiliate of the banking entity so long as the
banking entity:
    (A) Does not own, control, or hold with the power to vote 25
percent or more of the voting shares of the company or fund; and
    (B) Provides investment advisory, commodity trading advisory,
administrative, and other services to the company or fund in compliance
with the limitations under applicable regulation, order, or other
authority.
    (iii) Covered funds. For purposes of paragraph (b)(1)(i) of this
section, a covered fund will not be considered to be an affiliate of a
banking entity so long as the covered fund is held in compliance with
the requirements of this subpart.
    (iv) Treatment of employee and director investments financed by the
banking entity. For purposes of paragraph (b)(1)(i) of this section, an
investment by a director or employee of a banking entity who acquires
an ownership interest in his or her personal capacity in a covered fund
sponsored by the banking entity will be attributed to the banking
entity if the banking entity, directly or indirectly, extends financing
for the purpose of enabling the director or employee to

acquire the ownership interest in the fund and the financing is used to
acquire such ownership interest in the covered fund.
    (2) Calculation of permitted ownership interests in a single
covered fund. Except as provided in paragraph (b)(3) or (4), for
purposes of determining whether an investment in a single covered fund
complies with the restrictions on ownership interests under paragraphs
(a)(2)(i)(B) and (a)(2)(ii)(A) of this section:
    (i) The aggregate number of the outstanding ownership interests
held by the banking entity shall be the total number of ownership
interests held under this section by the banking entity in a covered
fund divided by the total number of ownership interests held by all
entities in that covered fund, as of the last day of each calendar
quarter (both measured without regard to committed funds not yet called
for investment);
    (ii) The aggregate value of the outstanding ownership interests
held by the banking entity shall be the aggregate fair market value of
all investments in and capital contributions made to the covered fund
by the banking entity, divided by the value of all investments in and
capital contributions made to that covered fund by all entities, as of
the last day of each calendar quarter (all measured without regard to
committed funds not yet called for investment). If fair market value
cannot be determined, then the value shall be the historical cost basis
of all investments in and contributions made by the banking entity to
the covered fund;
    (iii) For purposes of the calculation under paragraph (b)(2)(ii) of
this section, once a valuation methodology is chosen, the banking
entity must calculate the value of its investment and the investments
of all others in the covered fund in the same manner and according to
the same standards.
    (3) Issuing entities of asset-backed securities. In the case of an
ownership interest in an issuing entity of asset-backed securities, for
purposes of determining whether an investment in a single covered fund
complies with the restrictions on ownership interests under paragraphs
(a)(2)(i)(B) and (a)(2)(ii)(B) of this section:
    (i) For securitizations subject to the requirements of section 15G
of the Exchange Act (15 U.S.C. 78o-11), the calculations shall be made
as of the date and according to the valuation methodology applicable
pursuant to the requirements of section 15G of the Exchange Act (15
U.S.C. 78o-11) and the implementing regulations issued thereunder; or
    (ii) For securitization transactions completed prior to the
compliance date of such implementing regulations (or as to which such
implementing regulations do not apply), the calculations shall be made
as of the date of establishment as defined in paragraph (a)(2)(iv)(B)
of this section or such earlier date on which the transferred assets
have been valued for purposes of transfer to the covered fund, and
thereafter only upon the date on which additional securities of the
issuing entity of asset-backed securities are priced for purposes of
the sales of ownership interests to unaffiliated investors.
    (iii) For securitization transactions completed prior to the
compliance date of such implementing regulations (or as to which such
implementing regulations do not apply), the aggregate value of the
outstanding ownership interests in the covered fund shall be the fair
market value of the assets transferred to the issuing entity of the
securitization and any other assets otherwise held by the issuing
entity at such time, determined in a manner that is consistent with its
determination of the fair market value of those assets for financial
statement purposes.
    (iv) For purposes of the calculation under paragraph (b)(3)(iii) of
this section, the valuation methodology used to calculate the fair
market value of the ownership interests must be the same for both the
ownership interests held by a banking entity and the ownership
interests held by all others in the covered fund in the same manner and
according to the same standards.
    (4) Multi-tier fund investments--(i) Master-feeder fund
investments. If the principal investment strategy of a covered fund
(the ``feeder fund'') is to invest substantially all of its assets in
another single covered fund (the ``master fund''), then for purposes of
the investment limitations in paragraphs (a)(2)(i)(B) and (a)(2)(ii) of
this section, the banking entity's permitted investment in such funds
shall be measured only by reference to the value of the master fund.
The banking entity's permitted investment in the master fund shall
include any investment by the banking entity in the master fund, as
well as the banking entity's pro-rata share of any ownership interest
of the master fund that is held through the feeder fund; and
    (ii) Fund-of-funds investments. If a banking entity organizes and
offers a covered fund pursuant to Sec.  351.11 of this subpart for the
purpose of investing in other covered funds (a ``fund of funds'') and
that fund of funds itself invests in another covered fund that the
banking entity is permitted to own, then the banking entity's permitted
investment in that other fund shall include any investment by the
banking entity in that other fund, as well as the banking entity's pro-
rata share of any ownership interest of the fund that is held through
the fund of funds. The investment of the banking entity may not
represent more than 3 percent of the amount or value of any single
covered fund.
    (c) Aggregate permitted investments in all covered funds. (1) For
purposes of paragraph (a)(2)(iii) of this section, the aggregate value
of all ownership interests held by a banking entity shall be the sum of
all amounts paid or contributed by the banking entity in connection
with acquiring or retaining an ownership interest in covered funds
(together with any amounts paid by the entity (or employee thereof) in
connection with obtaining a restricted profit interest under Sec.
351.10(d)(6)(ii) of this subpart), on a historical cost basis.
    (2) Calculation of tier 1 capital. For purposes of paragraph
(a)(2)(iii) of this section:
    (i) Entities that are required to hold and report tier 1 capital.
If a banking entity is required to calculate and report tier 1 capital,
the banking entity's tier 1 capital shall be equal to the amount of
tier 1 capital of the banking entity as of the last day of the most
recent calendar quarter, as reported to its primary financial
regulatory agency; and
    (ii) If a banking entity is not required to calculate and report
tier 1 capital, the banking entity's tier 1 capital shall be determined
to be equal to:
    (A) In the case of a banking entity that is controlled, directly or
indirectly, by a depository institution that calculates and reports
tier 1 capital, be equal to the amount of tier 1 capital reported by
such controlling depository institution in the manner described in
paragraph (c)(2)(i) of this section;
    (B) In the case of a banking entity that is not controlled,
directly or indirectly, by a depository institution that calculates and
reports tier 1 capital:
    (1) Bank holding company subsidiaries. If the banking entity is a
subsidiary of a bank holding company or company that is treated as a
bank holding company, be equal to the amount of tier 1 capital reported
by the top-tier affiliate of such covered banking entity that
calculates and reports tier 1 capital in the manner described in
paragraph (c)(2)(i) of this section; and
    (2) Other holding companies and any subsidiary or affiliate
thereof. If the banking entity is not a subsidiary of a bank holding
company or a company that is treated as a bank holding company, be
equal to the total amount

