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

1 12 U.S.C. 1851.
2 Id.
3 12 U.S.C. 1851(d)(1).
DEPARTMENT OF TREASURY Office of the Comptroller of the Currency 12 CFR Part 44 [Docket No. OCC–2020–0002] RIN 1557–AE67 FEDERAL RESERVE SYSTEM 12 CFR Part 248 [Docket No. R–1694] RIN 7100–AF70 FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR Part 351 RIN 3064–AF17 COMMODITY FUTURES TRADING COMMISSION 17 CFR Part 75 RIN 3038–AE93 SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 255 [Release No. BHCA–9; File No. S7–02–20] RIN 3235–AM70 Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds AGENCY: Office of the Comptroller of the Currency, Treasury (OCC); Board of Governors of the Federal Reserve System (Board); Federal Deposit Insurance Corporation (FDIC); Securities and Exchange Commission (SEC); and Commodity Futures Trading Commission (CFTC). ACTION: Final rule. SUMMARY: The OCC, Board, FDIC, SEC, and CFTC (together, the agencies) are adopting amendments to the regulations implementing section 13 of the Bank Holding Company Act (BHC Act).
Section 13 contains certain restrictions
on the ability of a banking entity or nonbank financial company supervised by the Board to engage in proprietary trading and have certain interests in, or relationships with, a hedge fund or private equity fund (covered funds). These final amendments are intended to improve and streamline the regulations implementing section 13 of the BHC Act by modifying and clarifying requirements related to the covered fund provisions of the rules. DATES: Effective date: The final rule is effective October 1, 2020. FOR FURTHER INFORMATION CONTACT:
OCC: Roman Goldstein, Risk Specialist, Treasury and Market Risk Policy, (202) 649–6360; Tabitha Edgens, Counsel; Mark O’Horo, Senior Attorney, Chief Counsel’s Office, (202) 649–5490; for persons who are deaf or hearing impaired, TTY, (202) 649–5597, Office of the Comptroller of the Currency, 400 7th Street SW, Washington, DC 20219. Board: Flora Ahn, Special Counsel, (202) 452–2317, Gregory Frischmann, Senior Counsel, (202) 452–2803, Kirin Walsh, Attorney, (202) 452–3058, or Sarah Podrygula, Attorney, (202) 912– 4658, Legal Division, Elizabeth MacDonald, Manager, (202) 475–6316, Cecily Boggs, Senior Financial Institution Policy Analyst, (202) 530– 6209, Brendan Rowan, Senior Financial Institution Policy Analyst, (202) 475– 6685, Christopher Powell, Senior Financial Institution Policy Analyst, (202) 452–3442, Nathaniel Grant, Lead Financial Institution Policy Analyst, (202) 452–3105, David McArthur, Senior Economist, (202) 452–2985, Division of Supervision and Regulation; Board of Governors of the Federal Reserve System, 20th and C Streets NW, Washington, DC 20551. FDIC: Bobby R. Bean, Associate Director, bbean@fdic.gov, Andrew D. Carayiannis, Senior Policy Analyst, acarayiannis@fdic.gov, or Brian Cox, Senior Policy Analyst, brcox@fdic.gov, Capital Markets Branch, (202) 898–6888; Michael B. Phillips, Counsel, mphillips@fdic.gov, Benjamin J. Klein, Counsel, bklein@fdic.gov, or Annmarie H. Boyd, Counsel, aboyd@fdic.gov, Legal Division, Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429. CFTC: Cantrell Dumas, Special Counsel, (202) 418–5043, cdumas@ cftc.gov, Division of Swap Dealer and Intermediary Oversight; Mark Fajfar, Assistant General Counsel, (202) 418– 6636, mfajfar@cftc.gov, Office of the General Counsel; Stephen Kane, Research Economist, (202) 418–5911, skane@cftc.gov, Office of the Chief Economist; Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581. SEC: Juliet M. Han, Senior Counsel, William Miller, Senior Counsel, Benjamin A. Tecmire, Senior Counsel, or Jennifer Songer, Branch Chief at (202) 551–6787 or IArules@sec.gov, Investment Adviser Regulation Office, Division of Investment Management, and Katherine Hsu, Office Chief, or Benjamin Meeks, Special Counsel at (202) 551–3850, Office of Structured Finance, Division of Corporation Finance, U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549. SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
II. Notice of Proposed Rulemaking
III. Overview of the Final Rule
IV. Summary of the Final Rule
A. Qualifying Foreign Excluded Funds B. Modifications to Existing Covered Fund Exclusions
1. Foreign Public Funds
2. Loan Securitizations
3. Public Welfare and Small Business
Funds
C. Additional Covered Fund Exclusions
1. Credit Funds
2. Venture Capital Funds
3. Family Wealth Management Vehicles
4. Customer Facilitation Vehicles
D. Limitations on Relationships With a Covered Fund E. Ownership Interest F. Parallel Investments G. Technical Amendments
V. Administrative Law Matters
A. Use of Plain Language B. Paperwork Reduction Act
C. Regulatory Flexibility Act Analysis
D. Riegle Community Development and Regulatory Improvement Act E. OCC Unfunded Mandates Reform Act F. SEC Economic Analysis G. Congressional Review Act
I. Background
Section 13 of the BHC Act,1 also
known as the Volcker Rule, generally prohibits any banking entity from engaging in proprietary trading or from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with a hedge fund or private equity fund (covered fund).2 The statute expressly exempts from these prohibitions various activities, including, among other things:

Underwriting and market makingrelated activities;
Risk-mitigating hedging activities;
Activities on behalf of customers;
Activities for the general account of
insurance companies; and
Trading and covered fund activities
and investments by non-U.S. banking entities solely outside the United States.3 In addition, section 13 of the BHC Act contains an exemption that permits banking entities to organize and offer, including sponsor, covered funds, subject to certain restrictions, including

4 12 U.S.C. 1851(d)(1)(G). Other restrictions and requirements include: (1) The banking entity provides bona fide trust, fiduciary, or investment advisory services; (2) the fund is organized and offered only to customers in connection with the provision of such services; (3) the banking entity does not have an ownership interest in the fund, except for a de minimis investment; (4) the banking entity complies with certain marketing restrictions related to the fund; (5) no director or employee of the banking entity has an ownership interest in the fund, with certain exceptions; and (6) the banking entity discloses to investors that it does not guarantee the performance of the fund. Id. 5 12 U.S.C. 1851(b)(2). 6Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships with, Hedge Funds and Private Equity Funds; Final Rule, 79 FR 5535 (Jan. 31, 2014). 7Proposed Revisions to Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds, 83 FR 33432 (July 17, 2018). 8Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds, 84 FR 61974 (Nov. 14, 2019). The regulations implementing section 13 of the BHC Act, as amended through June 1, 2020, are referred throughout as the ‘‘implementing regulations.’’ 9 83 FR 33471–87. 10 In response to the 2018 proposal, the agencies received numerous comments related to covered fund issues for which no specific rule text was proposed. However, in the preamble to the 2019 amendments, the agencies generally deferred public consideration of such comments to a future proposed rulemaking. 84 FR 62016. 11Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds, 85 FR 12120 (Feb. 28, 2020). that banking entities do not rescue investors in those funds from loss, and are not themselves exposed to significant losses due to investments in or other relationships with these funds.4 Authority under section 13 of the BHC Act for developing and adopting regulations to implement the prohibitions, restrictions, and exemptions of section 13 is shared among the Board, the FDIC, the OCC, the SEC, and the CFTC (individually, an agency, and collectively, the agencies).5 The agencies originally issued a final rule implementing section 13 in December 2013 (the 2013 rule), and those provisions became effective on April 1, 2014.6 The agencies published a notice of proposed rulemaking in July 2018 (the 2018 proposal) that proposed several amendments to the 2013 rule.7 These proposed revisions sought to provide greater clarity and certainty about what activities are prohibited under the 2013 rule—in particular, under the prohibition on proprietary trading—and to better tailor the compliance requirements based on the risk of a banking entity’s trading activities. The
agencies issued a final rule implementing amendments to the 2013 rule in November 2019 (the 2019 amendments), and those provisions became effective in January 2020.8 As part of the 2018 proposal, the agencies proposed targeted changes to the provisions of the 2013 rule relating to acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with a fund and sought comments on other aspects of the covered fund provisions beyond those changes for which specific rule text was proposed.9 The 2019 amendments finalized those changes to the covered fund provisions for which specific rule text was proposed in the 2018 proposal.10 The agencies indicated they would issue a separate proposal addressing and requesting comment on the covered fund provisions of the rule and other fund-related issues, and, in February 2020, the agencies issued a separate notice of proposed rulemaking that specifically addressed those areas (the 2020 proposal).11
II. Notice of Proposed Rulemaking
In the 2020 proposal, the agencies proposed revisions to a number of the provisions regarding covered fund investments and activities as well as to other provisions of the implementing regulations related to the treatment of funds. The proposed changes, which were based on comments received in response to the agencies’ questions in the 2018 proposal and the agencies’ experience with the implementing regulations, were intended to reduce the extraterritorial impact of the implementing regulations, improve and streamline the covered fund provisions, and provide clarity to banking entities regarding the provision of financial services and the conduct of permissible activities in a manner that is consistent with the requirements of section 13 of the BHC Act. To better limit the extraterritorial impact of the implementing regulations, the 2020 proposal would have exempted the activities of certain funds that are organized outside of the United States and offered to foreign investors (qualifying foreign excluded funds) from the restrictions of the implementing regulations. Under the 2013 rule, in certain circumstances, some foreign funds that are not ‘‘covered funds’’ may be subject to the implementing regulations as ‘‘banking entities,’’ if they are controlled by a foreign banking entity, and thus could be subject to more onerous compliance obligations than are imposed on similarly-situated U.S. covered funds, even though the foreign funds have limited nexus to the United States. Accordingly, the 2020 proposal would have codified an existing policy statement by the Federal banking agencies (the OCC, Board, and FDIC) that addresses the potential issues related to a foreign banking entity controlling qualifying foreign excluded funds. The 2020 proposal also would have made modifications to several existing exclusions from the covered fund provisions to provide clarity and simplify compliance with the requirements of the implementing regulations. First, the 2020 proposal would have revised certain restrictions in the foreign public funds exclusion to more closely align the provision with the exclusion for similarly-situated U.S. registered investment companies. Second, the 2020 proposal would have permitted loan securitizations excluded from the definition of covered fund to hold a small amount of non-loan assets, consistent with past industry practice, and would have codified existing stafflevel guidance regarding this exclusion. In addition, the 2020 proposal would have revised the exclusion for small business investment companies to account for the life cycle of those companies and requested comment on whether to clarify the scope of the exclusion for public welfare and other investments to include rural business investment companies and qualified opportunity funds. Finally, the 2020 proposal would have addressed concerns about certain components of the preamble to the 2013 rule related to calculating a banking entity’s ownership interests in covered
funds. The agencies also included in the 2020 proposal several new exclusions from the covered fund definition in order to more directly align the regulation with the purpose of the statute. For example, the agencies recognized that the implementing regulations have inhibited banking entities’ ability to extend credit by restricting their relationships with credit funds, and the 2020 proposal would have created a new exclusion for such funds. Under the 2020 proposal, banking entities would have been able to invest in and have certain relationships with credit funds that extend the type of credit that a banking entity may provide directly, subject to certain safeguards. Relatedly, the 2020 proposal would have established an exclusion from the definition of covered fund for venture capital funds. This provision was intended to facilitate banking entities’ abilities to engage in this important type of development and investment activity, which may facilitate capital formation and provide important financing for small

