covered fund definition for wholly-owned subsidiaries, for the
holding of up to 0.5 percent of outstanding ownership interests by a
third party for limited purposes); and __.14(b) (subjecting certain
transactions with covered funds to section 23B of the Federal
Reserve Act).
---------------------------------------------------------------------------

    As proposed, the agencies are not applying Sec.  __.14(a), which
applies section 23A of the Federal Reserve Act to banking entities'
relationships with covered funds, to family wealth management vehicles
because the agencies understand that the application of Sec.  __.14(a)
to family wealth management vehicles could prohibit banking entities
from providing the full range of banking and asset management services
to customers using these vehicles.\350\ The agencies are, however,
applying Sec. Sec.  __.14(b) and __.15 to family wealth management
vehicles, as proposed, because the agencies continue to believe that it
will help ensure that banking entities and their affiliates' exposure
to risk remains appropriately limited.
---------------------------------------------------------------------------

    \350\ See SIFMA (stating that it agreed with the agencies'
approach of not applying Sec.  __.14 to relationships between
banking entities and family wealth management vehicles because doing
so would prevent banking entities from making ordinary extensions of
credit and entering into a number of other transactions with family
wealth management vehicles that are critical to the banking entity
providing traditional asset management and estate planning
services).
---------------------------------------------------------------------------

    The agencies are also adopting a prohibition, with modifications
described below, on banking entity purchases of low-quality assets from
family wealth management vehicles that would be prohibited under
Regulation W concerning transactions with affiliates (12 CFR
223.15(a))--as if such banking entity were a member bank and the entity
were an affiliate thereof--to prevent banking entities from ``bailing
out'' family wealth management vehicles.\351\ Regulation W (12 CFR
223.15(a)) provides that a member bank may not purchase a low-quality
asset from an affiliate unless, pursuant to an independent credit
evaluation, the member bank had committed itself to purchase the asset
before the time the asset was acquired by the affiliate.\352\ Several
commenters requested clarification that the exclusion permits banking
entities to engage in riskless principal transactions to purchase
assets--including low quality assets for purposes of section 223.15 of
the Board's Regulation W--from family wealth management vehicles.\353\
Commenters stated that the need for such asset purchases may arise as a
result of a family customer's preferences and that permitting the
banking entities to engage in such purchases may facilitate the family
customer's sale of the asset.\354\ Commenters stated that allowing
these transactions would pose minimal market or credit risk to a
banking entity because the banking entity would purchase and sell the
same asset contemporaneously.\355\ Furthermore, one commenter stated
that without clarity on the permissiveness of riskless principal
transactions, family wealth management vehicles would be forced to
obtain the services of a third-party service provider to sell low
quality assets, which would increase costs and operational complexity
of the family wealth management vehicles without furthering the aims of
section 13 of the BHC Act or the implementing regulations.\356\
---------------------------------------------------------------------------

    \351\ Final rule Sec.  __.10(c)(17)(ii)(F).
    \352\ 12 CFR 223.15(a).
    \353\ See, e.g., BPI and SIFMA.
    \354\ See, e.g., BPI and SIFMA.
    \355\ See, e.g., SIFMA and BPI.
    \356\ See SIFMA.
---------------------------------------------------------------------------

    The agencies believe that permitting a banking entity to engage in
riskless principal transactions that involve the purchase of low-
quality assets from a family wealth management vehicle is unlikely to
pose a substantive risk of evading section 13 of the BHC Act. In a
riskless principal transaction, the riskless principal (the banking
entity) buys and sells the same security contemporaneously, and the
asset risk passes promptly from the customer (family wealth management
vehicle, in this context) through the riskless principal to a third-
party.\357\ The agencies are adopting the condition that banking
entities and their affiliates comply with the requirements of 12 CFR
223.15(a), as if such banking entity and its affiliates were a member
bank and the entity were an affiliate. However, in a change from the
2020 proposal and in response to the concerns raised by

commenters, the condition will explicitly exclude from those
requirements transactions that meet the definition of riskless
principal transactions as defined in Sec.  __.10(d)(11). The definition
of riskless principal transactions adopted in Sec.  __.10(d)(11) is
similar to the definition adopted in the Board's Regulation W, as this
definition is appropriately narrow and generally familiar to banking
entities.\358\ The agencies expect that, together, the adopted criteria
for the family wealth management vehicle exclusion will prevent a
banking entity from being able to bail out such entities in periods of
financial stress or otherwise expose the banking entity to the types of
risks that the covered fund provisions of section 13 were intended to
address.
---------------------------------------------------------------------------

    \357\ See 67 FR 76597.
    \358\ 12 CFR 223.3(ee).
---------------------------------------------------------------------------

    Several commenters requested that the agencies remove the condition
that banking entities and their affiliates comply with the disclosure
obligations under Sec.  __.11(a)(8) of the final rule, as if the
vehicle were a covered fund, because such disclosures would not apply
to a vehicle that a banking entity was not organizing and offering
pursuant to Sec.  __.11(a) of the final rule and therefore would be
confusing.\359\ In particular, these commenters stated that the
required disclosure under Sec.  __.11(a)(8) concerning the banking
entity's ``ownership interests'' in the fund and referencing the fund's
``offering documents'' may create confusion in circumstances where the
banking entity does not own an interest in the family wealth management
vehicle, or where such vehicles do not have offering documents. Also,
commenters requested confirmation from the agencies that banking
entities would be permitted to (i) modify the required disclosures to
reflect the specific circumstances of their relationship with, and the
particular structure of, their family wealth management vehicle
clients; and (ii) satisfy the written disclosure requirement by means
other than including such disclosures in the governing document(s) of
the family wealth management vehicle(s).\360\
---------------------------------------------------------------------------

    \359\ See, e.g., ABA and PNC.
    \360\ See, e.g., BPI.
---------------------------------------------------------------------------

    The agencies are adopting the condition that banking entities and
their affiliates comply with the disclosure obligations under Sec.
__.11(a)(8) of the final rule with respect to family wealth management
vehicles. However, in a change from the 2020 proposal and in response
to the concerns raised by commenters, the condition will explicitly
permit banking entities and their affiliates to modify the content of
such disclosures to prevent the disclosure from being misleading and
also permit banking entities to modify the manner of disclosure to
accommodate the specific circumstances of the entity.\361\ The
obligations under Sec.  __.11(a)(8) of the final rule apply in
connection with the exemption for organizing and offering covered
funds, which would typically require the preparation and distribution
of offering documents. The agencies, however, understand that many
family wealth management vehicles may not have offering documents. The
agencies have an interest in providing family wealth management vehicle
customers with the substance of the disclosure, rather than a concern
with the specific wording of the disclosure or with the document in
which the disclosure is provided. Accordingly, the agencies have
provided that the content of the disclosure may be modified to prevent
the disclosure from being misleading and the manner of disclosure may
be modified to accommodate the specific circumstances of the family
wealth management vehicle.
---------------------------------------------------------------------------

    \361\ In the 2020 proposal, the agencies had indicated that for
purposes of the proposed exclusion, a banking entity could satisfy
these written disclosure obligations in a number of ways and could
modify the specific wording of the disclosures in Sec.  __.11(a)(8)
to accurately reflect the specific circumstances of the family
wealth management vehicle.
---------------------------------------------------------------------------

    For example, Sec.  __.11(a)(8) requires disclosure that an investor
``should read the fund offering documents before investing in the
covered fund.'' In order to accurately reflect the specific
circumstances of a family wealth management vehicle for which there are
no offering documents, the modified provision will allow the banking
entity to revise this disclosure to reference the appropriate
disclosure documents, if any, provided in connection with the vehicle.
Similarly, the agencies understand the specific wording of the
disclosures in Sec.  __.11(a)(8) of the rule may need to be modified to
accurately reflect the specific circumstances of the banking entity's
relationship with the family wealth management vehicle. For example, a
banking entity that holds no ownership interest in the family wealth
management vehicle may modify the disclosure required in Sec.
__.11(a)(8)(i)(A) to reflect its lack of ownership. Moreover, Sec.
__.11(a)(8) requires that the banking entity provide these disclosures,
``such as through disclosure in the . . . offering documents.'' The
agencies expect that a banking entity could satisfy these disclosure
delivery obligations in a number of ways, such as by including them in
the family wealth management vehicle's governing documents, in account
opening materials or in supplementary materials (e.g., a separate
disclosure document provided by the banking entity solely for purposes
of complying with this exclusion and providing the required
disclosures).
4. Customer Facilitation Vehicles
    The agencies are adopting an exclusion from the definition of
``covered fund'' under Sec.  __.10(b) of the rule for any issuer that
acts as a ``customer facilitation vehicle.'' The customer facilitation
vehicle exclusion will, as proposed, be available for any issuer that
is formed by or at the request of a customer of the banking entity for
the purpose of providing such customer (which may include one or more
affiliates of such customer) with exposure to a transaction, investment
strategy, or other service provided by the banking entity.\362\
---------------------------------------------------------------------------

    \362\ Final rule Sec.  __.10(c)(18)(i).
---------------------------------------------------------------------------

    A banking entity may only rely on the exclusion with respect to an
issuer provided that: (1) All of the ownership interests of the issuer
are owned by the customer (which may include one or more of its
affiliates) for whom the issuer was created; \363\ and (2) the banking
entity and its affiliates: (i) Maintain documentation outlining how the
banking entity intends to facilitate the customer's exposure to such
transaction, investment strategy, or service; (ii) do not, directly or
indirectly, guarantee, assume, or otherwise insure the obligations or
performance of such issuer; (iii) comply with the disclosure
obligations under Sec.  __.11(a)(8), as if such issuer were a covered
fund, provided that the content may be modified to prevent the
disclosure from being misleading and the manner of disclosure may be
modified to accommodate the specific circumstances of the issuer; (iv)
do not acquire or retain, as principal, an ownership interest in the
issuer, other than up to an aggregate 0.5 percent of the issuer's
outstanding ownership interests for the purpose of and to the extent
necessary for establishing corporate separateness or addressing
bankruptcy, insolvency, or similar concerns; (v) comply with the

requirements of Sec. Sec.  __.14(b) and __.15, as if such issuer were a
covered fund; and (vi) except for riskless principal transactions as
defined in Sec.  __.10(d)(11), comply with the requirements of 12 CFR
223.15(a), as if such banking entity and its affiliates were a member
bank and the entity were an affiliate thereof.\364\
---------------------------------------------------------------------------

    \363\ Notwithstanding this condition, up to an aggregate 0.5
percent of the issuer's outstanding ownership interests may be
acquired or retained by one or more entities that are not customers
if the ownership interest is acquired or retained by such parties
for the purpose of and to the extent necessary for establishing
corporate separateness or addressing bankruptcy, insolvency, or
similar concerns. Final rule Sec.  __.10(c)(18)(ii)(B).
    \364\ Final rule Sec.  __.10(c)(18)(ii).
---------------------------------------------------------------------------

    The agencies continue to believe that this exclusion will
appropriately allow banking entities to structure certain types of
services or transactions for customers, or to otherwise provide
traditional customer-facing banking and asset management services,
through a vehicle, even though such a vehicle may rely on section
3(c)(1) or 3(c)(7) of the Investment Company Act or would otherwise be
a covered fund under the final rule. Most commenters that addressed
this exclusion were supportive,\365\ stating that it would provide
banking entities with greater flexibility to meet client needs and
objectives.\366\ Some commenters found the exclusion's conditions to be
reasonable and sufficient.\367\ However, two commenters recommended
that the agencies impose additional limitations on the exclusion.\368\
One of these commenters argued that the exclusion would permit, and
possibly encourage, banking entities to increase their risk exposures
through the use of customer facilitation vehicles, and the agencies
should minimize such risk exposures and promote risk monitoring and
management.\369\
---------------------------------------------------------------------------

    \365\ See, e.g., SIFMA; BPI; ABA; Credit Suisse; FSF; Goldman
Sachs; and IAA.
    \366\ See, e.g., SIFMA; BPI; ABA; and Goldman Sachs.
    \367\ See, e.g., SIFMA; FSF; and SAF.
    \368\ See Better Markets and Data Boiler.
    \369\ See Better Markets.
---------------------------------------------------------------------------