of shareholders' equity of the top-tier affiliate within such
organization as of the last day of the most recent calendar quarter
that has ended, as determined under applicable accounting standards.
    (iii) Treatment of foreign banking entities--(A) Foreign banking
entities. Except as provided in paragraph (c)(2)(iii)(B) of this
section, with respect to a banking entity that is not itself, and is
not controlled directly or indirectly by, a banking entity that is
located or organized under the laws of the United States or of any
State, the tier 1 capital of the banking entity shall be the
consolidated tier 1 capital of the entity as calculated under
applicable home country standards.
    (B) U.S. affiliates of foreign banking entities. With respect to a
banking entity that is located or organized under the laws of the
United States or of any State and is controlled by a foreign banking
entity identified under paragraph (c)(2)(iii)(A) of this section, the
banking entity's tier 1 capital shall be as calculated under paragraphs
(c)(2)(i) or (ii) of this section.
    (d) Capital treatment for a permitted investment in a covered fund.
For purposes of calculating compliance with the applicable regulatory
capital requirements, a banking entity shall deduct from the banking
entity's tier 1 capital (as determined under paragraph (c)(2) of this
section) the greater of:
    (1) The sum of all amounts paid or contributed by the banking
entity in connection with acquiring or retaining an ownership interest
(together with any amounts paid by the entity (or employee thereof) in
connection with obtaining a restricted profit interest under Sec.
351.10(d)(6)(ii) of subpart C), on a historical cost basis, plus any
earnings received; and
    (2) The fair market value of the banking entity's ownership
interests in the covered fund as determined under paragraph (b)(2)(ii)
or (b)(3) of this section (together with any amounts paid by the entity
(or employee thereof) in connection with obtaining a restricted profit
interest under Sec.  351.10(d)(6)(ii) of subpart C), if the banking
entity accounts for the profits (or losses) of the fund investment in
its financial statements.
    (e) Extension of time to divest an ownership interest. (1) Upon
application by a banking entity, the Board may extend the period under
paragraph (a)(2)(i) of this section for up to 2 additional years if the
Board finds that an extension would be consistent with safety and
soundness and not detrimental to the public interest. An application
for extension must:
    (i) Be submitted to the Board at least 90 days prior to the
expiration of the applicable time period;
    (ii) Provide the reasons for application, including information
that addresses the factors in paragraph (e)(2) of this section; and
    (iii) Explain the banking entity's plan for reducing the permitted
investment in a covered fund through redemption, sale, dilution or
other methods as required in paragraph (a)(2) of this section.
    (2) Factors governing Board determinations. In reviewing any
application under paragraph (e)(1) of this section, the Board may
consider all the facts and circumstances related to the permitted
investment in a covered fund, including:
    (i) Whether the investment would result, directly or indirectly, in
a material exposure by the banking entity to high-risk assets or high-
risk trading strategies;
    (ii) The contractual terms governing the banking entity's interest
in the covered fund;
    (iii) The date on which the covered fund is expected to have
attracted sufficient investments from investors unaffiliated with the
banking entity to enable the banking entity to comply with the
limitations in paragraph (a)(2)(i) of this section;
    (iv) The total exposure of the covered banking entity to the
investment and the risks that disposing of, or maintaining, the
investment in the covered fund may pose to the banking entity and the
financial stability of the United States;
    (v) The cost to the banking entity of divesting or disposing of the
investment within the applicable period;
    (vi) Whether the investment or the divestiture or conformance of
the investment would involve or result in a material conflict of
interest between the banking entity and unaffiliated parties, including
clients, customers or counterparties to which it owes a duty;
    (vi) The banking entity's prior efforts to reduce through
redemption, sale, dilution, or other methods its ownership interests in
the covered fund, including activities related to the marketing of
interests in such covered fund;
    (viii) Market conditions; and
    (ix) Any other factor that the Board believes appropriate.
    (3) Authority to impose restrictions on activities or investment
during any extension period. The Board may impose such conditions on
any extension approved under paragraph (e)(1) of this section as the
Board determines are necessary or appropriate to protect the safety and
soundness of the banking entity or the financial stability of the
United States, address material conflicts of interest or other unsound
banking practices, or otherwise further the purposes of section 13 of
the BHC Act and this part.
    (4) Consultation. In the case of a banking entity that is primarily
regulated by another Federal banking agency, the SEC, or the CFTC, the
Board will consult with such agency prior to acting on an application
by the banking entity for an extension under paragraph (e)(1) of this
section.