12Separately, the agencies proposed various technical edits to the implementing regulations. See infra Section IV.G (Technical Amendments). 13Comments are generally discussed in the relevant sections, infra. The agencies also received several miscellaneous comments. One commenter suggested revising §ll.21 (Termination of activities or investments; penalties for violations) of the implementing regulations to provide for mandatory prison time for violations of the implementing regulations. Anonymous. The agencies believe that this comment is beyond the scope of the current rulemaking. Another commenter encouraged the agencies to exempt from the implementing regulations international banks with a small presence in the United States. Institute of International Bankers (IIB). The agencies believe that this comment is beyond the scope of the current rulemaking. A third commenter claimed that the 2020 proposal improperly assumed that the implementing regulations have certain burdens and that it did not adequately assess the costs and benefits of the proposed revisions to the implementing regulations. Occupy the SEC (Occupy). Contrary to the commenter’s suggestions, the Federal Register notice for the 2020 proposal contained extensive discussion of the costs and benefits of the 2020 proposal. See 85 FR 12151–76. This final rule contains similar analyses. See infra,
Section IV (Administrative Law Matters). Several
commenters expressed support for the comment letters submitted by other organizations. E.g., IIB; European Banking Federation (EBF); Goldman Sachs Group, Inc. (Goldman Sachs); and Canadian Bankers Association (CBA). Finally, one comment was not relevant. See Charity Colleen Crouse. businesses, particularly in areas where such financing may not be readily available. In addition, the agencies believed that excluding such activities would be consistent with the purpose of the statute, as it would exclude fund activities that do not present the risks that section 13 of the BHC Act was intended to address. The 2020 proposal also would have allowed a banking entity to provide certain traditional financial services to its customers via a fund structure, subject to certain safeguards and limitations. First, the 2020 proposal would have excluded from the definition of covered fund an entity created and used to facilitate customer exposures to a transaction, investment strategy, or other service. Second, the 2020 proposal would have excluded from the covered fund definition wealth management vehicles that manage the investment portfolio of a family and certain other closely related persons. Both of these provisions were intended to allow a banking entity to provide such services in the manner best suited to its customers. In addition, the 2020 proposal would have permitted a banking entity to engage in a limited set of covered transactions with a covered fund that the banking entity sponsors or advises or with which the banking entity has certain other relationships. The implementing regulations generally prohibit all covered transactions between a covered fund and its banking entity sponsor or investment adviser. The agencies, in the 2020 proposal, recognized that the existing restrictions have prevented banking entities from providing certain traditional banking services to covered funds, such as standard payment, clearing, and settlement services. Lastly, the 2020 proposal would have clarified certain aspects of the definition of ownership interest. Currently, due to the broad definition of ownership interest, some loans by banking entities to covered funds could be deemed ownership interests. The 2020 proposal included a safe harbor for bona fide senior loans or senior debt instruments to make clear that an ‘‘ownership interest’’ in a fund would not include such credit interests in the fund. In addition, the 2020 proposal would have clarified the types of creditor rights that may attach to an interest without necessarily causing such an interest to fall within the scope of the definition of ownership interest. Finally, the 2020 proposal would have simplified compliance efforts by tailoring the calculation of a banking entity’s compliance with the implementing regulations’ aggregate fund limit and covered fund deduction and provided clarity to banking entities regarding their permissible investments made alongside covered funds.12 The agencies invited
comment on all aspects of the 2020 proposal, including specific proposed revisions and questions posed by the agencies. The agencies received approximately 40 unique comments from banking entities and industry groups, public interest groups, and other organizations and individuals. In addition, the agencies received six letters related to the subject matter considered in the 2020 proposal prior to the formal comment period. The agencies are now finalizing the 2020 proposal, with certain changes based on public comments, as described in detail below.13
III. Overview of the Final Rule
Similar to the 2020 proposal, the final rule clarifies and simplifies compliance with the implementing regulations, refines the extraterritorial application of
section 13 of the BHC Act, and permits
additional fund activities that do not present the risks that section 13 was intended to address. The agencies received comments from a diverse set of commenters: Comments from banking entities and financial services industry trade groups were generally supportive of the 2020 proposal and recommended additional modifications, while several organizations and individuals were generally opposed to the 2020 proposal. As described further below, the agencies have adopted many of the proposed changes to the implementing regulations, with certain targeted adjustments. To reduce the extraterritorial impact of the implementing regulations, the final rule, similar to the 2020 proposal, exempts the activities of certain funds that are organized outside of the United States and offered to foreign investors (qualifying foreign excluded funds) from certain restrictions of the implementing regulations. Specifically, the final rule codifies an existing policy statement by the Federal banking agencies that addresses the potential issues related to a foreign banking entity controlling a qualifying foreign excluded fund. The final rule contains some modifications to the proposed exemption—the antievasion provision and compliance program requirements—to address comments that the proposed exemption would have unintentionally continued to subject qualifying foreign excluded funds to these requirements. The final rule also revises, as proposed, but with some modifications, several existing exclusions from the covered fund provisions, to provide clarity and simplify compliance with the requirements of the implementing regulations. First, the final rule revises certain restrictions in the foreign public funds exclusion to more closely align the provision with the exclusion for similarly situated U.S. registered investment companies. Second, the final rule permits loan securitizations excluded from the definition of covered fund to hold a small amount of debt securities, consistent with past industry practice, and codifies existing staff-level guidance regarding this exclusion. In addition, the final rule revises the exclusion for small business investment companies to account for the life cycle of those companies and clarifies the scope of the exclusion for public welfare and other investments to include rural business investment companies and qualified opportunity funds. Finally, the final rule clarifies the calculation of ownership interests in covered funds that are attributed to a banking entity. The final rule adopts—as proposed, with some modifications—several new exclusions from the covered fund definition to more closely align the regulation with the purpose of the statute. First, the final rule establishes a new exclusion for funds that extend credit to permit the same credit-related activities that banking entities can engage in directly. In addition, the final rule creates an exclusion for venture capital funds to help ensure that banking entities can
indirectly facilitate

14See https://www.occ.treas.gov/topics/ capitalmarkets/financial-markets/tradingvolckerrule/volcker-rule-implementation-faqs.html (OCC); https://www.federalreserve.gov/bankinforeg/ volcker-rule/faq.htm (Board); https://www.fdic.gov/ regulations/reform/volcker/faq.html (FDIC); https:// www.sec.gov/divisions/marketreg/faq-volcker-rulesection13.htm (SEC); https://www.cftc.gov/ LawRegulation/DoddFrankAct/Rulemakings/DF_ 28_VolckerRule/index.htm (CFTC). 15 85 FR 12122–23. 16E.g., Securities Industry and Financial Markets Association (SIFMA); Financial Services Forum (FSF); and IIB. 17 85 FR 12122–23. 18E.g., Better Markets, Inc. (Better Markets) and Kathy Bowman. 19American Bankers Association (ABA). 20https://www.federalreserve.gov/newsevents/ pressreleases/bcreg20200402a.htm. 21 84 FR 61974. 22E.g., SIFMA; FSF; Japanese Bankers Association (JBA); and ABA. 23 JBA. 24See infra, Section V.D (Riegle Community Development and Regulatory Improvement Act). 25The implementing regulations generally exclude covered funds from the definition of ‘‘banking entity.’’ 2013 rule §ll.2(c)(2)(i). However, because foreign excluded funds are not covered funds, they can become banking entities through affiliation with other banking entities. 26Statement regarding Treatment of Certain Foreign Funds under the Rules Implementing
Section 13 of the Bank Holding Company Act (July
21, 2017), available at https:// www.federalreserve.gov/newsevents/pressreleases/ files/bcreg20170721a1.pdf. 27 ‘‘Foreign banking entity’’ was defined for purposes of the policy statement to mean a banking Continued this important type of development and investment activity to the same degree that banking entities can do so directly. Finally, the final rule adopts two exclusions for family wealth management and customer facilitation vehicles to provide banking entities flexibility to provide advisory and other traditional banking services to customers through a fund structure. In an effort to clarify and simplify compliance with the implementing regulations, the final rule adopts revisions to the provisions that govern the relationship between a banking entity and a fund and the definition of ownership interest. Specifically, the final rule permits established, codified categories of limited low-risk transactions between a banking entity and a related fund, including riskless principal transactions, and allows a banking entity to engage in certain transactions with a related fund in connection with payment, clearing, and settlement activities. In addition, the final rule would provide an express safe harbor for senior loans and senior debt and provide clarity about the types of creditor rights that would be considered within the scope of the definition of ownership interest. Finally, the agencies are adopting revisions, as proposed, to provide clarity regarding a banking entity’s permissible investments in the same investments as a covered fund organized or offered by such banking entity. Frequently Asked Questions The staffs of the agencies have addressed several questions concerning the implementing regulations through a series of staff Frequently Asked Questions (FAQs).14 In the 2020 proposal, the agencies indicated that the proposed rule would not modify or revoke any previously issued staff FAQs, unless otherwise specified.15 Several commenters recommended codifying specific FAQs and making explicit that other FAQs would continue to be in effect, unmodified.16 Consistent with the 2020 proposal and commenters’ suggestions, the final rule does not modify or revoke any previously issued staff FAQs, unless otherwise specified.17 Comment Period Since the issuance of the 2020 proposal, the COVID–19 global pandemic has substantially disrupted activity in the United States and in other countries. The effects of the COVID–19 disruptions have created many challenges for households and businesses, and the agencies received comments requesting that the agencies extend the comment period for the 2020 proposal or delay the rulemaking more generally.18 In contrast, one commenter expressed support for the rapid approval of the 2020 proposal, to provide banking entities regulatory relief during a period of financial stress.19 The agencies announced on April 2, 2020, that they would consider comments submitted before May 1,
2020.20 The agencies, however, do not
believe that further delay of the rule is warranted, given the volume, depth, and diversity of comments submitted. The agencies believe, as well, that the final rule may provide clarity to banking entities that will enable banking entities to engage in financial services and other permissible activities in a manner that both is consistent with the requirements of section 13 of the BHC Act and will facilitate capital formation and economic activity. Effective and Compliance Dates The Federal Register notice accompanying the finalization of the 2019 amendments provided for a rolling compliance system.21 The effective date of the amendments was January 1, 2020, and firms are required to comply with the revisions by January 1, 2021. Until the mandatory compliance date, banking entities are required to comply with the 2013 rule, or alternatively, a banking entity may voluntarily comply, in whole or in part, with the 2019 amendments prior to the compliance date. Several commenters on the 2020 proposal suggested that the agencies provide for voluntary early compliance with the final rule.22 One commenter also suggested establishing a transition period of at least one year.23 The effective date for the final rule will be October 1, 2020, to accommodate the requirements of the Riegle Community Development and Regulatory Improvement Act.24 The agencies do not believe an extended compliance or transition period is necessary because the final rule largely tailors the regulations implementing
section 13 of the BHC Act rather than
increases compliance burdens.
IV. Summary of the Final Rule
A. Qualifying Foreign Excluded Funds Since the adoption of the 2013 rule, a number of foreign banking entities, foreign government officials, and other market participants have expressed concerns regarding instances in which certain funds offered and sold outside of the United States are excluded from the covered fund definition but still could be considered banking entities in certain circumstances (foreign excluded funds).25 This situation may occur if a foreign banking entity controls the foreign fund. A foreign banking entity could be considered to control the fund based on common corporate governance structures abroad, such as where the fund’s sponsor selects the majority of the fund’s directors or trustees, or the foreign banking entity otherwise controls the fund for purposes of section 13 of the BHC Act. As a result, such a fund would be subject to the requirements of section 13 and the implementing regulations, including restrictions on proprietary trading, restrictions on investing in or sponsoring covered funds, and compliance obligations. The Federal banking agencies released a policy statement on July 21, 2017 (the policy statement), to address concerns about the possible unintended consequences and extraterritorial impact of section 13 and the implementing regulations for foreign excluded funds.26 The policy statement noted that the Federal banking agencies would not take action against a foreign banking entity 27 based on attribution of