    The agencies continue to believe that these vehicles do not expose
banking entities to the types of risks that section 13 of the BHC Act
was intended to restrict, and that this exclusion is consistent with
section 13(d)(1)(D), which permits banking entities to engage in
transactions on behalf of customers, when such transactions would
otherwise be prohibited under section 13. The agencies have elsewhere
tailored the 2013 rule to allow banking entities to meet their
customers' needs.\370\ This exclusion will similarly allow banking
entities to provide customer-oriented financial services through a
vehicle when that vehicle's purpose is to facilitate a customer's
exposure to those services.\371\ As stated in the 2020 proposal, the
agencies do not believe that section 13 of the BHC Act was intended to
interfere unnecessarily with the ability of banking entities to provide
services to their customers simply because the customer may prefer to
receive those services through a vehicle or through a transaction with
a vehicle instead of directly with the banking entity.\372\ Some
commenters agreed, stating that customer facilitation vehicles would
not expose banking entities to the types of risks that section 13 was
intended to prohibit or limit, particularly given that such vehicles
will be subject to a number of conditions, as discussed below.\373\
---------------------------------------------------------------------------

    \370\ For example, the agencies in 2019 amended the exemption
for risk-mitigating hedging activities to allow banking entities to
acquire or retain an ownership interest in a covered fund as a risk-
mitigating hedge when acting as an intermediary on behalf of a
customer that is not itself a banking entity to facilitate the
exposure by the customer to the profits and losses of the covered
fund. See 2019 amendments Sec.  __.13(a)(1)(ii). See also 2019
amendments Sec.  __.3(d)(11) (excluding from the definition of
``proprietary trading'' the entering into of customer-driven swaps
or customer-driven security-based swaps and matched swaps or
security-based swaps under certain conditions).
    \371\ This exclusion does not require that the customer
relationship be pre-existing. In other words, the exclusion will be
available for an issuer that is formed for the purpose of
facilitating the exposure of a customer of the banking entity where
the customer relationship begins only in connection with the
formation of that issuer. The agencies took a similar approach to
this question in describing the exemption for activities related to
organizing and offering a covered fund under Sec.  __.11(a) of the
2013 rule. See 79 FR 5716. The agencies indicated that section
13(d)(1)(G), under which the exemption under Sec.  __.11(a) was
adopted, did not explicitly require that the customer relationship
be pre-existing. Similarly, section 13(d)(1)(D) does not explicitly
require a pre-existing customer relationship.
    \372\ 85 FR 12120.
    \373\ See SIFMA and ABA.
---------------------------------------------------------------------------

    The exclusion will, as proposed, require that the vehicle be formed
by or at the request of the customer.\374\ One commenter suggested that
the agencies remove this requirement, arguing that it would inhibit a
banking entity's ability to provide customers with services in a timely
manner.\375\ However, the agencies continue to believe that this
requirement is an important component of the exclusion because it helps
differentiate customer facilitation vehicles from covered funds that
are organized and offered by the banking entity. As stated in the 2020
proposal, the requirement will not preclude a banking entity from
marketing its customer facilitation vehicle services or discussing with
its customers prior to the formation of such vehicles the potential
benefits of structuring such services through a vehicle.\376\
---------------------------------------------------------------------------

    \374\ Final rule Sec.  __.10(c)(18)(i).
    \375\ SIFMA (stating that requiring a banking entity to wait for
a customer to request formation would delay the banking entity's
ability to provide services to the customer without any
corresponding regulatory benefit).
    \376\ 85 FR 12120.
---------------------------------------------------------------------------

    As in the 2020 proposal, the agencies are not specifying the types
of transaction, investment strategy or other service that a customer
facilitation vehicle may be formed to facilitate.\377\ One commenter
recommended specifying that the exclusion only allow vehicles to be
formed for extensions of intraday credit, and payment, clearing, and
settlement services, and only for purposes of operational
efficiency.\378\ Another commenter argued that attempting to specify
may prevent banking entities from being able to appropriately respond
to a customer's requests.\379\ The agencies continue to believe that
providing flexibility enhances the utility of this exclusion.
Specifically, the agencies note that the purpose of this exclusion is
to allow banking entities to provide customer-oriented financial
services through vehicles, providing customers with exposure to a
transaction, investment strategy, or other service that the banking
entity may provide to such customers directly. Limiting the type of
transaction, investment strategy, or service for which the customer
facilitation vehicle may be formed would interfere with this purpose.
Accordingly, the agencies are adopting this requirement as proposed.
---------------------------------------------------------------------------

    \377\ Final rule Sec.  __.10(c)(18)(i).
    \378\ See Data Boiler.
    \379\ See SIFMA.
---------------------------------------------------------------------------

    Under the final rule, similar to the 2020 proposal, a banking
entity will be able to rely on the customer facilitation vehicle
exclusion only under certain conditions, as stated above.\380\
Commenters supported most of the conditions, stating that the exclusion
imposes reasonable conditions that provide safeguards.\381\ Commenters
also suggested modifications to certain conditions, as discussed
below.\382\ The agencies are adopting the conditions, largely as
proposed. However, the agencies are modifying the conditions that
relate to de minimis ownership of the vehicle, the requirements of 12
CFR 223.15(a), and the disclosure obligations under Sec.  __.11(a)(8),
as discussed below.
---------------------------------------------------------------------------

    \380\ Final rule Sec.  __.10(c)(18)(ii).
    \381\ See, e.g., SIFMA; FSF; and SAF.
    \382\ See, e.g., SIFMA; BPI; and FSF.
---------------------------------------------------------------------------

    As proposed, the exclusion would have permitted banking entities
and their affiliates to acquire or retain, as principal, an ownership
interest in the issuer up to 0.5 percent of the issuer's outstanding
ownership interests, for the purpose of and to the extent necessary

for establishing corporate separateness or addressing bankruptcy,
insolvency, or similar concerns.\383\ Similar to their request for
family wealth management vehicles, commenters suggested that the
agencies specifically allow any party that is unaffiliated with the
customer, rather than only the banking entities and their affiliates,
to own this de minimis interest.\384\ For the same reasons as discussed
above with respect to family wealth management vehicles, the agencies
are modifying the de minimis ownership provision such that up to an
aggregate 0.5 percent of the issuer's outstanding ownership interests
may be acquired or retained by one or more entities that are not
customers if the ownership interest is acquired or retained by such
parties for the purpose of and to the extent necessary for establishing
corporate separateness or addressing bankruptcy, insolvency, or similar
concerns.\385\
---------------------------------------------------------------------------

    \383\ See 2020 proposed rule Sec.  __.10(c)(18)(ii)(B)(4).
    \384\ See SIFMA; BPI; and FSF.
    \385\ Final rule Sec.  __.10(c)(18)(ii)(B).
---------------------------------------------------------------------------

    The agencies are adopting, with modifications, the condition for a
banking entity to comply with the requirements of 12 CFR 223.15(a), as
if such banking entity were a member bank and the issuer were an
affiliate thereof.\386\ As discussed above, several commenters
recommended that the agencies clarify that the family wealth management
vehicle exclusion permits banking entities to engage in riskless
principal transactions to purchase assets--including low quality assets
for purposes of section 223.15 of the Board's Regulation W--from family
wealth management vehicles.\387\ One such commenter also suggested
that, for purposes of consistency, the agencies should similarly
clarify that banking entities are permitted to engage in such riskless
principal transactions with customer facilitation vehicles.\388\
---------------------------------------------------------------------------

    \386\ Final rule Sec.  __.10(c)(18)(ii)(C)(6). 12 CFR 223.15(a)
provides that a member bank may not purchase a low-quality asset
from an affiliate unless, pursuant to an independent credit
evaluation, the member bank had committed itself to purchase the
asset before the time the asset was acquired by the affiliate. 12
CFR 223.15(a).
    \387\ See, e.g., BPI and SIFMA. See supra, Section IV.C.3
(Family Wealth Management Vehicles).
    \388\ See BPI.
---------------------------------------------------------------------------

    The purpose of the proposed requirement that a customer
facilitation vehicle must comply with 12 CFR 223.15(a) was the same for
both the family wealth management vehicle and the customer facilitation
vehicle exclusions--to help ensure that the exclusions do not allow
banking entities to ``bail out'' either vehicle.\389\ For the same
reasons discussed above with respect to family wealth management
vehicles, the agencies have modified the requirement to exclude from
the requirements of 12 CFR 223.15(a) transactions that meet the
definition of riskless principal transactions as defined in Sec.
__.10(d)(11).\390\ Similar to the agencies' approach with respect to
family wealth management vehicles, the agencies expect that, together,
the adopted criteria for this exclusion will prevent a banking entity
from being able to bail out customer facilitation vehicles in periods
of financial stress or otherwise expose the banking entity to the types
of risks that the covered fund provisions of section 13 of the BHC Act
were intended to address.
---------------------------------------------------------------------------

    \389\ See 85 FR 12120.
    \390\ Final rule Sec.  __.10(c)(18)(ii)(C)(6).
---------------------------------------------------------------------------

    The agencies are modifying the condition that the banking entity
and its affiliates comply with the disclosure obligations under Sec.
__.11(a)(8), as if such issuer were a covered fund, to provide
clarification that the content of the disclosure may be modified to
prevent the disclosure from being misleading and the manner of
disclosure may be modified to accommodate the specific circumstances of
the issuer.\391\ Commenters requested that the agencies provide such
clarification in the context of family wealth management vehicles.\392\
Although the agencies did not receive any comments with respect to this
condition in the context of this exclusion, the agencies are similarly
modifying this condition under this exclusion. The agencies believe
that these disclosures will provide important information to the
customers for whom these vehicles will be used to provide services--
whether they are family customers under the family wealth management
vehicle exclusion or other customers under this exclusion. The
agencies' treatment of this condition for family wealth management
vehicles, as described above, will similarly apply to this condition
for customer facilitation vehicles.\393\
---------------------------------------------------------------------------

    \391\ Final rule Sec.  __.10(c)(18)(ii)(C)(3).
    \392\ See supra, Section IV.C.3 (Family Wealth Management
Vehicles).
    \393\ Id.
---------------------------------------------------------------------------

    The agencies are adopting, as proposed, the condition that all of
the ownership interests of the issuer are owned by the customer (which
may include one or more of the customer's affiliates) for whom the
issuer was created (other than a de minimis interest that may be held
by others, as discussed above).\394\ The agencies continue to believe
that this condition is appropriate to prevent banking entities from
using this exclusion for customer facilitation vehicles to evade the
restrictions of section 13 of the BHC Act. To help track compliance, a
banking entity and its affiliates will, as proposed, have to maintain
documentation outlining how the banking entity intends to facilitate
the customer's exposure to a transaction, investment strategy, or
service.\395\
---------------------------------------------------------------------------

    \394\ Final rule Sec. Sec.  __.10(c)(18)(ii)(A)-(B).
    \395\ Final rule Sec.  __.10(c)(18)(ii)(C)(1).
---------------------------------------------------------------------------

    The agencies are also adopting, as proposed, the condition that the
banking entity and its affiliates do not, directly or indirectly,
guarantee, assume, or otherwise insure the obligations or performance
of such issuer.\396\ The agencies continue to believe that this
condition is appropriate and consistent with the goal of preventing
banking entities from bailing out their customer facilitation vehicles.
Commenters generally agreed, supporting the condition as one that is
reasonable and appropriate in addressing the agencies' potential
evasion concerns.\397\
---------------------------------------------------------------------------

    \396\ Final rule Sec.  __.10(c)(18)(ii)(C)(2).
    \397\ See, e.g., SIFMA; FSF; and Data Boiler.
---------------------------------------------------------------------------

    Finally, the agencies are adopting, as proposed, the condition that
the banking entity and its affiliates comply with the requirements of
Sec. Sec.  __.14(b) and __.15, as if such issuer were a covered
fund.\398\ The agencies requested comment in the 2020 proposal whether
this exclusion should also require that the banking entity and its
affiliates comply with the requirements of all of Sec.  __.14. One
commenter argued that requiring compliance with the requirements of all
of Sec.  __.14 would eliminate the utility of this exclusion.\399\ The
same commenter supported the condition, as proposed, stating that
requiring compliance with only Sec.  __.14(b), which would apply the
requirements in section 23B of the Federal Reserve Act, and the
application of the prudential backstops under Sec.  __.15 would serve
as adequate safeguards to avoid the risk of bailout or other evasion
concerns.\400\ The agencies continue to believe that this condition
will help ensure that banking entities and their affiliates' exposure
to risk remains appropriately limited.
---------------------------------------------------------------------------