Sec.  351.13   Other permitted covered fund activities and investments.

    (a) Permitted risk-mitigating hedging activities. (1) The
prohibition contained in Sec.  351.10(a) of this subpart does not apply
with respect to an ownership interest in a covered fund acquired or
retained by a banking entity that is designed to demonstrably reduce or
otherwise significantly mitigate the specific, identifiable risks to
the banking entity in connection with a compensation arrangement with
an employee of the banking entity or an affiliate thereof that directly
provides investment advisory, commodity trading advisory or other
services to the covered fund.
    (2) Requirements. The risk-mitigating hedging activities of a
banking entity are permitted under this paragraph (a) only if:
    (i) The banking entity has established and implements, maintains
and enforces an internal compliance program required by subpart D of
this part that is reasonably designed to ensure the banking entity's
compliance with the requirements of this section, including:
    (A) Reasonably designed written policies and procedures; and
    (B) Internal controls and ongoing monitoring, management, and
authorization procedures, including relevant escalation procedures; and
    (ii) The acquisition or retention of the ownership interest:
    (A) Is made in accordance with the written policies, procedures and
internal controls required under this section;
    (B) At the inception of the hedge, is designed to reduce or
otherwise significantly mitigate and demonstrably reduces or otherwise
significantly mitigates one or more specific, identifiable risks
arising in connection with the compensation arrangement with the
employee that directly provides investment advisory, commodity trading
advisory, or other services to the covered fund;
    (C) Does not give rise, at the inception of the hedge, to any
significant new or additional risk that is not itself hedged