entity that is not, and is not controlled directly or indirectly by, a banking entity that is located in or organized under the laws of the United States or any State. Id. 28Statement regarding Treatment of Certain Foreign Funds under the Rules Implementing
Section 13 of the Bank Holding Company Act (July
17, 2019), available at https:// www.federalreserve.gov/newsevents/pressreleases/ files/bcreg20190717a1.pdf. 29SIFMA; Bank Policy Institute (BPI); Bundesverband Investment und Asset Management e.V. (BVI); American Investment Council (AIC); ABA; European Fund and Asset Management Association (EFAMA); Shareholder Advocacy Forum (SAF); IIB; JBA; CBA; and Credit Suisse. 30Occupy and Data Boiler Technologies LLC (Data Boiler). 31 IIB; JBA; CBA; Credit Suisse; and EBF. 32 JBA. 33 JBA. 34Credit Suisse. 35 IIB; JBA; Credit Suisse; and EBF. 36Credit Suisse. 37 JBA. 38See final rule §ll.13(b). the activities and investments of a qualifying foreign excluded fund to a foreign banking entity, or against a qualifying foreign excluded fund as a banking entity, for a period of one year while staffs of the agencies considered alternative ways in which the implementing regulations could be amended, or other appropriate action could be taken, to address the issue. The policy statement has since been extended and is currently scheduled to expire on July 21, 2021.28 For purposes of the policy statement, a ‘‘qualifying foreign excluded fund’’ means, with respect to a foreign banking entity, an entity that:
(1) Is organized or established outside the United States and the ownership interests of which are offered and sold solely outside the United States; (2) Would be a covered fund were the entity organized or established in the United States, or is, or holds itself out as being, an entity or arrangement that raises money from investors primarily for the purpose of investing in financial instruments for resale or other disposition or otherwise trading in financial instruments; (3) Would not otherwise be a banking entity except by virtue of the foreign banking entity’s acquisition or retention of an ownership interest in, or sponsorship of, the entity; (4) Is established and operated as part of a bona fide asset management business; and (5) Is not operated in a manner that enables the foreign banking entity to evade the requirements of section 13 or implementing regulations. To be eligible for this relief, the foreign banking entity’s acquisition or retention of any ownership interest in, or sponsorship of, the qualifying foreign excluded fund must meet the requirements for permitted covered fund activities and investments solely outside the United States, as provided in section 13(d)(1)(I) of the BHC Act and § ll.13(b) of the implementing regulations, as if the qualifying foreign excluded fund were a covered fund. To provide greater clarity and certainty to banking entities and qualifying foreign excluded funds, and to limit the extraterritoriality of the rule, the 2020 proposal included a permanent exemption from the section 13 restrictions on proprietary trading and investing in or sponsoring covered funds for the activities of qualifying foreign excluded funds. The proposed exemption generally included the same eligibility criteria from the policy statement, although it included a modified version of the anti-evasion provision such that, in order to qualify, a fund could not be operated in a manner that enables ‘‘any other banking entity’’ (rather than ‘‘the foreign banking entity’’) to evade the requirements of
section 13 or the implementing
regulations.
The agencies requested comment on all aspects of this exemption. Commenters were generally supportive of the 2020 proposal to exempt qualifying foreign excluded funds from certain requirements of the implementing regulations.29 Two commenters expressed opposition to the proposed exemption.30 Some commenters requested that qualifying foreign excluded funds be excluded from the definition of banking entity.31 One commenter expressed concern that the 2020 proposal would require qualifying foreign excluded funds to establish section 13 of the BHC Act compliance programs, imposing costs on qualifying foreign excluded funds.32 This commenter noted that there may be situations under section 13 of the BHC Act where a foreign banking entity controls a qualifying foreign excluded fund, but under foreign law does not have the necessary authority to require it to adopt a section 13 compliance program. As such, this commenter advocated for either excluding this type of fund from the definition of banking entity or exempting this type of fund from the compliance program requirements under the rule.33 One commenter expressed concern that a qualifying foreign excluded fund would still need to comply with various restrictions under section 13, including the provisions of § ll.14 of the implementing regulations (i.e., Super 23A) and the compliance program requirements.34 Some commenters requested that the agencies change the anti-evasion provision of the qualifying foreign excluded funds definition so that it would only apply to the specific foreign banking entity, in a manner consistent with the policy statement.35 One of these commenters suggested, as an alternative, revising the provision so that it would only apply to ‘‘any affiliated banking entities.’’ 36 One commenter requested an antievasion safe harbor and changes to allow a fund to be a qualifying foreign excluded fund when a non-U.S. banking entity serves as a management company to the fund and is approved to provide fund management in accordance with local law.37 This commenter also requested that the agencies limit the requirements in the proposed qualifying foreign excluded funds definition to only those set forth in § ll.13(b) of the rule for covered fund activities conducted by foreign banking entities solely outside the United States, and treat as qualifying foreign excluded funds those funds for which the foreign banking entity cannot exercise voting rights. Pursuant to their authority under
section 13(d)(1)(J) of the BHC Act, the
agencies are adopting the exemption for the activities of qualifying foreign excluded funds substantially as proposed, but with modifications to the anti-evasion provision and compliance program requirements. Specifically, the agencies are exempting the activities of qualified foreign excluded funds from the restrictions on proprietary trading and investing in or sponsoring covered funds, if the acquisition or retention of the ownership interest in, or sponsorship of, the qualifying foreign excluded fund by the foreign banking entity meets the requirements for permitted covered fund activities and investments conducted solely outside the United States, as provided in § ll.13(b) of the rule.38 Under the final rule, a qualifying foreign excluded fund has the same meaning as in the policy statement as described above and in the 2020 proposal, except for the modification to the anti-evasion provision, as described below.
Section 13(d)(1)(J) of the BHC Act
gives the agencies rulemaking authority to exempt activities from the prohibitions of section 13, provided the agencies determine that the activity in question would promote and protect the safety and soundness of the banking entity and the financial stability of the

39 12 U.S.C. 1851(d)(1)(J).
40A U.S. banking entity’s exposure to a fund that would be a qualifying foreign excluded fund with respect to a foreign banking entity may still be a covered fund with respect to a U.S. banking entity under §ll.10(b)(1)(iii) of the implementing regulations. A U.S. banking entity’s investment in and relationship with such a fund could therefore be subject to the entirety of the applicable prohibitions and restrictions of Subpart C of the implementing regulations. 41See 79 FR 5677. 42See id. 43 In adopting the foreign public fund exclusion, the agencies’ view was that it was appropriate to exclude these funds from the ‘‘covered fund’’ Continued United States.39 For the reasons described below, the agencies have determined that exempting the activities of qualifying foreign excluded funds promotes and protects the safety and soundness of banking entities and U.S. financial stability. This relief is expected to promote and protect the safety and soundness of such funds and their foreign banking entity sponsors by putting them on a level playing field with their foreign competitors that are not subject to the implementing regulations. If the activities of these foreign funds were subject to the restrictions applicable to banking entities, their asset management activities could be significantly disrupted, and their foreign banking entity sponsors may be at a competitive disadvantage to other foreign bank and non-bank market participants conducting asset management business outside of the United States. Exempting the activities of these foreign funds allows their foreign banking entity sponsors to continue to conduct their asset management business outside the United States as long as the foreign banking entity’s acquisition of an ownership interest in or sponsorship of the fund meets the requirements in § ll.13(b) of the implementing regulations. Thus, the exemption is expected to have the effect of promoting the safety and soundness of these foreign funds and their sponsors, while at the same time limiting the extraterritorial impact of the implementing regulations, consistent with the purposes of sections 13(d)(1)(H) and (I) of the BHC Act. The exemption is also expected to promote and protect U.S. financial stability. While qualifying foreign excluded funds have a very limited nexus to the U.S. financial system, the exemption would promote U.S. financial stability by providing additional capital and liquidity to U.S. capital markets without a concomitant increase in risk borne by U.S. entities. Because the exemption requires that the foreign banking entity’s acquisition of an ownership interest in or sponsorship of the fund meets the requirements in § ll.13(b) of the final rule, the exemption will help ensure that the risks of investments made by these foreign funds will be booked at foreign entities in foreign jurisdictions, thus promoting and protecting U.S. financial stability. Additionally, subjecting such funds to the requirements of the
implementing regulations could precipitate disruptions in foreign capital markets, which could generate spillover effects in the U.S. financial system. In response to comments regarding the anti-evasion provision, the final rule specifies that the qualifying foreign excluded fund must not be operated in a manner that enables the banking entity that sponsors or controls the qualifying foreign excluded fund, or any other affiliated banking entity (other than a qualifying foreign excluded fund), to evade the requirements of section 13 of the BHC Act or the final rule. This change is meant to clarify the scope of the anti-evasion provision and provide certainty for banking entities that sponsor or control the qualifying foreign excluded fund. Consistent with feedback from several commenters, the agencies also have modified compliance requirements with respect to qualifying foreign excluded funds. While, under the final rule, the activities of a qualifying foreign excluded fund are exempted from the proprietary trading restrictions of § ll.3(a) and the covered fund restrictions of § ll.10(a) of the final rule, the qualifying foreign excluded fund is still a banking entity. Absent any additional changes, the qualifying foreign excluded fund could become subject to the compliance requirements of §ll.20. However, since these qualifying foreign excluded funds are exempted from the proprietary trading requirements of § ll.3(a) and covered fund restrictions of §ll.10(a) of the final rule, the agencies believe that requiring a compliance program for the fund itself is overly burdensome and unnecessary. The requirements in § ll.20 are intended to ensure and monitor compliance with the proprietary trading and covered fund provisions, and there would be no benefit to applying these requirements to an entity that is exempt from those provisions. Therefore, under the final rule, qualifying foreign excluded funds are not required to have compliance programs or comply with the reporting and additional documentation requirements under § ll.20. However, any banking entity that owns or sponsors a qualifying foreign excluded fund will still be required to have in place appropriate compliance programs for itself and its other subsidiaries and provide reports and additional documentation as required by §ll.20. The final rule does not amend the definition of ‘‘banking entity’’ as requested by several commenters. Because ‘‘banking entity’’ is specifically defined in section 13 of the BHC Act, the agencies find it appropriate to address concerns related to foreign excluded funds through their exemptive rulemaking authority. The agencies are not making any change regarding the applicability of § ll.14 of the implementing regulations, which imposes limitations on relationships with covered funds, with respect to qualifying foreign excluded funds. The agencies believe it is appropriate to retain the application of §ll.14 to qualifying foreign excluded funds to limit risks that
may be borne by banking entities located in the United States through transactions with such funds.40 Further, given the limited set of circumstances in which § ll.14 would apply (i.e., a transaction between a foreign excluded fund and a covered fund that is sponsored or advised by the same banking entity), the agencies do not believe that it is overly burdensome for a banking entity that sponsors or controls a qualifying foreign excluded fund to ensure that it is not in violation of § ll.14. B. Modifications To Existing Covered Fund Exclusions In the preamble to the 2013 rule, the agencies acknowledged that the covered fund definition was expansive.41 To effectively tailor the covered fund provisions to the types of entities that
section 13 of the BHC Act was intended
to cover, the 2013 rule excluded various types of entities from the covered fund definition.42 In response to comments received on the 2020 proposal, and based on experience implementing the rule, the agencies are modifying certain of the existing exclusions, as described below, to make them more appropriately structured to effectuate the intent of the statute and its implementing regulations.

Foreign Public Funds
2013 Rule
To provide consistent treatment for U.S. registered investment companies and their foreign equivalents, the implementing regulations exclude foreign public funds from the definition of covered fund.43 A foreign public fund