    \398\ Final rule Sec.  __.10(c)(18)(ii)(C)(5).
    \399\ See FSF (stating that if banking entities were required to
comply with all of Sec.  __.14, they would not be able to enter into
swaps and other covered transactions with the customer facilitation
vehicle for their clients, many of whom seek such transactions
through the use of such vehicles).
    \400\ See FSF.
---------------------------------------------------------------------------

    The agencies continue to believe that, collectively, the conditions
on the exclusion will help to ensure that

customer facilitation vehicles are used for customer-oriented financial
services provided on arms-length, market terms, and to prevent evasion
of the requirements of section 13 of the BHC Act and the final rule.
The agencies also continue to believe that the adopted conditions will
be consistent with the purposes of section 13.
    As in the 2020 proposal, the agencies will not apply Sec.  __.14(a)
to customer facilitation vehicles because the agencies understand that
this would prohibit banking entities from providing the full range of
banking and asset management services to customers using these
vehicles. Commenters generally supported this approach,\401\ and one
noted that applying Sec.  __.14(a) to these vehicles would undo any
practical utility of the exclusion.\402\
---------------------------------------------------------------------------

    \401\ See, e.g., SIFMA and BPI.
    \402\ See SIFMA.
---------------------------------------------------------------------------

D. Limitations on Relationships With a Covered Fund

    In the 2020 proposal, the agencies proposed to amend the
regulations implementing section 13(f)(1) of the BHC Act to permit
banking entities to engage in a limited set of covered transactions
with covered funds for which the banking entity directly or indirectly
serves as investment manager, investment adviser, or sponsor, or that
the banking entity organizes and offers pursuant to section 13(d)(1)(G)
of the BHC Act (such funds, related covered funds).\403\
---------------------------------------------------------------------------

    \403\ See 2020 proposal Sec.  __.14(a)(2), (3); 85 FR 12143-
12146.
---------------------------------------------------------------------------

    Section 13(f)(1) of the BHC Act generally prohibits a banking
entity from entering into a transaction with a related covered fund
that would be a covered transaction as defined in section 23A of the
Federal Reserve Act as if the banking entity was a member bank and the
covered fund was an affiliate.\404\ The 2020 proposal would have
amended the application of section 13(f)(1) of the BHC Act in limited
circumstances, by allowing a banking entity to enter into certain
covered transactions with a related covered fund that would be
permissible without limit for a state member bank to enter into with an
affiliate under section 23A of the Federal Reserve Act. In addition,
the 2020 proposal would have allowed a banking entity to enter into
short-term extensions of credit with, and purchase assets from, a
related covered fund in connection with payment, clearing, and
settlement activities. The agencies invited comment on the past
interpretation of section 13(f)(1) of the BHC Act,\405\ and the
proposed amendments to the regulations implementing section
13(f)(1).\406\
---------------------------------------------------------------------------

    \404\ 12 U.S.C. 1851(f)(1); see also 12 U.S.C. 371c. Section
13(f)(3) of the BHC Act also provides an exemption for prime
brokerage transactions between a banking entity and a covered fund
in which a covered fund managed, sponsored, or advised by that
banking entity has taken an ownership interest. 12 U.S.C.
1851(f)(3). In addition, section 13(f)(2) subjects any transaction
permitted under section 13(f) (including a permitted prime brokerage
transaction) between a banking entity and covered fund to section
23B of the Federal Reserve Act. 12 U.S.C. 1851(f)(2); see 12 U.S.C.
371c-1.
    \405\ In the preamble to the 2013 rule, the agencies noted that
``[s]ection 13(f) of the BHC Act does not incorporate or reference
the exemptions contained in section 23A of the FR Act or the Board's
Regulation W.'' 79 FR 5746.
    \406\ 85 FR 12145-46.
---------------------------------------------------------------------------

    As described in the 2020 proposal, the agencies believe the
statutory rulemaking authority under paragraph (d)(1)(J) of section 13
of the BHC Act permits the agencies to determine that banking entities
may enter into covered transactions with related covered funds that
would otherwise be prohibited by section 13(f)(1) of the BHC Act,
provided that the rulemaking complies with applicable statutory
requirements.\407\ This interpretation of the agencies' rulemaking
authority is supported both by the inclusion of other covered
transactions within the permitted activities listed in paragraph (d)(1)
of section 13 and by the manner in which section 13(f)(1) of the BHC
Act is incorporated in the list of permitted activities in paragraph
(d)(1), as described below.
---------------------------------------------------------------------------

    \407\ 12 U.S.C. 1851(b)(2), (d)(1)(J), (d)(2).
---------------------------------------------------------------------------

    Section 23A of the Federal Reserve Act limits the aggregate amount
of covered transactions between a member bank and its affiliates, while
section 13(f)(1) of the BHC Act generally prohibits covered
transactions between a banking entity and a related covered fund, with
no minimum amount of permissible covered transactions.\408\ Despite the
general prohibition on certain covered transactions in section
13(f)(1), section 13 also authorizes a banking entity to own an
interest in a related covered fund, which would be a ``covered
transaction'' for purposes of section 23A of the Federal Reserve
Act.\409\ In addition to this apparent conflict between paragraphs
13(d) and (f) with respect to covered fund ownership, there are other
elements of these paragraphs that introduce ambiguity about the
interpretation of the term ``covered transaction'' as used in section
13(f) of the BHC Act. For example, despite the general prohibition on
covered funds, another part of section 13 permits a bank entity ``to
acquire or retain an ownership interest in a covered fund in accordance
with the requirements of section 13.'' \410\ In the preamble to the
2013 rule, the agencies specifically interpreted section 13 to allow
such investments noting that a contrary interpretation would make the
specific language that permits covered transactions between a banking
entity and a related covered fund ``mere surplusage.'' \411\ The
statute also prohibits a banking entity that organizes or offers a
hedge fund or private equity fund from directly or indirectly
guaranteeing, assuming, or otherwise insuring the obligations or
performance of the fund (or of any hedge fund or private equity fund in
which such hedge fund or private equity fund invests).\412\ To the
extent that section 13(f) prohibits all covered transactions between a
banking entity and a related covered fund, however, the independent
prohibition on guarantees in section 13(d)(1)(G)(v) would seem to be
unnecessary and redundant.\413\
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    \408\ 12 U.S.C. 371c, 12 U.S.C. 1851(f)(1). The term ``covered
transaction'' is defined in section 23A of the Federal Reserve Act
to mean, with respect to an affiliate of a member bank, (1) a loan
or extension of credit to the affiliate, including a purchase of
assets subject to an agreement to repurchase; (2) a purchase of or
an investment in securities issued by the affiliate; (3) a purchase
of assets from the affiliate, except such purchase of real and
personal property as may be specifically exempted by the Board by
order or regulation; (4) the acceptance of securities or other debt
obligations issued by the affiliate as collateral security for a
loan or extension of credit to any person or company; (5) the
issuance of a guarantee, acceptance, or letter of credit, including
an endorsement or standby letter of credit, on behalf of an
affiliate; (6) a transaction with an affiliate that involves the
borrowing or lending of securities, to the extent that the
transaction causes a member bank or a subsidiary to have credit
exposure to the affiliate; or (7) a derivative transaction, as
defined in paragraph (3) of section 5200(b) of the Revised Statutes
of the United States (12 U.S.C. 84(b)), with an affiliate, to the
extent that the transaction causes a member bank or a subsidiary to
have credit exposure to the affiliate. See 12 U.S.C. 371c(b)(7), as
amended by Pub. L. 111.203, section 608 (July 21, 2010). Section
13(f) of the BHC Act does not alter the applicability of section 23A
of the Federal Reserve Act and the Board's Regulation W to covered
transactions between insured depository institutions and their
affiliates.
    \409\ 12 U.S.C. 1851(d)(1)(G); (d)(4).
    \410\ 79 FR 5746.
    \411\ Id.
    \412\ 12 U.S.C. 1851(d)(1)(G)(v).
    \413\ See 12 U.S.C. 371c(b)(7)(E); 12 CFR 223.3(h)(4).
---------------------------------------------------------------------------

    Although the agencies previously expressed doubt about their
ability to permit banking entities to enter into covered transactions
with related covered funds pursuant to their authority under section
13(d)(1)(J) of the BHC Act,\414\ the activities permitted pursuant to
paragraph (d) specifically contemplate allowing a banking entity to
enter into certain covered

transactions with related funds.\415\ The exceptions in section
13(f)(1) are also expressly incorporated into the statutory list of
permitted activities, specifically in section 13(d)(1)(G)(iv).\416\ By
virtue of the conflict between paragraphs (d) and (f) of section 13,
and the inclusion of specific covered transactions within the permitted
activities in paragraph (d) of section 13, the agencies continue to
believe that the authority granted pursuant to paragraph (d)(1)(J) to
determine that other activities are not prohibited by the statute
authorizes the agencies to exercise rulemaking authority to determine
that banking entities may enter into covered transactions with related
covered funds that would otherwise be prohibited by section 13(f)(1) of
the BHC Act, provided that the rulemaking complies with applicable
statutory requirements.\417\
---------------------------------------------------------------------------

    \414\ See 76 FR 68912 n.313.
    \415\ 12 U.S.C. 1851(d)(1)(G); (d)(4).
    \416\ 12 U.S.C. 1851(d)(1)(G)(iv).
    \417\ 12 U.S.C. 1851(b)(2), (d)(1)(J), (d)(2).
---------------------------------------------------------------------------

    Several commenters expressed support for the proposed amendments to
the regulations implementing section 13(f)(1) of the BHC Act that would
have permitted a banking entity to engage in a limited set of covered
transactions with a related covered fund.\418\ Some commenters
recommended that the agencies clarify whether a banking entity may
enter into exempt transactions with a related covered fund in the
circumstance where such transactions would be exempt from section 23A
of the Federal Reserve Act only if a bank entered into such
transactions with a securities affiliate.\419\ A few commenters also
recommended that the agencies adopt a new exclusion allowing a banking
entity to offer other types of extensions of credit to a related
covered fund, including extensions of credit in the ordinary course of
business.\420\ Other commenters recommended that the agencies clarify
that section 13(f)(1) does not apply outside of the United States.\421\
The commenters noted that such an approach would limit the
extraterritorial effect of section 13(f)(1), and would better align
section 13(f)(1) with the manner in which section 23A of the Federal
Reserve Act applies outside of the United States.
---------------------------------------------------------------------------

    \418\ See, e.g., ABA; BPI; CBA; Data Boiler; EBF; FSF; IIB; PNC;
and SIFMA.
    \419\ ABA; BPI; FSF; and SIFMA.
    \420\ BPI and PNC.
    \421\ CBA; EBF; and IIB.
---------------------------------------------------------------------------

    As discussed below, the final rule adopts the proposed amendments
from the 2020 proposal with minor modifications. The agencies believe
that, under certain circumstances, it is appropriate to permit banking
entities to enter into certain covered transactions with related
covered funds, in the manner described in the amendments to Sec.  __.14
of the implementing regulations. Consistent with the 2020 proposal,
these amendments do not modify the definition of ``covered
transaction'' but instead authorize banking entities to engage in
limited transactions with related covered funds. Any transactions
permitted by these revisions must still meet the eligibility
requirements for the particular transaction, and the banking entity
must also comply with certain conflict of interest, high-risk, and
safety and soundness restrictions with respect to such transactions.
The agencies are also expressly providing that a banking entity may
enter into certain riskless principal transactions with a related
covered fund, as described below.
Exempt Transactions Under Section 23A and the Board's Regulation W;
Riskless Principal Transactions
    The final rule adopts the amendments to the regulations
implementing section 13(f)(1) of the BHC Act to permit banking entities
to enter into exempt transactions permitted under section 23A and the
Board's Regulation W. Specifically, the final rule permits a banking
entity to engage in certain covered transactions with a related covered
fund that would be exempt from the quantitative limits, collateral
requirements, and low-quality asset prohibition under section 23A of
the Federal Reserve Act, including certain transactions that would be
exempt pursuant to section 223.42 of the Board's Regulation W.\422\
---------------------------------------------------------------------------

    \422\ See 12 U.S.C. 371c(d); 12 CFR 223.42.
---------------------------------------------------------------------------

    Section 23A of the Federal Reserve Act is designed to protect
against a depository institution suffering losses in transactions with
affiliates, and to limit the ability of a depository institution to
transfer to its affiliates the ``subsidy'' arising from the depository
institution's access to the Federal safety net.\423\ Nevertheless, a
member bank may enter into certain ``exempt'' covered transactions set
forth in section 23A of the Federal Reserve Act and the Board's
Regulation W, without regard to the quantitative limits, collateral
requirements, and low-quality asset prohibition of section 23A and the
Board's Regulation W, provided such transactions meet the criteria
specified in Regulation W.\424\
---------------------------------------------------------------------------