contemporaneously in accordance with this section; and
    (D) Is subject to continuing review, monitoring and management by
the banking entity.
    (iii) The compensation arrangement relates solely to the covered
fund in which the banking entity or any affiliate has acquired an
ownership interest pursuant to this paragraph and such compensation
arrangement provides that any losses incurred by the banking entity on
such ownership interest will be offset by corresponding decreases in
amounts payable under such compensation arrangement.
    (b) Certain permitted covered fund activities and investments
outside of the United States. (1) The prohibition contained in Sec.
351.10(a) of this subpart does not apply to the acquisition or
retention of any ownership interest in, or the sponsorship of, a
covered fund by a banking entity only if:
    (i) The banking entity is not organized or directly or indirectly
controlled by a banking entity that is organized under the laws of the
United States or of one or more States;
    (ii) The activity or investment by the banking entity is pursuant
to paragraph (9) or (13) of section 4(c) of the BHC Act;
    (iii) No ownership interest in the covered fund is offered for sale
or sold to a resident of the United States; and
    (iv) The activity or investment occurs solely outside of the United
States.
    (2) An activity or investment by the banking entity is pursuant to
paragraph (9) or (13) of section 4(c) of the BHC Act for purposes of
paragraph (b)(1)(ii) of this section only if:
    (i) The activity or investment is conducted in accordance with the
requirements of this section; and
    (ii)(A) With respect to a banking entity that is a foreign banking
organization, the banking entity meets the qualifying foreign banking
organization requirements of section 211.23(a), (c) or (e) of the
Board's Regulation K (12 CFR 211.23(a), (c) or (e)), as applicable; or
    (B) With respect to a banking entity that is not a foreign banking
organization, the banking entity is not organized under the laws of the
United States or of one or more States and the banking entity, on a
fully-consolidated basis, meets at least two of the following
requirements:
    (1) Total assets of the banking entity held outside of the United
States exceed total assets of the banking entity held in the United
States;
    (2) Total revenues derived from the business of the banking entity
outside of the United States exceed total revenues derived from the
business of the banking entity in the United States; or
    (3) Total net income derived from the business of the banking
entity outside of the United States exceeds total net income derived
from the business of the banking entity in the United States.
    (3) An ownership interest in a covered fund is not offered for sale
or sold to a resident of the United States for purposes of paragraph
(b)(1)(iii) of this section only if it is sold or has been sold
pursuant to an offering that does not target residents of the United
States.
    (4) An activity or investment occurs solely outside of the United
States for purposes of paragraph (b)(1)(iv) of this section only if:
    (i) The banking entity acting as sponsor, or engaging as principal
in the acquisition or retention of an ownership interest in the covered
fund, is not itself, and is not controlled directly or indirectly by, a
banking entity that is located in the United States or organized under
the laws of the United States or of any State;
    (ii) The banking entity (including relevant personnel) that makes
the decision to acquire or retain the ownership interest or act as
sponsor to the covered fund is not located in the United States or
organized under the laws of the United States or of any State;
    (iii) The investment or sponsorship, including any transaction
arising from risk-mitigating hedging related to an ownership interest,
is not accounted for as principal directly or indirectly on a
consolidated basis by any branch or affiliate that is located in the
United States or organized under the laws of the United States or of
any State; and
    (iv) No financing for the banking entity's ownership or sponsorship
is provided, directly or indirectly, by any branch or affiliate that is
located in the United States or organized under the laws of the United
States or of any State.
    (5) For purposes of this section, a U.S. branch, agency, or
subsidiary of a foreign bank, or any subsidiary thereof, is located in
the United States; however, a foreign bank of which that branch,
agency, or subsidiary is a part is not considered to be located in the
United States solely by virtue of operation of the U.S. branch, agency,
or subsidiary.
    (c) Permitted covered fund interests and activities by a regulated
insurance company. The prohibition contained in Sec.  351.10(a) of this
subpart does not apply to the acquisition or retention by an insurance
company, or an affiliate thereof, of any ownership interest in, or the
sponsorship of, a covered fund only if:
    (1) The insurance company or its affiliate acquires and retains the
ownership interest solely for the general account of the insurance
company or for one or more separate accounts established by the
insurance company;
    (2) The acquisition and retention of the ownership interest is
conducted in compliance with, and subject to, the insurance company
investment laws, regulations, and written guidance of the State or
jurisdiction in which such insurance company is domiciled; and
    (3) The appropriate Federal banking agencies, after consultation
with the Financial Stability Oversight Council and the relevant
insurance commissioners of the States and foreign jurisdictions, as
appropriate, have not jointly determined, after notice and comment,
that a particular law, regulation, or written guidance described in
paragraph (c)(2) of this section is insufficient to protect the safety
and soundness of the banking entity, or the financial stability of the
United States.

Sec.  351.14   Limitations on relationships with a covered fund.