definition because they are sufficiently similar to U.S. registered investment companies. 79 FR 5678. 44 2013 rule §ll.10(c)(1); see also 79 FR 5678. 45 79 FR 5678. 46 2013 rule §ll.10(c)(1)(iii). 47Although the discussion of this condition generally refers to U.S. banking entities for ease of reading, the condition also applies to foreign subsidiaries of a U.S. banking entity. See 2013 rule §ll.10(c)(1)(ii) (applying this limitation ‘‘[w]ith respect to a banking entity that is, or is controlled directly or indirectly by a banking entity that is, located in or organized under the laws of the United States or of any State and any issuer for which such banking entity acts as sponsor’’). 48See 2013 rule §ll.10(c)(1)(ii). 49 79 FR 5678. is generally defined under the 2013 rule as any issuer that is organized or established outside of the United States and the ownership interests of which are (1) authorized to be offered and sold to retail investors in the issuer’s home jurisdiction and (2) sold predominantly through one or more public offerings outside of the United States.44 The agencies stated in the preamble to the 2013 rule that they generally expect that an offering is made predominantly outside of the United States if 85 percent or more of the fund’s interests are sold to investors that are not residents of the United States.45 The 2013 rule defines ‘‘public offering’’ for purposes of this exclusion to mean a ‘‘distribution,’’ as defined in § ll.4(a)(3) of subpart B, of securities in any jurisdiction outside the United States to investors, including retail investors, provided that the distribution complies with all applicable requirements in the jurisdiction in which such distribution is being made; the distribution does not restrict availability to only investors with a minimum level of net worth or net investment assets; and the issuer has filed or submitted, with the appropriate regulatory authority in such jurisdiction, offering disclosure documents that are publicly available.46 The 2013 rule places an additional condition on a U.S. banking entity’s ability to rely on the foreign public fund exclusion with respect to any foreign fund it sponsors.47 The foreign public fund exclusion is only available to a U.S. banking entity with respect to a foreign fund sponsored by the U.S. banking entity if, in addition to the requirements discussed above, the fund’s ownership interests are sold predominantly to persons other than the sponsoring banking entity, the issuer (or affiliates of the sponsoring banking entity or issuer), and employees and directors of such entities.48 The agencies stated in the preamble to the 2013 rule that, consistent with the agencies’ view concerning whether a foreign public fund has been sold predominantly outside of the United States, the agencies generally expect that a foreign public fund would satisfy this additional condition if 85 percent or more of the fund’s interests are sold to persons other than the sponsoring
U.S. banking entity and the specified persons connected to that banking entity.49 2020 Proposal In the 2020 proposal, the agencies acknowledged that some of the conditions of the 2013 rule’s foreign public fund exclusion may not be necessary to ensure consistent treatment of foreign public funds and U.S. registered investment companies. Moreover, some conditions may make it difficult for a non-U.S. fund to qualify for the exclusion or for a banking entity to validate whether a non-U.S. fund qualifies for the exclusion, resulting in certain non-U.S. funds that are similar to U.S. registered investment companies being treated as covered funds. To address these concerns, the 2020 proposal would have made certain modifications to the foreign public fund exclusion. First, the agencies proposed to replace the requirement that the fund be authorized to be offered and sold to retail investors in the issuer’s home jurisdiction (the home jurisdiction requirement) and the requirement that the fund interests be sold predominantly through one or more public offerings outside of the United States, with a requirement that the fund is authorized to offer and sell ownership interests, and such interests are offered and sold, through one or more public offerings outside of the United States. This change would have permitted foreign funds to qualify for the exclusion if they are organized in one jurisdiction but only authorized to be sold to retail investors in another jurisdiction, as this is a fairly common way for foreign retail funds to be organized. Also, no longer requiring a fund to be sold predominantly through one or more public offerings was intended to reduce the difficulty that banking entities have described in determining and monitoring the distribution history and patterns of a third-party sponsored fund or a sponsored fund whose interests are sold through third-party distributors. The agencies also proposed modifying the definition of ‘‘public offering’’ from the implementing regulations to add a new requirement that the distribution be subject to substantive disclosure and retail investor protection laws or regulations, to help ensure that foreign funds qualifying for this exclusion are sufficiently similar to U.S. registered investment companies. Additionally, the 2020 proposal would have only applied the condition that the distribution comply with all applicable requirements in the jurisdiction where it is made to instances in which the banking entity acts as the investment manager, investment adviser, commodity trading advisor, commodity pool operator, or sponsor. This proposed change was intended to address the potential difficulty that a banking entity investing in a third-party sponsored fund may have in determining whether the distribution of such fund complied with all the requirements in the jurisdiction where it was made. To simplify the requirements of the exclusion and address concerns described by banking entities with the difficulty
in tracking the sale of ownership interests to employees and their immediate family members, the 2020 proposal would have eliminated the limitation on selling ownership interests of the issuer to employees (other than senior executive officers) of the sponsoring banking entity or the issuer (or affiliates of the banking entity or issuer). This change was intended to help align the treatment of foreign public funds with that of U.S. registered investment companies, as the exclusion for U.S. registered investment companies has no such limitation. The 2020 proposal would have continued to limit the sale of ownership interests to directors or senior executive officers of the sponsoring banking entity or the issuer (or their affiliates), as the agencies believed that such a requirement would be simpler for a banking entity to track. Finally, the 2020 proposal requested comment on the appropriateness of the expectation stated in the preamble to the 2013 rule that, for a U.S. banking entity-sponsored foreign fund to satisfy the condition that it be ‘‘predominantly’’ sold to persons other than the sponsoring U.S. banking entity and certain persons connected to that banking entity, at least 85 percent of the ownership interests in the fund should be sold to such other persons. Discussion of Comments and the Final Rule The agencies are adopting all of the proposed changes and are making certain adjustments in response to comments received, as discussed below. Commenters on the 2020 proposal generally supported the proposed changes to the foreign public funds

50 IIB; SIFMA; BPI; ABA; EBF; EFAMA; FSF; Investment Company Institute (ICI); BVI; CBA; Committee on Capital Markets Regulation (CCMR); Data Boiler; Goldman Sachs; Investment Adviser Association (IAA); JBA; SAF; and U.S. Chamber of Commerce Center for Capital Markets Competitiveness (CCMC). 51 IIB; SIFMA; BPI; ABA; EBF; EFAMA; FSF; ICI; BVI; and CBA. 52 IIB; EFAMA; FSF; ICI; and BVI. 53 IIB; ICI; and CBA. One commenter supported this assertion by stating that 95 percent of the world’s securities markets, including all major emerging markets, have substantive disclosure and retail investor protection rules that are guided by the International Organization of Securities Commissions’ common principles for retail funds and the detailed policy work that informs those principles. ICI. 54FSF. 55SIFMA. 56 Data Boiler. 57One commenter recommended that the agencies create an exclusion from the ‘‘proprietary trading’’ definition for the activities of regulated funds, including foreign public funds, under certain circumstances. ICI. The agencies note that such a change is not within the scope of this rulemaking. 58 IIB; SIFMA; and EBF. 59Under the Investment Company Act, certain funds whose offerings are limited to investors with minimum net worth or net investment assets are exempt from registration as investment companies. See 15 U.S.C. 80a–3(c)(7). These funds are generally treated as covered funds under section 13 of the BHC Act and the implementing regulations. See 12 U.S.C. 1851(h)(2); implementing regulations §ll.10(b)(1)(i). 60 Data Boiler. 61Oleh Zadorestskyy. This commenter also suggested that the agencies require proof that the investors were non-U.S. persons. exclusion.50 Specifically, commenters supported the elimination of the home jurisdiction requirement and the requirement that the fund be sold predominantly through one or more public offerings.51 Commenters supported the proposed change to the ‘‘public offering’’ definition to include a requirement that a distribution be subject to substantive disclosure and retail investor protection laws or regulations,52 but did not recommend further specifying what substantive disclosure and investor protection requirements should apply because they generally viewed it as unnecessary and overly prescriptive.53 Commenters also supported eliminating the restriction on share ownership by employees (other than senior executives and directors) of the U.S. banking entity that sponsors the foreign public fund.54 In response to a specific question in the 2020 proposal, one commenter indicated that the proposed changes to the foreign public funds exclusion would not increase the risk of evasion of the requirements of
section 13 and the implementing
regulations, and thus no additional antievasion measures were necessary.55 Another commenter stated that the proposed changes were less than ideal but were acceptable after balancing compliance costs and benefits.56 Commenters also recommended additional changes to further align the treatment of foreign public funds with that of U.S. registered investment companies or to prevent evasion of the rule.57 Specifically, some commenters recommended eliminating the requirement that a fund actually be sold through a public offering and, instead, only require that a fund be authorized to be sold through a public offering.58 These commenters generally viewed this requirement as burdensome and difficult to administer and noted that U.S. registered investment companies are not required to be sold in public distributions. The agencies do not consider the fact that there is no requirement for U.S. registered investment companies to be actually sold through public offerings as a sufficient rationale for removing this requirement from the foreign public fund exclusion. Requiring foreign public funds to be sold through one or more public offerings is intended to ensure that such funds are in fact public funds and thus sufficiently similar to U.S. registered investment companies. While there may be certain limited scenarios where a U.S. registered investment company is not sold to retail investors, the agencies believe that the vast majority of U.S. registered investment companies are sold to retail investors. Furthermore, U.S. registered investment companies are subject to robust registration, reporting, and other requirements that are familiar to the agencies, whereas foreign public funds are subject to a differing array of requirements depending on the jurisdiction where they are authorized to be sold. These other jurisdictions may have less developed requirements for retail funds, which may increase the likelihood of a fund seeking authorization for public distribution in certain foreign jurisdictions solely as a means of avoiding the covered fund prohibition. The agencies believe that eliminating this requirement would increase the risk of evasion by permitting foreign funds that may be authorized for sale to retail investors in a foreign jurisdiction—but are only sold through private offerings where no substantive disclosure or retail investor protections exist—to qualify for the exclusion. Such funds would not be comparable to U.S. registered investment companies and would not be the type of fund that foreign public fund exclusion was intended to address. Accordingly, the agencies are not adopting this suggested modification. One trade association commenter suggested eliminating a provision in the ‘‘public offering’’ requirement that prohibits a distribution from being limited to investors with a minimum net worth or net investment assets because some of its members distribute funds, including mutual funds, in offerings that do not meet this requirement
but that are nonetheless subject to substantive disclosure and retail investor protection requirements. Similar to the reasons for retaining the requirement that a foreign public fund actually be sold through one or more public offerings, the agencies believe that retaining this requirement is necessary to ensure that funds qualifying for this exclusion are sufficiently similar to U.S. registered investment companies. In fact, one of the identifying characteristics of a covered fund is that its offerings are limited to investors with minimum net worth or net investment assets.59 The agencies therefore believe that foreign funds that limit their offerings to investors with a minimum net worth or net investment assets are generally not sufficiently similar to U.S. registered investment companies, and thus the agencies are not adopting this suggested change to the ‘‘public offering’’ definition. One commenter opposed the proposed elimination of the requirement in the ‘‘public offering’’ definition that a distribution comply with all applicable requirements in the jurisdiction in which such distribution is being made for a banking entity that does not serve as the fund’s investment manager, investment adviser, commodity trading advisor, commodity pool operator, or sponsor.60 The final rule adopts this modification as proposed, because the agencies believe the other eligibility criteria for a fund to qualify under the foreign public fund exclusion are sufficient to appropriately identify these funds. In addition, the agencies recognize that it may be difficult or impossible for a banking entity that invests in a third-party fund to know whether the fund’s distribution complied with all applicable requirements in the jurisdiction where it was distributed. One commenter recommended that the agencies require 85 percent of a foreign public fund’s ownership interests be sold to and owned by ‘‘bona fide’’ retail investors in the fund’s home jurisdiction.61 However, for the same reasons that the agencies are eliminating the home jurisdiction requirement and the requirement that a fund be sold predominantly through public offerings,

62 IIB and EBF.
63 IIB; SIFMA; BPI; ABA; FSF; and CBA. 64SIFMA and FSF. 65SIFMA; BPI; ICI; and CCMC. 66 79 FR 5678–79. 67See 12 CFR 225.2(e); 12 CFR 225.31(d)(2)(ii). If a foreign public fund is controlled by a banking entity for BHC Act purposes, such fund could also be being treated as a banking entity under section
13. See implementing regulations §ll.2(c); FAQ
14.
68BPI; FSF; ICI; and CCMC.
69Although the implementing regulations do not explicitly prohibit a banking entity from acquiring 25 percent or more of a U.S. registered investment company, a U.S. registered investment company would become a banking entity if it is affiliated with another banking entity (other than as described in §ll.12(b)(1)(ii) of the implementing regulations). See 79 FR 5732 (‘‘[F]or purposes of
section 13 of the BHC Act and the final rule, a
registered investment company . . . will not be considered to be an affiliate of the banking entity if the banking entity owns, controls, or holds with the power to vote less than 25 percent of the voting shares of the company or fund, and provides investment advisory, commodity trading advisory, administrative, and other services to the company or fund only in a manner that complies with other limitations under applicable regulation, order, or other authority.’’). 70For a U.S. banking entity that sponsors a foreign public fund, crossing the 24.9 percent ownership threshold (other than during a permitted seeding period) would cause the fund to be a covered fund (if no other exclusion applied), in which case the banking entity would be in violation of the 3 percent per-fund investment limit. See implementing regulations §ll.12(a)(2)(ii)(A). The agencies believe that such a strict prohibition against a U.S. banking entity acquiring 25 percent or more of a foreign public fund that it sponsors is appropriate because of the elevated risk of evasion by the sponsoring banking entity, which may be able to control the investments made by the fund. 71 IIB. the agencies are not adopting this requirement. Some commenters suggested that the agencies identify common foreign fund types that are presumed to qualify for the exclusion for foreign public funds for the purpose of improving efficiency and simplifying compliance with the rule.62 Other commenters recommended that issuers listed on an internationallyrecognized exchange and available in retail-level denominations should automatically qualify for the exclusion for similar reasons.63 Although the agencies expect many such funds will qualify for the exclusion, the agencies decline to adopt either of these suggested changes, as both would require the agencies’ review and ongoing monitoring of foreign laws and regulations to ensure that the types of funds that would qualify under these provisions are sufficiently similar to U.S. registered investment companies and that their exclusion as foreign public funds would continue to be appropriate. Some commenters recommended that the agencies entirely eliminate the restrictions on share ownership by parties affiliated with a U.S. banking entity sponsor of a foreign public fund.64 Other commenters suggested that, if the restrictions on share ownership by banking entities affiliated with the sponsor were retained, the restrictions on share ownership by senior executives and directors should be removed.65 The commenters generally viewed these requirements as unnecessary and burdensome to track and monitor. As discussed in the preamble to the 2013 rule, these requirements are intended to prevent evasion of section 13 of the BHC Act.66 Additionally, the agencies note that U.S. banking entity sponsors of foreign public funds would need to track the ownership of such funds by their affiliates and management officials even if the requirements were eliminated in order to
determine whether they control such funds for BHC Act purposes.67 Thus, for a U.S. banking entity relying on this exclusion with respect to a fund that it sponsors, the agencies are retaining the requirement that the fund be sold predominantly to persons other than the U.S. banking entity sponsor, the fund, affiliates of such sponsoring banking entity or fund, and the directors and senior executive officers of such entities (collectively, ‘‘U.S. banking entity sponsor and associated parties’’). Relatedly, some commenters recommended that the agencies modify their expectation of the level of ownership of a foreign public fund that would satisfy the requirement that a fund be ‘‘predominantly’’ sold to persons other than its U.S. banking entity sponsor and associated parties,68 which, in the preamble to the 2013 rule, the agencies stated was 85 percent or more (which would permit the U.S. banking entity sponsor and associated parties to own the remaining 15 percent). These commenters asserted that the relevant ownership threshold for U.S. registered investment companies is 25 percent, and that, for foreign public funds, the threshold should be the same. The agencies agree that the permitted ownership level of a foreign public fund by a U.S. banking entity sponsor and associated parties should be aligned with the functionally equivalent threshold for banking entity investments in U.S. registered investment companies, which is 24.9 percent.69 Accordingly, the agencies have amended this provision in the final rule to require that more than 75 percent of the fund’s interests be sold to persons other than the U.S. banking entity sponsor and associated parties.70 One commenter recommended that, with respect to foreign public funds sponsored by U.S. affiliates of foreign banking entities, the agencies exclude the sponsoring U.S. banking entity’s non-U.S. affiliates and their directors and employees from the restrictions on share ownership, provided that such non-U.S. affiliates are not controlled by a U.S. banking entity.71 This commenter asserted that there is no U.S. financial stability or safety and soundness benefit to applying this restriction to such nonU.S. affiliates and their directors and employees, as the risks of any such investments are borne solely outside the United States. However, with the change described above, which permits a U.S. banking entity sponsor and associated parties to hold less than 25 percent of a foreign public fund, the agencies do not believe that this change is necessary. Even if the requirement were modified as the commenter suggested, the banking entity and its affiliates would still be limited to owning less than 25 percent of the fund without the fund becoming a banking entity. One commenter requested that the agencies modify § ll.12(b)(1) of the implementing regulations, which governs attribution of ownership interests in covered funds to banking entities, to clarify that the banking entity ‘‘or an affiliate’’ can
provide the advisory, administrative, or other services required in §ll.12(b)(1)(ii)(B) for the non-attribution rule to apply. The commenter requested this clarification because § ll.12(b)(1)(ii)(B) is cross-referenced by FAQ 14, which, as discussed above, states that a foreign public fund will not be treated as a banking entity if it complies with the test in § ll.12(b)(1)(ii) (i.e., the banking entity holds less than 25 percent of the voting shares in the foreign public fund and provides advisory, administrative, or other services to the fund). The agencies confirm that the requested interpretation is correct and, accordingly, have amended § ll.12(b)(1)(ii) of the implementing regulations to clarify that the ownership limit applies to the banking entity and its affiliates, in the aggregate, and the requirement that the banking entity provide advisory or other services can be satisfied by the banking entity or its affiliates. One commenter noted that FAQ 16, which relates to the seeding period for foreign public funds, uses 3 years as an example of the duration of such a seeding period, and requested that the agencies confirm that a foreign public fund’s seeding period can be longer than