    \423\ For a brief background on section 23A of the Federal
Reserve Act, see Transactions Between Member Banks and Their
Affiliates, 67 FR 76560-765561 (December 12, 2002).
    \424\ See 12 U.S.C. 371c(d); 12 CFR 223.42.
---------------------------------------------------------------------------

    Under the Board's Regulation W, a member bank may enter into
certain exempt covered transactions only with a securities affiliate.
Specifically, under these exempt covered transactions, a member bank
may enter into transactions to purchase marketable securities, to
purchase municipal securities, and to enter into riskless principal
transactions only with a securities affiliate.\425\ In permitting such
transactions under Regulation W, the Board previously concluded that
the condition that such transactions were permissible only with a
securities affiliate was an important consideration that helped justify
the exemption, noting that securities affiliates generally must be
registered as broker-dealers, and are therefore subject to SEC
supervision and examination, and are required to keep detailed records
concerning each securities transaction.\426\
---------------------------------------------------------------------------

    \425\ 12 CFR 223.42(f), (g), (m).
    \426\ 67 FR 76591 (December 12, 2002); see 67 FR 76593, 76597.
---------------------------------------------------------------------------

    The exempt transactions specified in section 23A of the Federal
Reserve Act and Regulation W are structured in a manner so as not to
present the same concerns about a depository institution suffering
losses or transferring the subsidy arising from the depository
institution's access to the Federal safety net. The agencies believe
that the same rationale that supports the exemptions in section 23A of
the Federal Reserve Act and the Board's Regulation W also supports
exempting such transactions from the prohibition on covered
transactions between a banking entity and related covered funds under
section 13(f)(1) of the BHC Act, provided that such transactions are
subject to the same requirements and conditions specified in Regulation
W. In particular, the agencies note that these exemptions generally do
not present significant risks of loss and serve important public policy
objectives.\427\
---------------------------------------------------------------------------

    \427\ For example, intraday extensions of credit are exempt
covered transactions under section 23A of the Federal Reserve Act.
The Board previously has noted that ``[i]ntraday overdrafts and
other forms of intraday credit generally are not used as a means of
funding or otherwise providing financial support for an affiliate.
Rather, these credit extensions typically facilitate the settlement
of transactions between an affiliate and its customers when there
are mismatches between the timing of funds sent and received during
the business day.'' 67 FR 76596.
---------------------------------------------------------------------------

    Several commenters recommended that the agencies clarify whether a
banking entity may enter into certain transactions with a related
covered fund that would be permissible under the Board's Regulation W
if entered into between a bank and a securities affiliate,

even if the covered fund would not meet the eligibility criteria to be
a ``securities affiliate'' under the Board's Regulation W.\428\ As
noted above, Regulation W imposes various conditions and requirements
on transactions that a bank enters into with its affiliates, and
permits a bank to enter into transactions involving the purchase of
marketable securities, the purchase of municipal securities, and
riskless principal transactions only with an affiliate that is a
``securities affiliate'' as defined in Regulation W. With respect to
purchases of marketable securities and municipal securities, the final
rule follows the approach adopted in Regulation W, and permits a
banking entity to enter into such covered transactions with a related
covered fund only if those transactions would meet all of the
eligibility criteria to qualify as exempt transactions under Regulation
W, including the requirement that the related covered fund meets the
requirements to be a securities affiliate.\429\ As noted above, the
exempt transactions specified in Regulation W include various limits
and conditions that both limit the risks of such transactions and allow
the Federal banking agencies to monitor compliance. Generally, the
final rule retains the eligibility criteria for exempt covered
transactions defined in Regulation W. The agencies believe that these
conditions serve important policies, and appropriately limit the scope
of the exempt transactions permissible under the implementing
regulations.
---------------------------------------------------------------------------

    \428\ ABA; BPI; FSF; and SIFMA. Under the Board's Regulation W,
a ``securities affiliate'' is defined as ``[a]n affiliate of the
member bank that is registered with the Securities and Exchange
Commission as a broker or dealer; or . . . [a]ny other securities
broker or dealer affiliate of a member bank that is approved by the
Board.'' 12 CFR 223.3(gg).
    \429\ In addition to requiring that an affiliate be a securities
affiliate, the exemptions under Regulation W permitting a bank to
purchase marketable securities or municipal securities in certain
circumstances require the bank to retain records about the
underlying transaction. See 12 CFR 223.42(f)(6), (g)(3)(iii)(B).
---------------------------------------------------------------------------

    The final rule permits banking entities to enter into riskless
principal transactions with a related covered fund, including in
circumstances where the covered fund is not a ``securities affiliate.''
\430\ In a riskless principal transaction, the riskless principal (the
banking entity) buys and sells the same security contemporaneously, and
the asset risk passes promptly from the affiliate (the related covered
fund) through the riskless principal to a third party.\431\ In
permitting such transactions under Regulation W, the Board previously
found that there was no regulatory benefit to subjecting riskless
principal transactions to section 23A of the Federal Reserve Act,
because such transactions closely resemble securities brokerage
transactions, and these transactions do not allow the affiliate to
transfer risk to the affiliate acting as a riskless principal.\432\
---------------------------------------------------------------------------

    \430\ Cf. 12 CFR 223.42(m).
    \431\ See 67 FR 76597.
    \432\ Id.
---------------------------------------------------------------------------

    Although the 2020 proposal would have permitted a banking entity to
enter into a riskless principal transaction with a covered fund
provided it met the criteria in Regulation W, the final rule adopts a
standalone exception to differentiate riskless principal transactions
specifically from other transactions that would be exempt transactions
under the Board's Regulation W.\433\ In connection with permitting
banking entities to enter into riskless principal transactions with
related covered funds in a separate exception from Super 23A, the
agencies are defining riskless principal transactions in Sec.  __.10 of
the regulations. The definition of riskless principal transactions
adopted in the final rule is similar to the definition adopted in the
Board's Regulation W, as this definition is appropriately narrow and
generally familiar to banking entities.\434\
---------------------------------------------------------------------------

    \433\ 12 CFR 223.42.
    \434\ See 12 CFR 223.3(ee).
---------------------------------------------------------------------------

    In addition, and as discussed in more detail below, banking
entities may separately rely on the independent exception for
acquisitions of assets in connection with payment, clearing, and
settlement services. The agencies expect that in many instances,
subject to other applicable laws and regulations, a banking entity may
be able to engage in acquisitions of assets in connection with payment,
clearing, and settlement services, without relying on the exception
permitting banking entities to enter into covered transactions with
their related covered funds that would be exempt under Regulation W.
Short-Term Extensions of Credit and Acquisitions of Assets in
Connection With Payment, Clearing, and Settlement Services
    The final rule adopts the proposed amendments in the 2020 proposal
that would have permitted a banking entity to provide short-term
extensions of credit to, and purchase assets from, a related covered
fund, subject to appropriate limits. Under the final rule, each short-
term extension of credit or purchase of assets must be made in the
ordinary course of business in connection with payment transactions;
securities, derivatives, or futures clearing; or settlement services.
In addition, each extension of credit must be required to be repaid,
sold, or terminated no later than five business days after it was
originated. Additionally, the proposed five business day criterion is
consistent with the Federal banking agencies' capital rules and would
generally limit banking entities to transactions with normal settlement
periods, which have lower risk of delayed settlement or failure, when
providing short-term extensions of credit.\435\ Each short-term
extension of credit must also meet the same requirements applicable to
intraday extensions of credit under section 223.42(l)(1)(i) and (ii) of
the Board's Regulation W (as if the extension of credit was an intraday
extension of credit, regardless of the duration of the extension of
credit). Under these requirements, the banking entity making a short-
term extension would have to meet the same requirements as it would to
engage in an intraday extension of credit under Regulation W (and as
incorporated in the implementing regulations). Specifically, the
banking entity would need to have policies and procedures to manage the
credit exposure and must have no reason to believe that the related
covered fund will have difficulty repaying the extension of credit in
accordance with its terms. Finally, each extension of credit or
purchase of assets permitted by these revisions must also comply with
certain conflict of interest, high-risk, and safety and soundness
restrictions, and must otherwise be permissible for the banking entity
to enter into with the fund.\436\
---------------------------------------------------------------------------

    \435\ See 78 FR 62110 (October 11, 2013). While the Federal
banking agencies require firms to track and monitor the credit risk
exposure for transactions involving securities, foreign exchange
instruments, and commodities that have a risk of delayed settlement,
this requirement does not apply to other types of transactions which
may be used in providing a short-term extension of credit (e.g.,
repo-style transactions). Additionally, banking entities typically
monitor credit extensions by counterparty, and not by transaction
type. Thus, the final rule is consistent with the approach taken in
the Federal banking agencies' capital rule, without imposing an
additional compliance burden without a corresponding benefit. See,
e.g., 12 CFR 3.2; 217.2; 324.2 (defining derivative contract to
include unsettled securities with a contractual settlement or
delivery lag that is longer than the lesser of the market standard
for the particular instrument or five business days); 12 CFR
3.38(d); 217.38(d); 324.38(d) (noting that an institution must hold
risk-based capital against any delivery-versus-payment or payment-
versus-payment transaction with a normal settlement period if the
counterparty has not made delivery within five business days after
settlement).
    \436\ For example, an investment fund with respect to which a
member bank or its affiliate is an investment adviser may be subject
to additional restrictions under Section 23A of the Federal Reserve
Act. See 12 U.S.C. 371c(b)(1)(D).

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

    The agencies do not believe it would be appropriate to permit
banking entities to enter into other covered transactions with a
related covered fund, outside of the exceptions noted above. Although
some commenters recommended expanding this exception to allow banking
entities to enter into limited amounts of covered transactions with
related covered funds, the agencies believe that permitting banking
entities to engage in other covered transactions with related covered
funds would potentially raise the concerns that paragraph 13(f)(1) was
intended to address.
    The agencies also do not believe that it would be appropriate to
limit the application of section 13(f)(1) to the United States as some
commenters recommended, at this time. The agencies note that other
amendments in the final rule (for example, amendments to the treatment
of foreign excluded funds and foreign public funds) may help address
some of the commenters' concerns about the extraterritorial application
of section 13(f)(1).
Impact of the Amendments on Safety and Soundness and U.S. Financial
Stability
    The agencies expect that the amendments in the final rule described
above would generally promote and protect the safety and soundness of
banking entities and U.S. financial stability. In comments previously
submitted to the agencies, banking entities that sponsor or serve as
the investment adviser to covered funds have argued that the inability
to engage in any covered transactions with such funds, particularly
those types of transactions that are expressly exempted under section
23A of the Federal Reserve Act and the Board's Regulation W, has
limited the services that they or their affiliates can provide. The
commenters said that amending the regulations to permit limited covered
transactions with related covered funds would not create any new
incentives for the banking entity to financially support the related
covered fund in times of stress and would not otherwise permit the
banking entity to indirectly engage in proprietary trading through the
related covered fund.\437\ For example, when a banking entity sponsors
or advises a covered fund, the prohibition on covered transactions
between the banking entity (and its affiliates) and the covered fund
may limit the ability of the banking entity and its affiliates to
provide other services, such as trade settlement services, to the
covered fund.
---------------------------------------------------------------------------

    \437\ See 85 FR 12144.
---------------------------------------------------------------------------

    As discussed below, the agencies believe that the exceptions in the
final rule would generally promote and protect the safety and soundness
of banking entities and U.S. financial stability by allowing banking
entities to reduce operational risk.
    Currently, the restrictions under section 13(f)(1) of the BHC Act
substantially limit the ability of a banking entity to both (1)
organize and offer a covered fund, or act as an investment adviser to
the covered fund, and (2) provide custody or other services to the
fund. As a result, a third party is required to provide other necessary
services for the fund's operation, including payment, clearing, and
settlement services that are generally provided by the fund's
custodian, even when the banking entity sponsor of the fund typically
provides those services to other funds it sponsors. This is the case
even when the third party may not offer the same quality of services
available through an affiliate, or where the third party may charge
more for the same services that could be provided by an affiliate. This
increases the potential for problems at the third-party service
provider (e.g., an operational failure or a disruption to normal
functioning) to affect the banking entity or the fund, which were
required to use the third-party service provider as a result of the
restrictions under section 13(f)(1). Those problems may then spread
among financial institutions or markets and thereby threaten the
stability of the U.S. financial system. By amending Sec.  __.14(a),
therefore, the final rule allows a banking entity to reduce both
operational risk and interconnectedness to other financial institutions
by directly providing a broader array of services to a fund it
organizes and offers, or advises. The agencies believe that reducing
these risks will promote and protect the safety and soundness of
banking entities.\438\
---------------------------------------------------------------------------