    (a) Relationships with a covered fund. (1) Except as provided for
in paragraph (a)(2) of this section, no banking entity that serves,
directly or indirectly, as the investment manager, investment adviser,
commodity trading advisor, or sponsor to a covered fund, that organizes
and offers a covered fund pursuant to Sec.  351.11 of this subpart, or
that continues to hold an ownership interest in accordance with Sec.
351.11(b) of this subpart, and no affiliate of such entity, may enter
into a transaction with the covered fund, or with any other covered
fund that is controlled by such covered fund, that would be a covered
transaction as defined in section 23A of the Federal Reserve Act (12
U.S.C. 371c(b)(7)), as if such banking entity and the affiliate thereof
were a member bank and the covered fund were an affiliate thereof.
    (2) Notwithstanding paragraph (a)(1) of this section, a banking
entity may:
    (i) Acquire and retain any ownership interest in a covered fund in
accordance with the requirements of Sec.  351.11, Sec.  351.12, or
Sec.  351.13 of this subpart; and
    (ii) Enter into any prime brokerage transaction with any covered
fund in which a covered fund managed, sponsored, or advised by such
banking entity (or an affiliate thereof) has taken an ownership
interest, if:
    (A) The banking entity is in compliance with each of the
limitations set forth in Sec.  351.11 of this subpart with respect to a
covered fund organized and offered by such banking entity (or an
affiliate thereof);

    (B) The chief executive officer (or equivalent officer) of the
banking entity certifies in writing annually to the FDIC (with a duty
to update the certification if the information in the certification
materially changes) that the banking entity does not, directly or
indirectly, guarantee, assume, or otherwise insure the obligations or
performance of the covered fund or of any covered fund in which such
covered fund invests; and
    (C) The Board has not determined that such transaction is
inconsistent with the safe and sound operation and condition of the
banking entity.
    (b) Restrictions on transactions with covered funds. A banking
entity that serves, directly or indirectly, as the investment manager,
investment adviser, commodity trading advisor, or sponsor to a covered
fund, or that organizes and offers a covered fund pursuant to Sec.
351.11 of this subpart, or that continues to hold an ownership interest
in accordance with Sec.  351.11(b) of this subpart, shall be subject to
section 23B of the Federal Reserve Act (12 U.S.C. 371c-1), as if such
banking entity were a member bank and such covered fund were an
affiliate thereof.
    (c) Restrictions on prime brokerage transactions. A prime brokerage
transaction permitted under paragraph (a)(2)(ii) of this section shall
be subject to section 23B of the Federal Reserve Act (12 U.S.C. 371c-1)
as if the counterparty were an affiliate of the banking entity.

Sec.  351.15   Other limitations on permitted covered fund activities.

    (a) No transaction, class of transactions, or activity may be
deemed permissible under Sec. Sec.  351.11 through 351.13 of this
subpart if the transaction, class of transactions, or activity would:
    (1) Involve or result in a material conflict of interest between
the banking entity and its clients, customers, or counterparties;
    (2) Result, directly or indirectly, in a material exposure by the
banking entity to a high-risk asset or a high-risk trading strategy; or
    (3) Pose a threat to the safety and soundness of the banking entity
or to the financial stability of the United States.
    (b) Definition of material conflict of interest. (1) For purposes
of this section, a material conflict of interest between a banking
entity and its clients, customers, or counterparties exists if the
banking entity engages in any transaction, class of transactions, or
activity that would involve or result in the banking entity's interests
being materially adverse to the interests of its client, customer, or
counterparty with respect to such transaction, class of transactions,
or activity, and the banking entity has not taken at least one of the
actions in paragraph (b)(2) of this section.
    (2) Prior to effecting the specific transaction or class or type of
transactions, or engaging in the specific activity, the banking entity:
    (i) Timely and effective disclosure. (A) Has made clear, timely,
and effective disclosure of the conflict of interest, together with
other necessary information, in reasonable detail and in a manner
sufficient to permit a reasonable client, customer, or counterparty to
meaningfully understand the conflict of interest; and
    (B) Such disclosure is made in a manner that provides the client,
customer, or counterparty the opportunity to negate, or substantially
mitigate, any materially adverse effect on the client, customer, or
counterparty created by the conflict of interest; or
    (ii) Information barriers. Has established, maintained, and
enforced information barriers that are memorialized in written policies
and procedures, such as physical separation of personnel, or functions,
or limitations on types of activity, that are reasonably designed,
taking into consideration the nature of the banking entity's business,
to prevent the conflict of interest from involving or resulting in a
materially adverse effect on a client, customer, or counterparty. A
banking entity may not rely on such information barriers if, in the
case of any specific transaction, class or type of transactions or
activity, the banking entity knows or should reasonably know that,
notwithstanding the banking entity's establishment of information
barriers, the conflict of interest may involve or result in a
materially adverse effect on a client, customer, or counterparty.
    (c) Definition of high-risk asset and high-risk trading strategy.
For purposes of this section:
    (1) High-risk asset means an asset or group of related assets that