72 IAA.
73CCMC.
74The foreign public fund seeding FAQ states that staffs of the agencies would not advise that a seeding vehicle that is operated pursuant to a written plan to become a foreign public fund and that meets certain conditions be treated as a covered fund during such seeding period. 75 IIB. 76 12 U.S.C. 1851(g)(2). 77See 2013 rule §ll.10(c)(8). Loan is further defined as any loan, lease, extension of credit, or secured or unsecured receivable that is not a security or derivative. Implementing regulations §ll.2(t). 78 83 FR 33480–81. 79E.g., SIFMA; BPI; Managed Funds Association (MFA); PNC Financial Services Group, Inc. (PNC); Goldman Sachs; Loan Syndications and Trading Association (LSTA); and Structured Finance Association (SFA). 80E.g., SIFMA; CCMC; BPI; and IIB. 81One commenter suggested that some jurisdictions’ risk retention rules may vary from the regulations implementing section 15G of the Exchange Act (15 U.S.C. 78o–11), which requires a banking entity to retain and maintain a certain minimum interest in certain asset-backed securities. See IIB. This commenter recommended allowing banking entities to hold certain investments in compliance with certain foreign laws (e.g., European risk retention rules). The agencies understand that rules for risk retention vary across jurisdictions. However, the agencies believe that the requested action is outside the scope of the current rulemaking. In addition, another commenter requested that the agencies clarify the definition of asset-backed securities as used in the loan securitization exclusions. See Arnold & Porter Kaye Scholer LLP (Arnold & Porter). The agencies discuss the definition of asset-backed securities in Section IV.C.1.iii (Credit Funds), infra. 82 §§ll.2(t); ll.10(c)(8)(i)(D); ll.10(c)(8)(v). 83See, e.g., FASB Statement No. 156: Accounting for Servicing of Financial Assets, ¶ 61 (FAS 156). 84The 2020 proposal also clarified that special units of beneficial interest and collateral certificates meeting the requirements of paragraph (c)(8)(v) of the exclusion that are securities need not meet the requirements of paragraph (c)(8)(iii) of the exclusion. See 2020 proposal §ll.10(c)(8)(i)(B). The agencies are adopting this revision, as proposed. 85E.g., SIFMA; PNC; and SFA. One commenter indicated that the current Loan Securitization Servicing FAQ was sufficient and that codifying the FAQ was not necessary; however, the commenter did not elaborate on or justify this position. Data Boiler. 86See supra, n.14. 87 2020 proposed rule §ll.10(c)(8)(iii)(A). 3 years.72 Another commenter requested that the agencies codify the 3-year seeding period in the implementing regulations.73 The agencies believe that, depending on the facts and circumstances of a particular foreign public fund, the appropriate duration of its seeding period may vary and, under certain facts and circumstances, may exceed three years. The agencies believe that this flexibility is appropriate and thus decline to further specify such a
limit. Another commenter requested that the agencies codify the foreign public fund seeding FAQ,74 FAQ 14, and FAQ 16, both described above, in the implementing regulations.75 The agencies decline to codify these FAQs at this time but note that the final rule does not modify or revoke any previously issued staff FAQs, unless otherwise specified. In the final rule, the agencies are adopting the amendments to the foreign public funds exclusion as proposed, with the additional modifications described above. The agencies believe the revised requirements will make the foreign public fund exclusion more effective by expanding its availability, providing clarity, and simplifying compliance with its requirements, while continuing to ensure that the funds that qualify are sufficiently similar to U.S. registered investment companies.
2. Loan Securitizations
Section 13 of the BHC Act provides
that ‘‘[n]othing in this section shall be construed to limit or restrict the ability of a banking entity . . . to sell or securitize loans in a manner otherwise permitted by law.’’ 76 To effectuate this statutory mandate, the 2013 rule excluded from the definition of covered fund loan securitizations that issue asset-backed securities and hold only loans, certain rights and assets that arise from the structure of the loan securitization or from the loans supporting a loan securitization, and a small set of other financial instruments (permissible assets).77 Since the adoption of the 2013 rule, several banking entities and other participants in the loan securitization industry have commented that the limited set of permissible assets has inappropriately restricted their ability to use the loan securitization exclusion. In the 2018 proposal, the agencies asked several questions regarding the efficacy and scope of the exclusion and the Loan Securitization Servicing FAQ.78 Comments focused on permitting small amounts of non-loan assets and clarifying the treatment of leases and related assets. In response to these concerns, the 2020 proposal would have codified the Loan Securitization Servicing FAQ and permitted loan securitizations to hold a small amount of non-loan assets. The agencies requested comment on all aspects of the proposed changes to the loan securitization exclusion, and comments were generally supportive of the proposed revisions.79 Several commenters also suggested revisions to the 2020 proposal.80 Comments are discussed in detail below.81 Servicing Assets The implementing regulations permit loan securitizations to hold rights or other assets (servicing assets) that arise from the structure of the loan securitization or from the loans supporting a loan securitization.82 Rights or other servicing assets are assets designed to facilitate the servicing of the underlying loans or the distribution of proceeds from those loans to holders of the asset-backed securities.83 In response to confusion regarding the scope of the provisions permitting servicing assets and a separate provision limiting the types of permitted securities, the staffs of the agencies released the Loan Securitization Servicing FAQ. The FAQ clarified that a servicing asset may or may not be a security, but if the servicing asset is a security, it must be a permitted security under the rule. The 2020 proposal would have codified the Loan Securitization Servicing FAQ in the implementing regulations to clarify the scope of the servicing asset provision.84 Commenters generally supported the codification of the Loan Securitization Servicing FAQ, indicating that such a codification would promote transparency and ensure continued use of the loan securitization exclusion.85 For the above reasons, the final rule adopts the codification of the Loan Securitization Servicing FAQ as proposed. Cash Equivalents The loan securitization exclusion permits issuers relying on the exclusion
to hold certain types of contractual rights or assets related to the loans underlying the securitization, including cash equivalents. In response to questions about the scope of the cash equivalents provision, the Loan Securitization Servicing FAQ stated that ‘‘cash equivalents’’ means high quality, highly liquid investments whose maturity corresponds to the securitization’s expected or potential need for funds and whose currency corresponds to either the underlying loans or the asset-backed securities.86 To promote transparency and clarity, the 2020 proposal would have codified this additional language in the Loan Securitization Servicing FAQ regarding the meaning of ‘‘cash equivalents.’’ 87 The agencies did not propose requiring ‘‘cash equivalents’’ to be ‘‘short term,’’ because the agencies recognized that a loan securitization may need greater flexibility to match the maturity of high quality, highly liquid investments to its expected or potential need for funds. Commenters generally supported the codification of the definition of ‘‘cash equivalents’’ in the loan securitization