    \438\ The agencies believe that the same rationales that
supported exempting certain covered transactions in section 23A of
the Federal Reserve Act and the Board's Regulation W also support
permitting a banking entity to engage in those exempt covered
transactions with a related covered fund, subject to the same terms
and conditions as applicable under section 23A and Regulation W.
---------------------------------------------------------------------------

    The final rule also would promote and protect U.S. financial
stability by reducing interconnectedness among firms. The provision of
custodial services among depository institutions in the United States
is highly concentrated, with the four largest providers, all of which
remain subject to the Volcker Rule, holding more than 85 percent of
custodial assets. Requiring a banking entity that organizes and offers
a covered fund to use a third party to provide these services could
increase the interconnections between these firms and the risk that
distress at one banking entity would be spread to the others. The
authorized covered transactions would permit banking entities to
provide a more comprehensive suite of services to related covered
funds, reducing interconnectedness by reducing the need to rely on
third parties to provide such services.
    The final rule also retains important limits on the transactions
that a banking entity may enter into with a related covered fund,
including limitations that apply to transactions within the new
exceptions in the regulations implementing Sec.  __.14(a). As specified
in the statute, such activities are permissible only ``to the extent
permitted by any other provision of Federal or state law, and subject
to the limitations under section 13(d)(2) of the BHC Act and any
restrictions or limitations that the appropriate Federal banking
agencies, the Securities and Exchange Commission, and the Commodity
Futures Trading Commission, may determine . . .'' \439\ Section
13(d)(2) of the BHC Act also imposes additional restrictions on any
activities authorized pursuant to section (d)(1), including those
activities authorized by rulemaking pursuant to section (d)(1)(J).\440\
---------------------------------------------------------------------------

    \439\ 12 U.S.C. 1851(d)(1).
    \440\ 12 U.S.C. 1851(d)(2); see also 2013 rule Sec. Sec.  __.7
and __.15.
---------------------------------------------------------------------------

    Sections __.14(b) and __.14(c) of the regulations implementing
section 13 of the BHC Act both generally require that a banking entity
may enter into certain transactions specified in section 23B of the
Federal Reserve Act (including ``covered transactions'' as defined in
section 23A of the Federal Reserve Act) with related covered funds only
on terms and under circumstances that are substantially the same (or at
least as favorable) as to the banking entity as those prevailing at the
time for comparable transactions with or involving other nonaffiliated
companies, or in the absence of comparable transactions, on terms and
under circumstances that the banking entity in good faith would offer
to, or would apply to, nonaffiliated companies.\441\
---------------------------------------------------------------------------

    \441\ 12 U.S.C. 1851(f)(2); see 12 U.S.C. 371c-1(a)(1).

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

    The agencies therefore have determined that the amendments to Sec.
__.14(a) of the final rule, in the manner described above, would
promote and protect both the safety and soundness of banking entities,
and U.S. financial stability.

E. Ownership Interest

1. Definition of ``Ownership Interest''
    The 2013 rule defines an ``ownership interest'' in a covered fund
to mean any equity, partnership, or other similar interest. Some
banking entities have expressed concern about the inclusion of the term
``other similar interest'' in the definition of ``ownership interest,''
and have indicated that the definition of this term could lead to the
inclusion of debt instruments that have standard covenants within the
definition of ownership interest. Under the 2013 rule, ``other similar
interest'' is defined as an interest that:
     Has the right to participate in the selection or removal
of a general partner, managing member, member of the board of directors
or trustees, investment manager, investment adviser, or commodity
trading advisor of the covered fund (excluding the rights of a creditor
to exercise remedies upon the occurrence of an event of default or an
acceleration event);
     Has the right under the terms of the interest to receive a
share of the income, gains or profits of the covered fund;
     Has the right to receive the underlying assets of the
covered fund after all other interests have been redeemed and/or paid
in full (excluding the rights of a creditor to exercise remedies upon
the occurrence of an event of default or an acceleration event);
     Has the right to receive all or a portion of excess spread
(the positive difference, if any, between the aggregate interest
payments received from the underlying assets of the covered fund and
the aggregate interest paid to the holders of other outstanding
interests);
     Provides under the terms of the interest that the amounts
payable by the covered fund with respect to the interest could be
reduced based on losses arising from the underlying assets of the
covered fund, such as allocation of losses, write-downs or charge-offs
of the outstanding principal balance, or reductions in the amount of
interest due and payable on the interest;
     Receives income on a pass-through basis from the covered
fund, or has a rate of return that is determined by reference to the
performance of the underlying assets of the covered fund; or
     Any synthetic right to have, receive, or be allocated any
of the rights above.\442\
---------------------------------------------------------------------------

    \442\ 2013 rule Sec.  __.10(d)(6)(i).
---------------------------------------------------------------------------

    This definition focuses on the attributes of the interest and
whether it provides a banking entity with economic exposure to the
profits and losses of the covered fund, rather than its form. Under the
2013 rule, a debt interest in a covered fund can be an ownership
interest if it has the same characteristics as an equity or other
ownership interest (e.g., provides the holder with certain voting
rights; the right or ability to share in the covered fund's profits or
losses; or the ability, directly or pursuant to a contract or synthetic
interest, to earn a return based on the performance of the fund's
underlying holdings or investments).
    In the 2018 proposal, the agencies requested comment on all aspects
of the 2013 rule's application to securitization transactions,
including the definition of ownership interest. Specifically, the
agencies asked whether there were any modifications that should be made
to the 2013 rule's definition of ownership interest.\443\ Among other
things, the agencies requested comments on whether they should modify
Sec.  __.10(d)(6)(i)(A) to provide that the ``rights of a creditor to
exercise remedies upon the occurrence of an event of default or an
acceleration event'' include the right to participate in the removal of
an investment manager for cause, or to nominate or vote on a nominated
replacement manager upon an investment manager's resignation or
removal.\444\
---------------------------------------------------------------------------

    \443\ 83 FR 33481.
    \444\ Id.
---------------------------------------------------------------------------

    A number of comments received on the 2018 proposal supported the
agencies' suggestion to modify Sec.  __.10(d)(6)(i)(A) and to expressly
permit creditors to participate in the removal of an investment manager
for cause, or to nominate or vote on a nominated replacement manager
upon an investment manager's resignation or removal without causing an
interest to become an ownership interest.\445\ However, a few of these
commenters on the 2018 proposal noted that this modification would not
address all issues with the condition as banks sometimes have
contractual rights to participate in the selection or removal of a
general partner, managing member or member of the board of directors or
trustees of a borrower that are not limited to the exercise of a remedy
upon an event of default or other default event.\446\ Therefore, these
commenters proposed eliminating the ``other similar interest'' clause
from the definition altogether or, alternatively, replacing the
definition of ownership interest with the definition of ``voting
securities'' from the Board's Regulation Y.
---------------------------------------------------------------------------

    \445\ See, e.g., SFIG; JBA; LSTA; and IAA.
    \446\ See SFIG.
---------------------------------------------------------------------------

    A number of commenters on the 2018 proposal argued that debt
interests issued by covered funds and loans to third-party covered
funds not advised or managed by a banking entity should be excluded
from the definition of ownership interest.\447\ Other commenters
suggested reducing the scope of the definition of ownership interest to
apply only to equity and equity-like interests that are commonly
understood to indicate a bona fide ownership interest in a covered
fund.\448\ One other commenter asked the agencies to clarify conditions
under the ``other similar interest'' clause.\449\ Specifically, the
commenter asked the agencies to clarify whether the right to receive
all or a portion of the spread extends to using the excess spread or
any debt repaid from collections on underlying assets of a special
purpose entity to pay principal or interest that is otherwise owed is
not an ownership interest. Another commenter asked the agencies not to
modify the definition of ownership interest as, the commenter argued,
there is nothing under section 13 of the BHC Act that limits or
restricts the ability of a banking entity or nonbank financial company
to sell or securitize loans in a manner permitted by law.\450\
---------------------------------------------------------------------------

    \447\ See, e.g., Capital One et al. and BPI.
    \448\ See, e.g., ABA and CAE.
    \449\ See SFIG.
    \450\ See Data Boiler.
---------------------------------------------------------------------------

    In response to comments received on the 2018 proposal and in order
to provide clarity about the types of interests that would be
considered within the scope of the definition of ownership interest,
the 2020 proposal would have amended the parenthetical in Sec.
__.10(d)(6)(i)(A) to specify that creditors' remedies upon the
occurrence of an event of default or an acceleration event, which
include, for example, the right to participate in the removal of an
investment manager for cause or to nominate or vote on a nominated
replacement manager upon an occurrence of an event of default, would
not be considered an ownership interest for this reason alone.\451\ The
2020 proposal also sought comment on whether it would be appropriate to

further allow for an interest to confer the right to participate in any
removal of an investment manager for cause, or to nominate or vote on a
nominated replacement manager upon an investment manager's resignation
or removal, whether or not an event of default or an acceleration event
has occurred, without that interest being deemed an ownership interest.
Such additional ``for cause'' termination events may include the
insolvency of the investment manager, the breach by the investment
manager of certain representations or warranties, or the occurrence of
a ``key person'' event or a change in control with respect to the
investment manager.
---------------------------------------------------------------------------

    \451\ The definition of ``ownership interest'' in the
implementing regulations is independent from the definition of
``voting securities'' in the Board's Regulation Y.
---------------------------------------------------------------------------

    Commenters on the 2020 proposal generally supported the proposed
amendment to the definition of ownership interest to specify that
creditors' remedies upon the occurrence of an event of default or an
acceleration event include the right to participate in the removal of
an investment manager for cause or to nominate or vote on a nominated
replacement manager upon an occurrence of an event of default. In the
view of these commenters, the proposed clarification would
appropriately recognize that the ability of a holder to vote on removal
or appointment of managers for cause is not a right limited to equity
holders. However, many of these commenters asserted that creditors'
rights are also provided to debt holders in circumstances other than an
event of default or acceleration. These commenters therefore
recommended the proposed amendments be expanded to include additional
for cause events that are independent of an event of default or
acceleration, such as the insolvency of the investment manager or
breach of the investment management or collateral management
agreement.\452\
---------------------------------------------------------------------------

    \452\ See, e.g., SIFMA.
---------------------------------------------------------------------------

    In light of comments received on the 2020 proposal, the agencies
recognize that it is customary for debt holders to hold certain rights
to participate in the removal or replacement of an investment manager
for cause that may be triggered by events other than default or
acceleration events. The agencies believe that debt interests that
include the rights of a creditor to participate in the for-cause
removal or replacement of an investment manager under certain
circumstances do not necessarily constitute the type of interest
Section 13 of the BHC Act is intended to capture as an ownership
interest. The agencies are therefore finalizing, with certain
modifications, the amendments to Sec.  __.10(d)(6)(i)(A) in order to
provide clarity about the types of creditor rights that may attach to
an interest without that interest being deemed an ownership interest.
The agencies have modified the scope of the definition of ownership
interest in the final rule to allow for certain additional rights of
creditors that are not triggered exclusively by an event of default or
acceleration to attach to a debt interest without such interests being
deemed ownership interests. In addition to such rights arising under
events of default or acceleration, under the final rule, the definition
of ownership interest does not include rights of a creditor to
participate in the removal or replacement of an investment manager for
cause in connection with:
    (1) The bankruptcy, insolvency, conservatorship or receivership of
the investment manager;
    (2) the breach by the investment manager of any material provision
of the covered fund's transaction agreements applicable to the
investment manager;
    (3) the breach by the investment manager of material
representations or warranties;
    (4) the occurrence of an act that constitutes fraud or criminal
activity in the performance of the investment manager's obligations
under the covered fund's transaction agreements;
    (5) the indictment of the investment manager for a criminal
offense, or the indictment of any officer, member, partner or other
principal of the investment manager for a criminal offense materially
related to his or her investment management activities;
    (6) a change in control with respect to the investment manager;
    (7) the loss, separation or incapacitation of an individual
critical to the operation of the investment manager or primarily
responsible for the management of the covered fund's assets; or
    (8) other similar events that constitute ``cause'' for removal of
an investment manager, provided that such events are not solely related
to the performance of the covered fund or to the investment manager's
exercise of investment discretion under the covered fund's transaction
agreements.
    The 2020 proposal also would have provided a safe harbor from the
definition of ownership interest, as suggested by some commenters to
the 2018 proposal.\453\ The safe harbor was intended to address
concerns of commenters to the 2018 proposal that some ordinary debt
interests could be construed as an ownership interest. The 2020
proposal, therefore, would have provided that any senior loan or other
senior debt interest that meets all of the following characteristics
would not be considered to be an ownership interest:
---------------------------------------------------------------------------

    \453\ See SFIG.
---------------------------------------------------------------------------

    (1) The holders of such interest do not receive any profits of the
covered fund but may only receive: (i) Interest payments which are not
dependent on the performance of the covered fund; and (ii) fixed
principal payments on or before a maturity date (which may include
prepayment premiums intended solely to reflect, and compensate holders
of the interest for, foregone income resulting from an early
prepayment);
    (2) The entitlement to payments on the interest is absolute and may
not be reduced because of the losses arising from the covered fund,
such as allocation of losses, write-downs or charge-offs of the
outstanding principal balance, or reductions in the principal and
interest payable; and
    (3) The holders of the interest are not entitled to receive the
underlying assets of the covered fund after all other interests have
been redeemed and/or paid in full (excluding the rights of a creditor
to exercise remedies upon the occurrence of an event of default or an
acceleration event).
    Commenters on the 2020 proposal generally supported the proposed
safe harbor from the definition of ownership interest for certain
senior loans or senior debt interests that do not have
equity[hyphen]like characteristics.\454\ However, certain commenters
also requested that the agencies clarify that the safe harbor is
available to senior loans and senior debt interests where repayment of
principal may vary as a result of acceleration or amortization
provisions.\455\ Additionally, certain commenters also requested that
the agencies clarify that the reference to senior loans or senior debt
interests in the proposed safe harbor includes all exposures that would
meet the definition of ``investment grade'' found in 12 CFR part 1 and
implementing guidelines, as long as such exposures comply with the
proposed conditions.\456\
---------------------------------------------------------------------------

    \454\ See, e.g., SIFMA; BPI; LSTA; Mortgage Bankers Association;
and PNC.
    \455\ See SIFMA.
    \456\ See, e.g., LSTA and SFA.
---------------------------------------------------------------------------

    The agencies intended for the proposed conditions of the safe
harbor to provide clarity and predictability to banking entities by
enabling them to determine more readily whether an interest would be an
ownership interest under the regulations implementing section 13 of the
BHC Act. After considering comments received, the

agencies have included the conditions from the 2020 proposal for the
safe harbor with a modification to Sec.  __.10(d)(6)(ii)(B)(1)(ii). The
modification requires that the senior loan or senior debt interest
involves, among other things, repayment of a fixed principal amount, on
or before a maturity date, in a contractually-determined manner (which
may include prepayment premiums intended solely to reflect, and
compensate holders of the interest for, forgone income resulting from
an early prepayment). The agencies believe this modification will
provide additional clarity that the safe harbor is available to senior
loan and senior debt interests where contractual principal payments
vary over the life of a senior loan or senior debt interest for reasons
such as amortization and acceleration provided that the total amount of
principal required to be repaid over the life of the instrument does
not change. The agencies believe this modification to the safe harbor
under the final rule will ensure that debt interests that do not have
equity-like characteristics are not considered ownership interests.
Additionally, the agencies believe that the conditions are rigorous
enough to prevent banking entities from evading the prohibition on
acquiring or retaining an ownership interest in a covered fund.
    Further, in response to certain commenters' request that the
agencies clarify that the reference to senior loans or senior debt
interests in the proposed safe harbor includes all exposures that would
meet the definition of ``investment grade'' found in 12 CFR part 1 and
implementing guidelines, the agencies have determined that such a
provision would be inappropriate for purposes of the safe harbor
conditions in the final rule. Unlike the safe harbor provisions in the
final rule regarding ownership interests, such a provision would not
ensure that debt interests that have equity-like characteristics are
treated as ownership interests for purposes of subpart C of the final
rule.
    In response to the 2020 proposal, one commenter requested that the
agencies modify the condition in Sec.  __.10(d)(6)(i)(B) of the
implementing regulations and Sec.  __.10(d)(6)(ii)(B)(1) of the 2020
proposal, which states that an interest that has the right to receive a
share of the income, gains or profits of the covered fund is considered
an ownership interest, to clarify that the condition would not include
amounts payable to securitization noteholders in accordance with a
contractual priority of payments, commonly referred to as a
``waterfall,'' so long as such amounts are limited to fixed principal
and interest determined on a fixed or typical index floating rate
basis.\457\ Specifically, the commenter suggested a modification to
this condition to clarify that the term ``profit'' is intended to mean
``net profits'' out of concern for the potential ambiguity of how the
condition would apply to amounts received by securitization noteholders
in accordance with the securitization's waterfall of payment. Another
commenter disagreed with any revision to the 2020 proposed rule that
would only cover as an ownership interest an interest which has the
right to receive a share of the ``net'' income, gains or profits of the
covered fund.\458\ The final rule does not modify Sec.
__.10(d)(6)(i)(B) of the implementing regulations or Sec.
__.10(d)(6)(ii)(B)(1) of the 2020 proposal. However, the agencies
clarify that a debt interest in a covered fund would not be considered
an ownership interest solely because the interest is entitled to
receive an allocation of collections from the covered fund's underlying
financial assets in accordance with a contractual priority of payments.
---------------------------------------------------------------------------

    \457\ See SFA.
    \458\ See Data Boiler.
---------------------------------------------------------------------------

2. Fund Limits and Covered Fund Deduction
    The 2020 proposal included amendments to the implementing
regulations to better align the manner in which a banking entity
calculates the aggregate fund limit and covered fund deduction with the
manner in which it calculates the per fund limit, as it relates to
investments by employees of the banking entity. Specifically,
consistent with how investments by employees and directors are treated
generally under the existing rule of construction in Sec.
__.12(b)(1)(iv), the 2020 proposal would have modified Sec. Sec.
__.12(c) and __.12(d) to require attribution of amounts paid by an
employee or director to acquire a restricted profit interest only when
the banking entity has financed the acquisition.
    The 2013 rule excludes from the definition of ownership interest
certain restricted profit interests.\459\ To be excluded from the
definition of ownership interest, the restricted profit interest must
also meet various other conditions, including that any amounts invested
in the covered fund--including amounts paid by the entity, an employee
of the entity, or former employee of the entity--are within the
applicable limits under Sec.  __.12 of the 2013 rule.\460\
---------------------------------------------------------------------------

    \459\ 2013 rule Sec.  __.10(d)(6)(ii). Under the 2013 rule, the
exclusion from the definition of ownership interest is limited to
restricted profit interests held by an entity, employee, or former
employee in a covered fund for which the entity or employee serves
as investment manager, investment adviser, commodity trading
advisor, or other service provider. As noted in the preamble to the
2013 rule, the term ``restricted profit interest'' was used to avoid
any confusion from using the term ``carried interest,'' which is
used in other contexts. The proposed rule would focus on the
treatment of restricted profit interests for purposes of calculating
compliance with the aggregate fund limit and covered fund deduction
but would not address in any way the treatment of such profit
interests under other laws, including under Federal income tax law.
See 79 FR 5706, n.2091.
    \460\ 2013 rule Sec.  __.10(d)(6)(ii)(C).
---------------------------------------------------------------------------

    Under Sec.  __.12 of the 2013 rule, different calculation
methodologies apply for purposes of calculating compliance with the per
fund limit, the aggregate fund limit, and the covered fund
deduction.\461\ For purposes of calculating a banking entity's
compliance with the aggregate fund limit and the covered fund
deduction, the banking entity must include any amounts paid by the
banking entity or an employee in connection with obtaining a restricted
profit interest in the covered fund.\462\
---------------------------------------------------------------------------

    \461\ 2013 rule Sec.  __.12(b)(1)(iv). As noted in the preamble
to the 2013 rule, the attribution to a banking entity of ownership
interests acquired by an employee or director using financing
provided by the banking entity ensures that funding provided by the
banking entity to acquire ownership interests in the fund, whether
provided directly or indirectly, is counted against the per fund
limit and aggregate fund limit. See 79 FR 5733.
    \462\ 2013 rule Sec.  __.10(d)(6)(C); Sec. Sec.  __.12(c)(1),
(d). See also 12 U.S.C. 1851(d)(1)(G).
---------------------------------------------------------------------------

    The agencies did not receive comments on the proposed change in the
treatment of restricted profit interests. Several commenters
recommended that the agencies eliminate the per fund limit, the
aggregate fund limit, and the covered fund deduction with respect to
any ownership interest held by a banking entity in any covered fund, if
that interest is held pursuant to underwriting and market making
activities.\463\
---------------------------------------------------------------------------

    \463\ BPI; FSF; IIB; and SIFMA.
---------------------------------------------------------------------------

    With respect to the proposed change in the treatment of restricted
profit interests, the agencies continue to believe that it is
appropriate for a banking entity to count amounts invested by the
banking entity (or its affiliates) to acquire restricted profit
interests in a fund organized and offered by the banking entity for
purposes of the aggregate fund limit and covered fund deduction.
However, the agencies believe attribution of employee and director
ownership of restricted profit interests to a banking entity may not be
necessary in the circumstance when a banking entity does not finance,
directly

or indirectly, the employee's or director's acquisition of a restricted
profit interest in a covered fund organized or offered by the banking
entity. The final rule amends the implementing regulations to limit the
attribution of an employee's or director's restricted profit interest
in a covered fund organized or offered by the banking entity to only
those circumstances in which the banking entity has directly or
indirectly financed the acquisition of the restricted profit interest.
The agencies expect that this amendment will simplify a banking
entity's compliance with the aggregate fund limit and covered fund
deduction provisions of the rule, and more fully recognize that
employees and directors may use their own resources, not provided by
the banking entity, to invest in ownership interests or restricted
profit interests in a covered fund they advise (for example, to align
their personal financial interests with those of other investors in the
covered fund).
    The final rule does not adopt the recommendation from commenters
that the agencies should eliminate the per fund limit, aggregate fund
limit, or covered fund deduction requirements. The 2019 amendments
adopted several changes to simplify the covered fund compliance
requirements for banking entities that engage in market making or
underwriting with respect to a third-party covered fund. Specifically,
the 2019 amendments eliminated the aggregate fund limit and capital
deduction requirements for the value of ownership interests in third-
party funds acquired or retained in connection with permissible market
making or underwriting activities (i.e., covered funds that the banking
entity does not advise or organize and offer pursuant to Sec.  __.11(a)
or (b) of the implementing regulations). In discussing this change in
the preamble to the 2019 amendments, the agencies noted that the
amendments to the treatment of ownership interests in third-party funds
were intended to better align the compliance requirements for
underwriting and market making involving covered funds with the risks
that those activities entail.\464\ The compliance challenges associated
with underwriting and market making in ownership interests in covered
funds is particularly acute with respect to third-party covered funds.
As discussed in the preamble to the 2019 amendments, ``a banking entity
can more readily determine whether a fund is a covered fund if the
banking entity advises or organizes and offers the fund.'' \465\ While
section 13 of the BHC Act provides the agencies greater flexibility to
adopt changes in the treatment of ownership interests in third-party
funds, it prescribes specific requirements that apply to funds that the
banking entity advises, or organizes and offers. Specifically, section
13 provides that a banking entity must not acquire or retain an
ownership interest in a fund organized and offered by the banking
entity except for a de minimis investment subject to and in compliance
with paragraph (d)(4) of section 13 of the BHC Act.\466\ Therefore, the
final rule does not adopt the change recommended by commenters to
modify the treatment of ownership interests in related covered funds
that are held by a banking entity in connection with market making and
underwriting activities.
---------------------------------------------------------------------------

    \464\ See 84 FR 62017.
    \465\ Id.
    \466\ 12 U.S.C. 1851(d)(1)(G)(iii).
---------------------------------------------------------------------------

F. Parallel Investments

    The 2020 proposal included a new rule of construction in Sec.
__.12(b) clarifying that banking entities are not required to treat
investments alongside covered funds as investments in covered funds if
certain conditions are met.\467\ As explained in the 2020 proposal,
this rule of construction was meant to provide clarity in light of a
discrepancy between the preamble to the 2013 rule and the text of the
implementing regulations.
---------------------------------------------------------------------------