88E.g., LSTA; PNC; and SIFMA. One commenter expressed opposition to this codification but did not elaborate or justify this position. See Data Boiler. 89 79 FR 5687–88. 90 79 FR 5687. 91 85 FR 12128–29. 92E.g., SIFMA; CCMC; ABA; Credit Suisse; MFA; Goldman Sachs; LSTA; BPI; and SFA. 93E.g., LSTA and Goldman Sachs. 94E.g., MFA; LSTA; and SFA. One commenter also requested that the agencies make clear that the non-loan assets would not be subject to the other provisions of the loan securitization exclusion. LSTA. 95SFA and LSTA. 96 JBA. 97SIFMA; CCMC; ABA; Credit Suisse; MFA; Goldman Sachs; LSTA; and SFA. 98PNC. Another commenter who generally supported the proposed modifications to the loan securitization exclusion did not urge the agencies to raise the cap on non-loan assets. See BPI. 99E.g., LSTA; SIFMA; and Goldman Sachs. 100SIFMA; BPI; ABA; and LSTA. 101SIFMA and BPI. 102BPI. 103 Goldman Sachs. 104SFA. 105 JBA and Data Boiler. 106Occupy. 107See 79 FR 5688–92 (stating, for example, that ‘‘[t]he [a]gencies also do not believe that they lack the statutory authority to permit a loan securitization relying on the loan securitization exclusion to use derivative[s,] as suggested by [Occupy]’’ and that, more broadly, the agencies have the authority to allow excluded loan securitizations to hold non-loan assets). 108 12 U.S.C. 1851(g)(2). 109 85 FR 12128–29. exclusion.88 The final rule adopts the codification of ‘‘cash equivalents’’ as proposed. Limited Holdings of Certain Debt Securities In the preamble to the 2013 rule, the agencies declined to permit loan securitizations to hold a certain amount of non-loan assets.89 The agencies supported a narrow scope of permissible assets in loan securitizations, suggesting that such an approach would be consistent with the purpose of section 13 of the BHC Act.90 Several commenters on the 2018 proposal disagreed with the agencies’ views and supported expanding the range of permissible assets in an excluded loan securitization. After considering the comments received on the 2018 proposal, the 2020 proposal would have allowed a loan securitization vehicle to hold up to five percent of the fund’s total assets in nonloan assets. The agencies indicated that authorizing loan securitizations to hold small amounts of non-loan assets could, consistent with section 13 of the BHC Act, permit loan securitizations to respond to investor demand and reduce compliance costs associated with the securitization process without significantly increasing risk to banking entities and the financial system.91 The agencies requested comment on, among other things, the maximum amount of permitted non-loan assets, the methodology for calculating the cap on non-loan assets, and whether the agencies should limit the type of assets that could be held under the non-loan asset provision. Specifically, the agencies requested comment on whether the non-loan asset provision should be limited to debt securities or should exclude certain financial
instruments such as derivatives and collateralized debt obligations. Commenters were generally supportive of allowing loan securitizations to hold a limited amount of non-loan assets.92 These commenters indicated that the requirements for the current loan securitization exclusion are too restrictive and excessively limit use of the exclusion and prevent issuers from responding to investor demand, and suggested that a limited bucket of non-loan assets would not fundamentally alter the characteristics and risks of securitizations or otherwise increase risks in banking entities or the financial system.93 Several commenters recommended against limiting the type of assets that could be held per the non-loan asset provision.94 For example, one commenter stated that allowing excluded loan securitizations to invest in any class of asset would allow those vehicles to achieve investment goals during periods of constrained loan supply, while another commenter indicated that such a restriction would be unnecessary given that the low limit on non-loan assets would constrain risks.95 In contrast, one commenter suggested limiting the type of permissible assets to securities with risk characteristics similar to loans.96 Numerous commenters suggested raising the cap on non-loan assets from five percent of assets to ten percent of assets,97 while one commenter indicated that a five percent cap would be sufficient.98 Commenters that supported an elevated limit on non-loan assets generally argued that a ten percent limit would further reduce compliance burdens while not materially increasing risk.99 Several commenters also suggested a method for calculating the cap on nonloan assets: The par value of assets on the day they are acquired.100 These commenters suggested that relying on par value is accepted practice in the loan securitization industry and would obviate concerns related to tracking amortization or prepayment of loans in a securitization portfolio.101 One of these commenters further specified that the limit should be calculated (1) according to the par value of the acquired assets on the date of investment over the securitization’s total collateral pool and (2) only at the time of investment.102 Another commenter indicated that the cap should be calculated as the lower of the purchase price and par value of the nonqualifying assets over the issuer’s aggregate capital commitments plus its subscription based credit facility.103 A third commenter suggested having a separate valuation mechanism for equity securities, which the commenter suggested should be market value upon acquisition.104 Finally, two commenters opposed allowing excluded loan securitizations to hold non-loan assets and suggested that such a change would be contrary to the purpose of section 13 of the BHC Act or would result in loan securitizations with differing risk characteristics, potentially increasing monitoring costs on investors.105 In addition, a commenter claimed that the 2020
proposal to allow excluded loan securitizations to hold non-loan assets would be contrary to section 13 of the BHC Act.106 Specifically, this commenter suggested that the rule of construction in 12 U.S.C. 1851(g)(2) only permits the securitization or sale of loans and that legislative history supports this reading of the statute. The agencies previously concluded and continue to believe they have legal authority to adopt the proposed allowance for a limited amount of nonloan assets.107 Section 13(g)(2) of the BHC Act states, ‘‘[n]othing in this
section shall be construed to limit or
restrict the ability of a banking entity or nonbank financial company supervised by the Board to sell or securitize loans in a manner otherwise permitted by law.’’ 108 This rule of construction is permissive—it allows the agencies to design the regulations implementing
section 13 in a way that accommodates
and does not unduly ‘‘limit or restrict’’ the ability of banking entities to sell or securitize loans. Contrary to the commenter’s argument, this provision does not mandate that any loan securitization exclusion only relate to loans. As discussed in this section and the preamble to the 2020 proposal,109 the agencies believe that allowing excluded loan securitizations to hold limited amounts of non-loan assets would, in fact, promote the ability of

110Final rule §ll.10(c)(8)(i)(E). 111Final rule §ll.10(c)(8)(i)(E)(1)–(2). 112 2020 proposal §ll.10(c)(8)(i)(E); 85 FR 12129. 113Final rule §ll.10(c)(8)(i)(E)(1)–(2). 114The agencies also have authority to address acts that function as an evasion of the requirements of the exclusion. See implementing regulations §ll.21. 115See 85 FR 12128. banking entities to sell or securitize loans. After considering the foregoing comments, the agencies are revising the loan securitization exclusion to permit a loan securitization to hold a limited amount of debt securities. Loan securitizations provide an important mechanism for banking entities to fund lending programs. Allowing loan securitizations to hold a small amount of debt securities in response to customer and market demand may increase a banking entity’s capacity to provide financing and lending. To minimize the potential for banking entities to use this exclusion to engage in impermissible activities or take on excessive risk, the final rule permits a loan securitization to hold debt securities (excluding asset-backed securities and convertible securities), as opposed to any non-loan assets, as the 2020 proposal would have allowed.110 Although several commenters supported allowing a loan securitization to hold any non-loan asset to provide flexibility and allow the issuer’s investment manager to respond to changing market demands, the agencies believe that limiting the assets to debt securities is more consistent with the activities of an issuer focused on securitizing loans, rather than engaging in other activities. The agencies have determined, consistent with the views of another commenter, that non-loan assets with materially different risk characteristics from loans could change the character and complexity of an issuer and raise the type of concerns that section 13 of the BHC Act was intended to address. Moreover, as described further below, limiting the assets to those with risk characteristics that are similar to loans will allow for a simpler and more transparent calculation of the five percent limit, which will facilitate banking entities’ compliance with the exclusion. For the same reasons, the final rule does not permit a loan securitization to hold asset-backed securities or convertible securities as part of its five percent allowance for debt securities. This helps to ensure that a loan securitization will not be exposed to complex financial instruments and will retain the general characteristic of a loan securitization issuer. Similarly, to reduce potential risktaking and to ensure that the fund is composed almost entirely of loans with minimal non-loan assets, the final rule retains the 2020 proposal’s five percent limit on non-loan assets. Commenters differed on whether raising the limit on non-loan assets was appropriate or necessary to ensure flexibility, and it is not clear what benefit would accrue to issuers who could hold debt securities of, for example, seven or ten percent
versus five percent. The amount of nonloan assets held by a fund should not be so significant that it fundamentally changes the character of the fund from one that is engaged in securitizing loans to one that is engaged in investing in other types of assets. The agencies are also clarifying the methodology for calculating the five percent limit on non-convertible debt securities.111 The 2020 proposal only provided that ‘‘the aggregate value of any such other assets must not exceed five percent of the aggregate value of the issuing entity’s assets’’ and requested comment about how the agencies should calculate this limit.112 As suggested by several commenters, the final rule specifies that the limit on nonconvertible debt securities must be calculated at the most recent time of acquisition of such assets. Specifically, the aggregate value of debt securities held under § ll.10(c)(8)(i)(E) of the final rule may not exceed five percent of the aggregate value of loans held under §ll.10(c)(8)(i)(A), cash and cash equivalents held under § ll.10(c)(8)(iii)(A), and debt securities held under § ll.10(c)(8)(i)(E), where the value of the loans, cash and cash equivalents, and debt securities is calculated at par value at the time any such debt security is purchased.113 The agencies have chosen the most recent time of acquisition of nonconvertible debt securities as the moment of calculation to simplify the manner in which the 5 percent cap applies. This would permit an issuer that, at some point in its life, held debt securities in excess of five percent of its assets to qualify for the exclusion if it came into compliance with the five percent limit prior to a banking entity relying on the exclusion with respect to such issuer. The agencies believe that a continuous monitoring obligation could impose significant burdens on excluded issuers and could cause an issuer to be disqualified from the loan securitization exclusion based on market events not under its control. It is also unnecessary to require this calculation at other intervals because limiting permissible assets to those that have similar characteristics as loans addresses the potential for evasion of the five percent limit that could arise if the issuer held more volatile assets.114 In the final rule, this measurement is based only on the value of the loans and debt securities held under §§ ll.10(c)(8)(i)(A) and (E) and the cash and cash equivalents held under § ll.10(c)(8)(iii)(A) rather than the aggregate value of all of the issuing entity’s assets. The purpose of the five percent limit is to ensure the investment pool of a loan securitization is composed of loans. Therefore, the calculation takes into account the assets that should make up the issuing entity’s investment pool and excludes the value of other rights or incidental assets, as well as derivatives held for risk management. This further simplifies the calculation methodology by excluding assets that may be more complex to value and
that are ancillary to the loan securitization’s investment activities. This straightforward calculation methodology will ensure that the loan securitization exclusion remains easy to use and will facilitate banking entities’ compliance with the exclusion. The agencies recognize that a loan securitization’s transaction agreements may require that some categories of loans, cash equivalents, or debt securities be valued at fair market value for certain purposes. To accommodate such situations, the exclusion provides that the value of any loan, cash equivalent, or permissible debt security may be based on its fair market value if (1) the issuing entity is required to use the fair market value of such loan or debt security for purposes of calculating compliance with concentration limitations or other similar calculations under its transaction agreements and (2) the issuing entity’s valuation methodology values similarly situated assets, for example non-performing loans, consistently. This provision is intended to provide issuers with the flexibility to leverage existing calculation methodologies while preventing issuers from using inconsistent methodologies in a manner to evade the requirements of the exclusion. Leases A commenter on the 2018 proposal suggested that the loan securitization exclusion be expanded to cover leases and related assets, including operating or capital leases.115 In response, in the 2020 proposal the agencies stated that they were ‘‘not proposing to separately

116 Id.
117SFA.
118See 12 U.S.C. 1851(d)(1)(E).
119 Implementing regulations §ll.10(c)(11)(ii)(A). 120See 85 FR 12130; 12 CFR 24.3. 121See 85 FR 12130 (noting that such a change could provide additional certainty regarding community development investments made through fund structures). 122See id. 123See id. 124See id. 125See id. 126See id. 127See id. 128See SIFMA; FSF; BPI; ABA; PNC; Community Development Venture Capital Alliance (CDVCA); IIB; and Data Boiler (stating that incorporating the CRA public welfare exemption may ease some challenges faced by communities during the current COVID pandemic, but all PWI should not be excluded). 129See SIFMA; FSF; and CDVCA. 130See CDVCA. 131See id. 132See SIFMA; BPI; ABA; and IIB. 133See SIFMA; FSF; ABA (addressing QOFs); and Small Business Investor Alliance (SBIA) (addressing RBICs). 134See SIFMA and FSF. list leases within the loan securitization exclusion because leases are included in the definition of loan and thus are permitted assets for loan securitizations under the current exclusion.’’ 116 That same commenter made a comment on the 2020 proposal urging the agencies to reconsider explicitly including operating leases and leased properties in the loan securitization exclusion.117 This commenter asserted that unless the agencies specifically revise the definition of ‘‘rights or other assets’’ to explicitly include leased property, then securitization vehicles with operating leases that rely on the residual property value after expiration of the lease to support their asset-backed securities would not be able to qualify under the loan securitization exemption, despite the 2013 rule’s provisions for special units of beneficial interest and collateral certificates. Consistent with the 2020 proposal, the agencies are not separately listing leases within the loan securitization exclusion because leases are included in the definition of loan and thus are permitted assets for loan securitizations under the current exclusion. The agencies are also not modifying the definition of ‘‘rights or other assets’’ to explicitly include leased property, as any residual value of such leased property upon expiration of an operating lease should meet the requirements to constitute an asset that is related or incidental to purchasing or otherwise acquiring and holding loans.
3. Public Welfare and Small Business
Funds
i. Public Welfare Funds
Section 13(d)(1)(E) of the BHC Act
permits, among other things, a banking entity to make and retain investments that are designed primarily to promote the public welfare of the type permitted under 12 U.S.C. 24(Eleventh).118 Consistent with the statute, the implementing regulations exclude from the definition of ‘‘covered fund’’ issuers that make investments that are designed primarily to promote the public welfare, of the type permitted under paragraph 11 of section 5136 of the Revised Statutes of the United States (12 U.S.C. 24), including the welfare of low- and moderate-income communities or families (such as providing housing, services, or jobs) (the public welfare investment exclusion).119 The 2020 proposal noted that the OCC’s regulations implementing 12 U.S.C. 24(Eleventh) provide that investments that receive consideration as qualified investments under the regulations implementing the Community Reinvestment Act (CRA) are public welfare investments for national banks.120 The 2020 proposal requested comment on whether any change should be made to clarify that all permissible public welfare investments, under any agency’s regulation, are excluded from the covered fund restrictions.121 The 2020 proposal specifically asked whether investments that would receive consideration as qualified investments under the CRA should be excluded from the definition of covered fund, either by incorporating these investments into the public welfare investment exclusion or by establishing a new exclusion for CRA-qualifying investments.122 In addition, the 2020 proposal requested comment on whether Rural Business Investment Companies (RBICs) are typically excluded from the definition of ‘‘covered fund’’ because of the public welfare investment exclusion or another exclusion and on whether the agencies should expressly exclude RBICs from the definition of covered fund.123 RBICs are licensed under a program designed to promote economic development and job creation in rural communities by investing in companies involved in the production, processing, and supply of food and agriculturerelated products.124 The Tax Cuts and Jobs Act established the ‘‘opportunity zone’’ program to provide tax incentives for long-term investing in designated economically distressed communities.125 The program allows taxpayers to defer and reduce taxes on capital gains by reinvesting gains in ‘‘qualified opportunity funds’’ (QOF) that are required to have at least 90 percent of their assets in designated low-income zones.126 The 2020 proposal requested comment on whether many or all QOFs would meet the terms of the public welfare investment exclusion and on whether the agencies should expressly exclude QOFs from the definition of covered fund.127 Commenters generally supported clarifying that funds that make investments that qualify for consideration under the CRA qualify for the public welfare investment exclusion.128 Commenters noted that this clarification would be consistent with the OCC’s regulations concerning
public welfare investments and the CRA, provide greater certainty, and avoid unnecessarily chilling public welfare investment activities.129 One commenter stated that some banking entities have been reluctant to invest in certain community development funds due to uncertainty as to whether these funds were covered funds.130 This commenter stated that explicitly excluding funds that qualify for consideration under the CRA from the definition of covered fund would eliminate this uncertainty and would help support the type of community development efforts that the public welfare investment exclusion was designed to promote.131 In addition, some commenters recommended excluding funds that qualify for the public welfare investment exclusion from the definition of ‘‘banking entity.’’ 132 Commenters also generally favored explicitly excluding RBICs and QOFs from the definition of ‘‘covered fund,’’ either by adopting new exclusions, or by clarifying the scope of the public welfare investment exclusion.133 Commenters stated that explicitly excluding these funds from the definition of ‘‘covered fund’’ would be consistent with the statutory provision permitting public welfare investments. Commenters stated that RBICs and QOFs must make investments that are clearly designed primarily to promote the public welfare because they are required to invest primarily in ways that promote job creation in rural communities (which may have significant low- and moderate-income populations or be economically disadvantaged and in need of revitalization or stabilization) and in economically distressed communities, respectively.134 Commenters stated that