    \467\ See 85 FR 12149.
---------------------------------------------------------------------------

    The implementing regulations require that a banking entity hold no
more than three percent of the total ownership interests of a covered
fund that the banking entity organizes and offers pursuant to Sec.
__.11.\468\ Section __.12(b)(1)(i) of the implementing regulations
requires that, for purposes of this ownership limitation, ``the amount
and value of a banking entity's permitted investment in any single
covered fund shall include any ownership interest held under Sec.
__.12 directly by the banking entity, including any affiliate of the
banking entity.'' \469\ Section __.12(b) also includes several other
rules of construction that address circumstances under which an
investment in a covered fund would be attributed to a banking entity.
---------------------------------------------------------------------------

    \468\ See id. at 12148; implementing regulations Sec.  __.12.
    \469\ See implementing regulations Sec.  __.12(b)(1)(i).
---------------------------------------------------------------------------

    The 2011 notice of proposed rulemaking included a proposed
provision that would have required attribution of certain direct
investments by a banking entity alongside, or otherwise in parallel
with, a covered fund.\470\ The agencies declined to adopt this
provision in the 2013 rule after considering the language of the
statute as well as commenters' views on that provision.\471\
---------------------------------------------------------------------------

    \470\ Prohibitions and Restrictions on Proprietary Trading and
Certain Interests in, and Relationships With, Hedge Funds and
Private Equity Funds, 76 FR 68846, 68951-52 (Nov. 7, 2011).
    \471\ In declining to adopt this parallel investment provision,
the agencies noted that banking entities rely on a number of
investment authorities and structures to make investments and meet
the needs of their clients. 79 FR 5734.
---------------------------------------------------------------------------

    The 2013 rule restricts a banking entity's investment in a covered
fund organized and offered pursuant to Sec.  __.11 to three percent of
the total number or value of the outstanding ownership interests of the
fund. That regulatory requirement is consistent with section 13(d)(4)
of the BHC Act, which limits the size of investments by a banking
entity in a hedge fund or private equity fund.\472\ Neither section
13(d)(4) of the BHC Act nor the text of the implementing regulations
requires a banking entity to treat an otherwise permissible investment
the banking entity makes alongside a covered fund as an investment in
the covered fund. The text of the 2013 rule does not impose any
quantitative limits on any investments by banking entities made
alongside, or otherwise in parallel with, covered funds.\473\ However,
in the preamble to the 2013 rule, the agencies discussed the potential
for evasion of the per fund limit and aggregate fund limit and stated
that ``if a banking entity makes investments side by side in
substantially the same positions as the covered fund, then the value of
such investments shall be included for purposes of determining the
value of the banking entity's investment in the covered fund.'' \474\
The agencies also stated that ``a banking entity that sponsors the
covered fund should not itself make any additional side by side co-
investment with the covered fund in a privately negotiated investment
unless the value of such co-investment is less than 3% of the value of
the total amount co-invested by other investors in such investment.''
\475\
---------------------------------------------------------------------------

    \472\ 12 U.S.C. 1851(d)(4).
    \473\ Any investment by the banking entity would need to comply
with the proprietary trading restrictions in Subpart B of the
implementing regulations.
    \474\ 79 FR 5734.
    \475\ See id.
---------------------------------------------------------------------------

    The 2020 proposal included a new rule of construction to address
investments made by banking entities alongside covered funds. This
proposed rule of construction was intended to clarify in the rule text
that banking

entities are not required to treat a direct investment by a banking
entity alongside a covered fund as an investment in the covered fund if
certain conditions are met. Specifically, proposed Sec.  __.12(b)(5)
provided that:
    (1) A banking entity shall not be required to include in the
calculation of the investment limits under Sec.  __.12(a)(2) any
investment the banking entity makes alongside a covered fund as long as
the investment is made in compliance with applicable laws and
regulations, including applicable safety and soundness standards.
    (2) A banking entity shall not be restricted under Sec.  __.12 in
the amount of any investment the banking entity makes alongside a
covered fund as long as the investment is made in compliance with
applicable laws and regulations, including applicable safety and
soundness standards.\476\
---------------------------------------------------------------------------

    \476\ See 85 FR 12149.
---------------------------------------------------------------------------

    In the preamble to the 2020 proposal, the agencies recognized that
banking entities rely on a number of investment authorities and
structures to make investments and meet the needs of their clients and
shareholders.\477\ The agencies indicated that the proposed rule of
construction would provide clarity to banking entities so that they may
make such investments for the benefit of their clients and
shareholders, provided that those investments comply with applicable
laws and regulations.\478\ The preamble to the 2020 proposal went on to
note several restrictions that may apply to a banking entity's
investment alongside a covered fund. For example, a banking entity may
not engage in prohibited proprietary trading alongside a covered fund.
Likewise, a banking entity must have authority to make any investment
alongside a covered fund under applicable banking and other laws and
regulations and must ensure that the investment complies with
applicable safety and soundness standards. For example, national banks
are restricted in their ability to make direct equity investments under
12 U.S.C. 24 (Seventh) and 12 CFR part 1. In addition, a banking entity
that invests alongside a covered fund that the banking entity organizes
and offers under the asset management exemption in Sec.  __.11 would
need to comply with all the conditions of that exemption, which, among
other things, prohibits the banking entity from guaranteeing, assuming,
or otherwise insuring the obligations or performance of the covered
fund. Thus, a banking entity would not be permitted to make a direct
investment alongside a covered fund that the banking entity organizes
and offers for the purpose of artificially maintaining or increasing
the value of the fund's positions. Likewise, the banking entity would
also need to ensure that any direct investment alongside an organized
and offered covered fund does not cause the sponsoring banking entity's
permitted organizing and offering activities to violate the prudential
backstops under Sec.  __.15.\479\
---------------------------------------------------------------------------

    \477\ Id. See also 79 FR 5734.
    \478\ 85 FR 12149.
    \479\ See id. In particular, to the extent the investment would
result in a material conflict of interest between the banking entity
and its clients, for example because the banking entity may exit the
position at a different time or on different terms than the covered
fund, the banking entity would be required to provide timely and
effective disclosure in accordance with Sec.  __.15(b) prior to
making the investments. Id.
---------------------------------------------------------------------------

    Most commenters that addressed the proposed rule of construction
supported adopting the proposed revision.\480\ Commenters stated that
the rule of construction was consistent with section 13 of the BHC Act,
would not increase the types of risks that section 13 of the BHC Act
was meant to address, and would not raise concerns about evading
section 13 of the BHC Act.\481\ Commenters noted that banking entities
would need to hold their investments in a manner consistent with
relevant authorities and the associated risk management and other
prudential and regulatory limits and controls, including stringent
capital requirements, for these types of investments.\482\ Some
commenters also requested that the agencies permit employees and
directors of a banking entity that sponsors a covered fund to invest
directly in that covered fund, regardless of whether the employees or
directors provide services to the covered fund on behalf of their
banking entity employer.\483\ The agencies received one comment
opposing the proposed rule of construction.\484\ This commenter
characterized the proposed rule of construction as permitting
proprietary trading at arm's length but without a limit on the
ownership interest that a banking entity may hold and stated that
parallel investments should be subject to the limitations that would
apply to direct investments in covered funds.\485\
---------------------------------------------------------------------------

    \480\ See FSF; SIFMA; BPI; IIB; Goldman Sachs; PNC; and ABA.
    \481\ See FSF; SIFMA; and BPI.
    \482\ See FSF; SIFMA; and BPI.
    \483\ See ABA and PNC.
    \484\ See Data Boiler.
    \485\ See id.
---------------------------------------------------------------------------

    After carefully considering the comments received, the agencies are
adopting the rule of construction in Sec.  __.12(b)(5), as
proposed.\486\ As described above and in the 2020 proposal, this rule
of construction is consistent with the text of section 13 of the BHC
Act, which does not prohibit a banking entity from making otherwise
permissible investments directly when doing so alongside a covered
fund. This rule of construction will also reduce compliance burden by
clarifying that a banking entity is not required under Sec.  __.12 of
the final rule to attribute to the banking entity direct investments
made alongside a covered fund for purposes of the de minimis investment
limitation. In response to the commenter who opposed the rule of
construction,\487\ the agencies note that the rule of construction is
consistent with section 13 of the BHC Act and each investment by a
banking entity must comply with laws and regulations, including any
applicable safety and soundness standards.
---------------------------------------------------------------------------

    \486\ Final rule Sec.  __.12(b)(5). These kinds of investments
could be, for example, parallel investments or co-investments. For
these purposes, ``parallel investments'' generally refers to a
series of investments that are made side-by-side with a covered
fund, and ``co-investments'' generally refers to a specific
investment opportunity that is made available to third-parties when
the general partner or investment manager for the covered fund
determines that the covered fund does not have sufficient capital
available to make the entire investment in the target portfolio
company or determines that it would not be suitable for the covered
fund to take the entire available investment.
    \487\ See Data Boiler.
---------------------------------------------------------------------------

    As discussed in the preamble to the 2020 proposal, the rule of
construction will not prohibit a banking entity from having investment
policies, arrangements or agreements to invest alongside a covered fund
in all or substantially all of the investments made by the covered fund
or to fund all or any portion of the investment opportunities made
available by the covered fund to other investors. Accordingly, a
banking entity could market a covered fund it organizes and offers
pursuant to Sec.  __.11 on the basis of the banking entity's
expectation that it would invest in parallel with the covered fund in
some or all of the same investments, or the expectation that the
banking entity would fund one or more co-investment opportunities made
available by the covered fund. However, as discussed in the preamble to
the 2020 proposal, the agencies would expect that any such investment
policies, arrangements or agreements would ensure that the banking
entity has the ability to evaluate each investment on a case-by-case
basis to confirm that the banking entity does not make any investment
unless the investment complies with applicable laws and

regulations, including any applicable safety and soundness standards.
The agencies believe that this would further ensure that the banking
entity is not exposed to the types of risks that section 13 of the BHC
Act was intended to address.
    As discussed earlier and in the preamble to the 2020 proposal, the
agencies recognize that the 2011 proposed rule would have required a
banking entity to apply the per fund limit and aggregate fund limit to
a direct investment alongside a covered fund when, among other things,
a banking entity is contractually obligated to make such investment
alongside a covered fund. The agencies continue to believe that such a
prohibition is not necessary given the agencies' expectation that a
banking entity would retain the ability to evaluate each investment on
a case-by-case basis to confirm that the banking entity does not make
any investment unless the investment complies with applicable laws and
regulations, including any applicable safety and soundness standards.
    The 2013 rule imposes certain attribution rules and eligibility
requirements for investments by directors and employees of a banking
entity in covered funds organized and offered by the banking entity.
Specifically, Sec.  __.12(b)(1)(iv) of the 2013 rule requires
attribution of an investment by a director or employee of a banking
entity who acquires an ownership interest in his or her personal
capacity in a covered fund sponsored by the banking entity if the
banking entity, directly or indirectly, extends financing for the
purpose of enabling the director or employee to acquire the ownership
interest in the fund and the financing is used to acquire such
ownership interest in the covered fund. Section __.11(a)(7) prohibits
investments by any director or employee of the banking entity (or an
affiliate thereof) in the covered fund, other than any director or
employee who is directly engaged in providing investment advisory,
commodity trading advisory, or other services to the covered fund at
the time the director or employee makes the investment.
    As discussed in the preamble to the 2020 proposal, the agencies
recognize that directors and employees of banking entities may
participate in investments alongside a covered fund, for example on an
ad hoc basis or as part of a compensation arrangement. Consistent with
the agencies' rule of construction regarding direct investments by
banking entities alongside a covered fund, the agencies would expect
that any direct investments (whether a series of parallel investments
or a co-investment) by a director or employee of a banking entity (or
an affiliate thereof) made alongside a covered fund in compliance with
applicable laws and regulations would not be treated as an investment
by the director or employee in the covered fund. Accordingly, such a
direct investment would not be attributed to the banking entity as an
investment in the covered fund, regardless of whether the banking
entity arranged the transaction on behalf of the director or employee
or provided financing for the investment.\488\ Similarly, the
requirements under Sec.  __.11(a)(7) limiting the directors and
employees that are eligible to invest in a covered fund organized and
offered by the banking entity to those that are directly engaged in
providing specified services to the covered fund would not apply to any
such direct investment.\489\
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    \488\ See 2013 rule Sec.  __.12(b)(1)(iv) (requiring attribution
of an investment by a director or employee in a covered fund
organized and offered by the banking entity, where the banking
entity, directly or indirectly, extends financing for the purpose of
enabling the director or employee to acquire the ownership interest
in the covered fund and the financing is used to acquire such
ownership interest in the covered fund) (emphasis added).
    \489\ See 2013 rule Sec.  __.11(a)(7) (prohibiting investments
by any director or employee of the banking entity (or an affiliate
thereof) in a covered fund organized and offered by the banking
entity, other than any director or employee who is directly engaged
in providing investment advisory, commodity trading advisory, or
other services to the covered fund at the time the director or
employee makes the investment) (emphasis added).
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    With respect to investments in a covered fund, the agencies decline
to permit an employee or director of a banking entity that organizes
and offers a covered fund to make investments in that covered fund if
the director or employee does not provide services to the covered fund
on behalf of the banking entity, as requested by some commenters.\490\
The restriction on these types of director and employee investments is
required by the statute.\491\
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    \490\ See ABA and PNC.
    \491\ See 12 U.S.C. 1851(d)(1)(G)(vii).
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G. Technical Amendments

    The agencies proposed five sets of clarifying technical edits to
the implementing regulations. Specifically, the agencies proposed to
(1) amend Sec.  __.12(b)(1)(ii) to add a comma after the words ``SEC-
regulated business development companies'' in both places where that
phrase is used; (2) amend Sec.  __.12(b)(4)(i) to replace the phrase
``ownership interest of the master fund'' with the phrase ``ownership
interest in the master fund''; (3) amend Sec.  __.12(b)(4)(ii) to
replace the phrase ``ownership interest of the fund'' with the phrase
``ownership interest in the fund;'' (4) amend Sec. Sec.  __.10(c)(3)(i)
and __.10(c)(10)(i) to replace the word ``comprised'' with the word
``composed;'' and (5) amend Sec.  __.10(c)(8)(iv)(A) to replace the
word ``of'' in the phrase ``contractual rights of other assets'' with
the word ``or.''
    The agencies did not receive comment on these provisions and are
adopting the technical amendments as proposed.

V. Administrative Law Matters

A. Use of Plain Language

    Section 722 of the Gramm-Leach-Bliley Act \492\ requires the
Federal banking agencies to use plain language in all proposed and
final rules published after January 1, 2000. The Federal banking
agencies sought to present the proposed rule in a simple and
straightforward manner and did not receive any comments on plain
language.
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    \492\ Public Law 106-102, section 722, 113 Stat. 1338, 1471
(1999).
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B. Paperwork Reduction Act

    Certain provisions of the final rule contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act (PRA) of 1995 (44 U.S.C. 3501-3521). In accordance with
the requirements of the PRA, the agencies may not conduct or sponsor,
and a respondent is not required to respond to, an information
collection unless it displays a currently valid Office of Management
and Budget (OMB) control number. The agencies reviewed the final rule
and determined that the final rule creates new recordkeeping
requirements and revises certain disclosure requirements that have been
previously cleared under various OMB control numbers. The agencies did
not receive any specific comments on the PRA. The agencies are
extending for three years, with revision, these information
collections. The information collection requirements contained in this
final rule have been submitted by the OCC and FDIC to OMB for review
and approval under section 3507(d) of the PRA (44 U.S.C. 3507(d)) and
section 1320.11 of the OMB's implementing regulations (5 CFR 1320). The
Board reviewed the final rule under the authority delegated to the
Board by OMB. The Board will submit information collection burden
estimates to OMB, and the submission will include burden for Federal
Reserve-supervised institutions, as well as burden for OCC-, FDIC-,
SEC-, and CFTC-supervised institutions under a holding company. The OCC
and the

FDIC will take burden for banking entities that are not under a holding
company.

Abstract

    Section 13 of the BHC Act generally prohibits any banking entity
from engaging in proprietary trading or from acquiring or retaining an
ownership interest in, sponsoring, or having certain relationships with
a covered fund, subject to certain exemptions. The exemptions allow
certain types of permissible trading and asset management activities.

Current Actions

    The final rule contains requirements subject to the PRA, and the
changes relative to the implementing regulations are discussed herein.
The new recordkeeping requirements are found in section
__.10(c)(18)(ii)(C)(1) and the modified disclosure requirements are
found in section __.11(a)(8)(i). The modified information collection
requirements would implement section 13 of the BHC Act. The respondents
are for-profit financial institutions, including small businesses. A
covered entity must retain these records for a period that is no less
than 5 years in a form that allows it to promptly produce such records
to the relevant agency on request.

Recordkeeping Requirements

    Section __.10(c)(18)(ii)(C)(1) requires a banking entity relying on
the exclusion from the covered fund definition for customer
facilitation vehicles to maintain documentation outlining how the
banking entity intends to facilitate the customer's exposure to a
transaction, investment strategy, or service. The agencies estimate
that the new recordkeeping requirement will be incurred once a year
with an average hour per response of 10 hours.

Disclosure Requirements

    Section __.11(a)(8)(i), which requires banking entities that
organize and offer covered funds to make certain disclosures to
investors in such funds, is being expanded to also apply to banking
entities relying on exclusions for credit funds, venture capital funds,
family wealth management vehicles, or customer facilitation vehicles.
The agencies estimate that the current average hours per response of
0.1 will increase to 0.5.
Revision, With Extension, of the Following Information Collections
    Estimated average hours per response:

Reporting

    Section __.4(c)(3)(i)--0.25 hours for an average of 20 times per
year.
    Section __.12(e)--20 hours (Initial set-up 50 hours) for an average
of 10 times per year.
    Section __.20(d)--41 hours (Initial set-up 125 hours) quarterly.
    Section __.20(i)--20 hours.

Recordkeeping

    Section __.3(d)(3)--1 hour (Initial set-up 3 hours).
    Section __.4(b)(3)(i)(A)--2 hours quarterly.
    Section __.4(c)(3)(i)--0.25 hours for an average of 40 times per
year.
    Section __.5(c)--40 hours (Initial setup 80 hours).
    Section __.10(c)(18)(ii)(C)(1)--10 hours.
    Section __.11(a)(2)--10 hours.
    Section __.20(b)--265 hours (Initial set-up 795 hours).
    Section __.20(c)--100 hours (Initial set-up 300 hours).
    Section __.20(d)--10 hours.
    Section __.20(e)--200 hours.
    Section __.20(f)(1)--8 hours.
    Section __.20(f)(2)--40 hours (Initial set-up 100 hours).
    Disclosure
    Section __.11(a)(8)(i)--0.5 hours for an average of 26 times per
year.
OCC
    Title of Information Collection: Reporting, Recordkeeping, and
Disclosure Requirements Associated with Restrictions on Proprietary
Trading and Certain Relationships with Hedge Funds and Private Equity
Funds.
    Frequency: Annual, quarterly, and event driven.
    Affected Public: Businesses or other for-profit.
    Respondents: National banks, state member banks, state nonmember
banks, and state and federal savings associations.
    OMB control number: 1557-0309.
    Estimated number of respondents: 39.
    Revisions estimated annual burden: 302 hours.
    Estimated annual burden hours: 20,410 hours (3,681 hour for initial
set-up and 16,729 hours for ongoing).
Board
    Title of Information Collection: Reporting, Recordkeeping, and
Disclosure Requirements Associated with Regulation VV.
    Frequency: Annual, quarterly, and event driven.
    Affected Public: Businesses or other for-profit.
    Respondents: State member banks, bank holding companies, savings
and loan holding companies, foreign banking organizations, U.S. State
branches or agencies of foreign banks, and other holding companies that
control an insured depository institution and any subsidiary of the
foregoing other than a subsidiary for which the OCC, FDIC, CFTC, or SEC
is the primary financial regulatory agency. The Board will take burden
for all institutions under a holding company including:
     OCC-supervised institutions,
     FDIC-supervised institutions,
     Banking entities for which the CFTC is the primary
financial regulatory agency, as defined in section 2(12)(C) of the
Dodd-Frank Act, and
     Banking entities for which the SEC is the primary
financial regulatory agency, as defined in section 2(12)(B) of the
Dodd-Frank Act.
    Legal authorization and confidentiality: This information
collection is authorized by section 13 of the BHC Act (12 U.S.C.
1851(b)(2) and 12 U.S.C. 1851(e)(1)). The information collection is
required in order for covered entities to obtain the benefit of
engaging in certain types of proprietary trading or investing in,
sponsoring, or having certain relationships with a hedge fund or
private equity fund, under the restrictions set forth in section 13 and
the final rule. If a respondent considers the information to be trade
secrets and/or privileged, such information could be withheld from the
public under the authority of the Freedom of Information Act (5 U.S.C.
552(b)(4)). Additionally, to the extent that such information may be
contained in an examination report, such information could also be
withheld from the public (5 U.S.C. 552 (b)(8)).
    Agency form number: FR VV.
    OMB control number: 7100-0360.
    Estimated number of respondents: 255.
    Revisions estimated annual burden: 7,880 hours.
    Estimated annual burden hours: 36,112 hours (4,381 hour for initial
set-up and 31,731 hours for ongoing).
FDIC
    Title of Information Collection: Volcker Rule Restrictions on
Proprietary Trading and Relationships with Hedge Funds and Private
Equity Funds.
    Frequency: Annual, quarterly, and event driven.
    Affected Public: Businesses or other for-profit.
    Respondents: State nonmember banks, state savings associations, and
certain subsidiaries of those entities.
    OMB control number: 3064-0184.
    Estimated number of respondents: 10.

    Revisions estimated annual burden: 175 hours.
    Estimated annual burden hours: 3,288 hours (1,759 hours for initial
set-up and 1,529 hours for ongoing).

C. Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (RFA) \493\ requires an agency to
either provide a regulatory flexibility analysis with a final rule or
certify that the final rule will not have a significant economic impact
on a substantial number of small entities. The U.S. Small Business
Administration (SBA) establishes size standards that define which
entities are small businesses for purposes of the RFA.\494\ Except as
otherwise specified below, the size standard to be considered a small
business for banking entities subject to the final rule is $600 million
or less in consolidated assets.\495\
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    \493\ 5 U.S.C. 601 et seq.
    \494\ U.S. SBA, Table of Small Business Size Standards Matched
to North American Industry Classification System Codes, available at
https://www.sba.gov/document/support--table-size-standards.
    \495\ See id. Pursuant to SBA regulations, the asset size of a
concern includes the assets of the concern whose size is at issue
and all of its domestic and foreign affiliates. 13 CFR 121.103(6).
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Board
    The Board has considered the potential impact of the final rule on
small entities in accordance with section 603 of the RFA. Based on the
Board's analysis, and for the reasons stated below, the Board certifies
that the final rule will not have a significant economic impact on a
substantial of number of small entities.
    The Board invited comment on all aspects of its analysis related to
the requirements of the RFA in connection with the 2020 proposal. In
particular, the Board requested that commenters describe the nature of
any impact on small entities and provide empirical data to illustrate
and support the extent of the impact. The Board did not receive any
comments related to this issue.
    As discussed in the Supplementary Information, the agencies are
adopting revisions to the regulations implementing section 13 of the
BHC Act in order to improve and streamline the regulations by modifying
and clarifying requirements related to the covered fund
provisions.\496\ Certain of the exclusions from the covered fund
definition included in the final rule contain recordkeeping and
disclosure requirements that would apply to banking entities relying on
the exclusion. For example, the exclusion for customer facilitation
vehicles requires a banking entity relying on the exclusion to maintain
documentation outlining how the banking entity intends to facilitate
the customer's exposure to a transaction, investment strategy, or
service. The final rule is expected to reduce regulatory burden on
banking entities, and the Board does not expect these recordkeeping
requirements to result in a significant economic impact.
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    \496\ The agencies are explicitly authorized under section
13(b)(2) of the BHC Act to adopt rules implementing section 13. 12
U.S.C. 1851(b)(2).
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    The Board's rule generally applies to state-chartered banks that
are members of the Federal Reserve System, bank holding companies, and
foreign banking organizations and nonbank financial companies
supervised by the Board (collectively, ``Board-regulated entities'').
However, section 203 of the Economic Growth, Regulatory Relief, and
Consumer Protection Act (EGRRCPA),\497\ which was enacted on May 24,
2018, amended section 13 of the BHC Act by narrowing the definition of
banking entity to exclude certain community banks.\498\ The Board is
not aware of any Board-regulated entities that meet the SBA's