135See SIFMA and FSF.
136See SIFMA.
137See SBIA.
138See Data Boiler.
139See PNC.
140Final rule §ll.10(c)(11)(ii)(A). 141See 12 U.S.C. 1851(d)(1)(E). A banking entity must have independent authority to make a public welfare investment. For example, a banking entity that is a state member bank may make a public welfare investment to the extent permissible under 12 U.S.C. 338a and 12 CFR 208.22. 142See, e.g., Rural Business Investment Company (RBIC) Program, 85 FR 16519, 16520 (Mar. 24, 2020). 143See 26 U.S.C. 1400Z–2(d). 144See 12 U.S.C. 1851(d)(1)(E); 156 Cong. Rec. S5896 (daily ed. July 15, 2010) (Statement of Sen. Merkley) (noting that Section 13(d)(1)(E) permits investments ‘‘of the type’’ permitted under 12 U.S.C. 24 (Eleventh), including ‘‘a range of lowincome community development and other projects,’’ but ‘‘is flexible enough to permit the [agencies] to include other similar low-risk investments with a public welfare purpose’’). 145Final rule §ll.10(c)(11)(iii). As with SBICs, discussed below, the final rule contemplates that an issuer that ceases to be a RBIC during wind-down may continue to qualify for the exclusion from the definition of ‘‘covered fund’’ for RBICs if the issuer satisfies certain conditions designed to prevent abuse. 146Final rule §ll.10(c)(11)(iv). As with other types of issuers excluded from the covered fund definition, a banking entity must have independent authority to invest in a QOF. 147See SIFMA and BPI. 148 12 U.S.C. 1851(h)(1). 149See 12 U.S.C. 1851(d)(1)(E) (permitting investments in SBICs). 150See implementing regulations §ll.10(c)(11)(i). 151See 85 FR 12131. certain RBICs and QOFs qualify for the public welfare investment exclusion, but providing an express exclusion for these funds would reduce uncertainty and associated compliance burdens and would encourage banking entities to provide capital to projects that promote economic development in rural and low-income communities.135 One commenter stated that RBICs and QOFs engage in investments that are substantively similar or identical to those of public welfare investment funds that are already excluded from the definition of covered fund and of the type that Congress recognized that
section 13 of the BHC Act was not
designed to prohibit.136 Another commenter stated that explicitly excluding RBICs would result in the provision of valuable expertise and services to RBICs and provide funding and assistance to small businesses and low- and moderate-income communities.137 One commenter expressed skepticism about providing a new exclusion for RBICs and QOFs but suggested that certain of these funds may currently qualify for the public welfare investment exclusion.138 Another commenter stated that it is not necessary to expressly exclude QOFs from the definition of covered fund, noting that these funds should be of the type primarily intended to promote the public welfare of low- and moderateincome areas and should therefore qualify for the current public welfare investment exclusion.139 After carefully considering the comments received, the agencies are revising the public welfare investment exclusion to explicitly incorporate funds, the business of which is to make investments that qualify for consideration under the Federal banking agencies’ regulations implementing the CRA.140 Explicitly excluding these types of investments from the definition of covered fund clarifies and gives full effect to the statutory exemption for public welfare investments.141 In addition, this clarification will reduce uncertainty and will facilitate public welfare investments by banking entities. The agencies are also adopting explicit exclusions from the definition of covered fund for RBICs and QOFs in § ll.10(c)(11) of the final rule. These types of funds were created by Congress to promote development in rural and low-income communities, and, due to their similarity to SBICs and public welfare investments, the agencies believe that section 13 of the BHC Act was not intended to restrict the types of funds that engage in those activities. RBICs are companies licensed under the Rural Business Investment Program, a program designed to promote economic development and the creation of wealth and job opportunities among individuals living in rural areas and to help meet the equity capital investment needs primarily of smaller enterprises located in such areas.142 Likewise, QOFs were developed as part of a program to promote long-term investing in designated economically distressed communities and are required to have at least 90 percent of their assets in designated low-income zones.143 Congress created RBICs and QOFs to encourage investment in rural areas, small enterprises, and low-income areas. Providing an explicit exclusion for these funds in the implementing regulations gives effect to section 13 of the BHC Act’s provision permitting public welfare investments and avoids chilling the activities of funds that were not the target of section 13 of the BHC Act.144 Although many of these funds may already qualify for the public welfare investment exclusion, the agencies are explicitly excluding these funds from the definition of covered fund to reduce uncertainty and compliance burden.
Thus, under the final rule, a covered fund does not include an issuer that has elected to be regulated or is regulated as a RBIC, as described in 15 U.S.C. 80b–3(b)(8)(A) or (B), or that has terminated its participation as a RBIC in accordance with 7 CFR 4290.1900 and does not make any new investments (other than investments in cash equivalents, which, for the purposes of this paragraph, means high quality, highly liquid investments whose maturity corresponds to the issuer’s expected or potential need for funds and whose currency corresponds to the issuer’s assets) after such termination.145 Likewise, under the final rule, a covered fund does not include an issuer that is a QOF, as defined in 26 U.S.C. 1400Z– 2(d).146 The final rule does not exclude funds that qualify for the public welfare investment exclusion from the definition of ‘‘banking entity’’ as requested by some commenters.147 The term ‘‘banking entity’’ is specifically defined in section 13 of the BHC Act.148 In addition, the agencies do not believe that applying the definition of banking entity places an undue burden on banking entities’ public welfare investments. The agencies believe that banking entities are able to design their permissible public welfare investments so as not to cause the investment fund to become a banking entity. For public welfare investment funds that are banking entities, the agencies believe that the burden-reducing amendments adopted in this final rule and the 2019 amendments should mitigate concerns about compliance burdens.
ii. Small Business Investment
Companies
Consistent with section 13 of the BHC Act,149 the implementing regulations exclude from the definition of ‘‘covered fund’’ SBICs and issuers that have received notice from the Small Business Administration to proceed to qualify for a license as an SBIC, which notice or license has not been revoked.150 The agencies proposed revising the exclusion for SBICs to clarify how the exclusion would apply to SBICs that surrender their licenses during winddown phases.151 Specifically, the agencies proposed revising the exclusion for SBICs to apply explicitly to an issuer that has voluntarily surrendered its license to operate as an SBIC in accordance with 13 CFR
107.1900 and does not make new
investments (other than investments in cash equivalents) after such voluntary

152See id. 153See id.; 12 U.S.C 1851(d)(1)(E). 154See 85 FR 12131. 155See id. 156See SIFMA; BPI; ABA; PNC; and SBIA. 157See SBIA. 158See SIFMA; BPI; and SBIA. 159See SIFMA; BPI; and SBIA. 160See Data Boiler. 161See final rule §ll10(c)(11)(i). 162See Data Boiler. 163E.g., SIFMA; JBA; Credit Suisse; and SAF. 164SIFMA. 165SIFMA and BPI. 166 IAA. 167ABA. 168 JBA. 169See 79 FR 5671. 170See 79 FR 5705. 171 Id. 172 2020 proposal §ll.10(c)(15)(i). 173 2020 proposal §ll.10(c)(15)(ii). 174 2020 proposal §ll.10(c)(15)(iii). surrender.152 The agencies explained that applying the exclusion to an issuer that has surrendered its SBIC license is appropriate because of the statutory exemption for investments in SBICs and because banking entities may otherwise become discouraged from investing in SBICs due to concerns that an SBIC may become a covered fund during its winddown phase.153 The agencies further noted that the proposed revisions included a number of requirements designed to ensure that the exclusion would not be abused.154 In particular, the exclusion would apply only to an issuer that voluntarily surrenders its license in accordance with 13 CFR
107.1900 and that does not make any
new investments (other than investments in cash equivalents).155 Most commenters that directly addressed the 2020 proposal’s revisions concerning SBICs supported the proposed revisions, stating that the proposed revisions would provide greater certainty to banking entities wishing to invest in SBICs and would increase investment in small businesses.156 One commenter stated that revising the exclusion for SBICs would prevent a banking entity from being forced to sell an interest in an SBIC that became a covered fund for reasons outside of the banking entity’s control.157 Commenters further noted that the proposed revisions included sufficient safeguards against evasion and did not present safety or soundness concerns.158 One commenter recommended against revising the exclusion from the definition of covered fund for SBICs. This commenter expressed concern about frequent buying and selling of SBICs and noted that section 13 of the BHC Act and its implementing regulations do not prohibit a banking entity from lending to small businesses.159 The commenter further expressed concern that an SBIC that surrenders its license may be doing so because it has failed or no longer wishes to comply with the Small Business Administration’s regulations.160 After carefully considering the comments received, the agencies are adopting the revisions to the exclusion from the definition of covered fund for SBICs, as proposed.161 The revisions will provide greater certainty to banking entities, give full effect to the provision of section 13 of the BHC Act that permits investments in SBICs, and support capital formation for small businesses. In response to one commenter’s concerns regarding the exclusion for SBICs,162 the agencies note that a banking entity’s investment in an SBIC must comply with all applicable laws and regulations, including the prohibition against proprietary trading under section 13 of the BHC Act and its implementing regulations. Furthermore, as noted above, the revised exclusion for SBICs includes safeguards designed to prevent abuse or evasion. In particular, the exclusion would only apply to an issuer that has voluntarily surrendered its license to operate as an SBIC in accordance with 13 CFR 107.1900 and that does not make new investments (other than investments in cash equivalents) after such voluntary surrender.
C. Additional Covered Fund Exclusions
In addition to modifying certain existing exclusions, the agencies are creating four new exclusions from the definition of ‘‘covered fund’’ to better tailor the provision to the types of entities that section 13 was intended to cover. These exclusions are for credit funds, venture capital funds, family wealth management vehicles, and customer facilitation vehicles. General Comments Many commenters were broadly supportive of the proposed new exclusions from the definition of ‘‘covered fund.’’ 163 Some commenters recommended adopting additional exclusions for an array of fund types and situations, including for tender bond vehicles,164 ownership interests erroneously acquired or retained,165 certain real estate funds,166 and funds in their seeding period.167 The agencies are declining to adopt these suggested exclusions because the requested actions are outside the scope of the current rulemaking. In addition, one commenter urged the agencies to redefine the definition of ‘‘covered fund,’’ to rely on a characteristics-based approach.168 The agencies decline to revise the definition of ‘‘covered fund’’ for the reasons articulated in the preamble to the 2013 rule.169

Credit Funds
i. Background and 2020 Proposal
In the preamble to the 2013 rule, the agencies declined to establish an exclusion from the definition of covered fund for funds that make loans, invest in debt, or otherwise extend the type of credit that banking entities may provide directly under applicable banking law (credit funds).170 The agencies cited concerns about whether credit funds could be distinguished from private equity funds and hedge funds and the possible evasion of the requirements of
section 13 of the BHC Act through the
availability of such an exclusion. In addition, the agencies suggested that some credit funds would be able to operate using other exclusions from the definition of covered fund in the 2013 rule, such as the exclusion for joint ventures or the exclusion for loan securitizations.171 However, commenters on the 2018 proposal noted that many credit funds have not been able to utilize the joint venture and loan securitization exclusions. In response, the agencies included in the 2020 proposal a specific exclusion for credit funds. Under the 2020 proposal, a credit fund would have been an issuer whose assets consist solely of:

Loans;
Debt instruments;
Related rights and other assets that
are related or incidental to acquiring, holding, servicing, or selling loans, or debt instruments; and
Certain interest rate or foreign
exchange derivatives.172 The proposed exclusion would have been subject to certain additional requirements to reduce evasion concerns and help ensure that banking entities invest in, sponsor, or advise credit funds in a safe and sound manner. For example, the proposed exclusion would have imposed (1) certain activity requirements on the credit fund, including a prohibition on proprietary trading; 173 (2) disclosure and safety and soundness requirements on banking entities that sponsor or serve as an advisor for a credit fund; 174 (3) safety and soundness requirements on all banking entities that invest in or have certain relationships with a credit

175 2020 proposal §ll.10(c)(15)(iv). 176 2020 proposal §ll.10(c)(15)(v). 177 2020 proposal §ll.10(c)(15)(i)(C)(1)(iii). 178See 85 FR 12133. 179E.g., CCMC; AIC; SIFMA; FSF; ABA; Arnold & Porter; and Goldman Sachs. 180E.g., SIFMA; Credit Suisse; Goldman Sachs; and Arnold & Porter. 181Better Markets and Data Boiler. One of these commenters suggested that banking entities should instead rely on the exclusions for joint ventures and loan securitizations. Data Boiler. 182E.g., SIFMA; Arnold & Porter; and ABA. One commenter also noted that the permissible holding period for debt previously contracted varies depending on applicable regulations and suggested that the agencies specify the holding period for debt previously contracted assets owned by a credit fund and provide for an extension process. Arnold & Porter. 183SIFMA. The same commenter also urged the agencies to permit credit funds to hold commodity forward contracts, which the commenter argued may be an appropriate hedge for extensions of credit to agricultural businesses. SIFMA. 184Credit Suisse. See also Arnold & Porter (recommending expanding the types of permissible derivatives, to allow for more effective hedging and easier disposal of portfolio assets). 185ABA. 186Arnold & Porter. 187 Data Boiler and Better Markets. One of these commenters argued that the inclusion of non-loan instruments would be contrary to the purpose of
section 13 of the BHC Act. Data Boiler. As indicated
by the agencies in the preamble to the 2020 proposal, taking limited amounts of non-loan or debt assets as consideration for an extension of credit is common and is a permitted practice for insured depository institutions. Therefore, the agencies believe it would not be inconsistent with
section 13 of the BHC Act to facilitate the sale of
loans by establishing a credit fund exclusion that allows a credit fund to hold a limited amount of certain equity instruments related to extensions of credit. See also the discussion about permitting excluded loan securitizations to hold a small amount of non-loan assets, supra Section IV.B.2 (Loan Securitizations). 188E.g., SIFMA; Credit Suisse; ABA; and Arnold & Porter. 189E.g., SIFMA; Credit Suisse; and Arnold & Porter. 190SIFMA; FSF; CCMC; AIC; ABA; and Goldman Sachs. 191SIFMA and CCMC. 192Arnold & Porter. 193 Goldman Sachs and FSF. 194ABA. 195SIFMA; FSF; Credit Suisse; ABA; and Goldman Sachs. One commenter also suggested a formula for determining the cap. Goldman Sachs. 196E.g., SIFMA and Goldman Sachs. 197 Id. fund; 175 and (4) restrictions on the banking entity’s investment in, and relationship with, a credit fund.176 The proposed exclusion also would have permitted a credit fund to receive and hold a limited amount of equity securities (or rights to acquire equity securities) that were received on customary terms in connection with the credit fund’s loans or debt instruments.177
ii. Comments
The agencies requested comment on all aspects of the proposed credit fund exclusion. In addition, the agencies solicited comment on specific provisions of the proposed exclusion, including the permissibility of certain assets and requirements related to the activities of the credit fund and the relationship between a banking entity and a credit fund.178 General Commenters were generally supportive of adopting an exclusion for credit funds, and several commenters suggested specific revisions to the proposed exclusion.179 Several commenters supportive of the 2020 proposal urged the agencies not to adopt any further limitations on the proposed exclusion and indicated that the proposed exclusion would not increase the risk of evasion of the requirements of section 13 of the BHC Act.180 Two commenters expressed general opposition to or concern about the proposed credit fund exclusion.181 Asset Requirements Commenters were generally supportive of allowing a credit fund to invest broadly in loans and debt instruments, certain related assets, and certain derivatives.182 One commenter recommended against delineating between permissible and nonpermissible types of loans and debt instruments, arguing that credit funds should be able to extend credit to the same degree as would be permitted for the banking entity to extend directly.183 Another commenter encouraged the agencies to clarify and expand the definition of debt instrument and derivatives, to include all tranches of debt, collateralized loan and collateralized debt obligations, and any derivatives related to hedging credit risk, such as credit default swaps and total return swaps.184 In addition, a commenter suggested clarifying that no specific credit standard applies to loans held by a credit fund.185 One commenter also urged the agencies to establish a safe harbor to the permissible asset restrictions for banking entities that rely, in good faith, on a representation by the credit fund that the credit fund only invests in permissible assets.186 Two commenters recommended limiting permissible assets to only loans or debt instruments, and not equity.187 In contrast, a range of commenters argued that allowing a credit fund to receive certain assets, like equity, related to an extension of credit would promote the sale of loans and extensions of credit.188 Some of these commenters suggested that taking equity as partial consideration for extending credit is commonplace in the debt and loan markets and that such a provision could ensure that credit funds are able to facilitate loan and debt workouts and restructurings, a critical financial intermediation function.189 Most commenters supportive of the 2020 proposal were generally opposed to a quantitative limit on the amount of equity securities (or rights to acquire an equity security) received on customary terms in connection with such loans or debt instruments that could be held by a credit fund, citing compliance costs and diminished
flexibility,190 but some commenters indicated that a limitation of 20 or 25 percent of total assets could be acceptable if the agencies were to impose a limit.191 Commenters supportive of allowing credit funds to hold certain related assets, such as equity, in connection with an extension of credit suggested that the provision would not raise significant safety and soundness or evasion concerns. For example, one commenter claimed that such a provision would not raise the risk of evasion, in part, because equity options received as consideration generally expire unexercised.192 Other commenters argued that the activity requirements of the exclusion would prevent a credit fund from becoming actively involved in the purchase and sale of equity instruments.193 Another commenter suggested that the agencies could impose a requirement that nonloan or non-debt assets be acquired on arms-length terms and adhere to bank safety and soundness standards.194 Separately, several commenters recommended allowing excluded credit funds to hold any type of asset, up to a certain percentage of aggregate assets, either 20 or 25 percent of a credit fund’s total assets.195 These commenters asserted that permitting a credit fund to own equity securities and other assets would help the fund more effectively provide credit, without altering the character of the credit fund, and would reduce compliance burdens associated with launching and operating a credit fund.196 In addition, these commenters claimed that a limited bucket for nonloan and non-debt assets would be consistent with the ability of banking entities and some business development companies to invest in equity.197 Banking Entity and Issuer Requirements Generally, commenters either agreed that certain restrictions to ensure that a credit fund is actually engaged in prudently providing credit and credit

198E.g., SIFMA; Better Markets; FSF; and Goldman Sachs. One commenter also indicated that the disclosure requirement for banking entities that sponsor or advise funds is appropriate. Arnold & Porter. 199SIFMA. For example, the commenter suggested that a credit fund sponsored by a banking entity subject to the market risk rule should be permitted to use the definitions of proprietary trading and trading account in §ll.3(b)(1)(ii). 200FSF. 201Arnold & Porter. 202SIFMA. 203Arnold & Porter. 204Arnold & Porter. 205 Id. 206 Id. 207 Id. 208 Id. 209 Id. 210SIFMA; FSF; CCMC; Credit Suisse; and Data Boiler. 211Arnold & Porter. 212See 12 U.S.C. 1851(g)(2), (h)(2). Paragraph (g)(2) of section 13 of the BHC Act makes clear that the Volcker rule is not intended to impede banking entities’ ability to extend credit by, for example, selling loans or securitize loans. See 12 U.S.C. 1851(g)(2). intermediation and is not operated for the purpose of evading the provisions of
section 13 of the BHC Act were
appropriate or did not object to the inclusion of these requirements.198 Several commenters, however, offered revisions to the activities, sponsor or advisor, banking entity, or investment and relationship limit requirements. For example, several commenters requested clarification on the prohibition on proprietary trading by an excluded credit fund contained in § ll.10(c)(15)(ii)(A) of the 2020 proposal. One commenter suggested that the definition of proprietary trading for a credit fund should depend on the definition used by the banking entity.199 Another commenter encouraged the agencies to incorporate the exclusions and exemptions from the prohibition on proprietary trading into the credit fund exclusion’s prohibition on proprietary trading.200 A third commenter recommended making explicit that exercising rights for certain related assets, such as an equity warrant, is not proprietary trading.201 Commenters also requested revisions to and clarification about the limits on a banking entity’s investment in, and relationship with, a credit fund. One commenter argued that the imposition of §ll.14 of the implementing regulations (which imposes limitations on the relationship between a banking entity and a fund it sponsors or advises) would be duplicative of (1) the requirement that the banking entity not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or performance of the credit fund and (2) certain conflict of interest, high-risk, and safety and soundness restrictions.202 Another commenter claimed that there was little benefit to imposing the requirements of §ll.14 (described above) and §ll.15 (which imposes certain material conflicts of interest, high-risk investments, and safety and soundness and financial stability requirements on permitted covered fund activities) of the implementing regulations in the context of credit funds and suggested that the partial application of §ll.14, in particular, could lead to unexpected and inappropriate outcomes, such as allowing a banking entity to invest in the equity of a credit fund, but not the debt instruments issued by that same credit fund.203 That same commenter also recommended eliminating § ll.10(c)(15)(v)(B) of the 2020 proposal—which would have required that the banking entity’s investment in, and relationship with, the credit fund be conducted in compliance with, and subject to, applicable banking laws and regulations—because applicable banking laws and regulations apply regardless of the banking entity’s use of the credit fund exclusion.204 In addition, a commenter argued that banking entities that serve as investment advisers or commodity trading advisors to credit funds should not be subject to the disclosure and safety and soundness requirements of § ll.10(c)(15)(iii) of the 2020 proposal since investment advisers and commodity trading advisors who do not otherwise sponsor or invest in a fund are generally not subject to section 13 of the BHC Act. The
commenter argued that § ll.10(c)(15)(iii) of the 2020 proposal would impose differing requirements on a credit fund depending on whether the investment adviser or commodity trading advisor was an insured depository institution or a bank holding company. That commenter also claimed that the portfolio requirements in § ll.10(c)(15)(iv)(B) of the 2020 proposal could require banking entities to establish complex compliance programs to assess credit fund compliance with state and foreign laws and that the agencies should limit the scope of the provision to only federal banking laws and regulations.205 Finally, one commenter contended that the application of certain requirements in the exclusion is contingent on the type of banking entity that invests in or sponsors a credit fund and urged the agencies to make explicit that only the identity of the sponsor of the credit fund, and not its affiliates or third-party investors, determines which portfolio quality and safety and soundness requirements apply to the credit fund.206 More generally, this commenter asked the agencies to make explicit in the preamble to the final rule that the actions of unaffiliated, thirdparty banking entities do not affect whether a banking entity may invest in a fund.207 Other Comments Commenters also submitted several miscellaneous comments about the proposed exclusion for credit funds. One commenter requested that the agencies clarify the definition of assetbacked securities as used in the proposed credit fund exclusion and the current loan securitization exclusion.208 That same commenter also urged the agencies to revise the proposed credit fund exclusion to allow banking entities with more stringent credit requirements, such as insured depository institutions, to invest in credit funds that hold distressed debt.209 Finally, the 2020 proposal requested comment on whether to combine the proposed credit fund exclusion with the loan securitization exclusion. Commenters were generally opposed to combining the two exclusions, citing different classes of assets in which the two types of issuers invest and a fundamental difference in structure (loan securitizations issue asset-backed securities, while credit funds do not).210 In addition, one commenter argued that while combining the two exclusions would increase the simplicity of the rule, such an amalgamated exclusion could result in increased compliance burdens for issuers who are accustomed to the lack of credit requirements in the current loan securitization exclusion.211
iii. Final Exclusion
After consideration of the comments, the agencies are adopting the credit fund exclusion as proposed, with certain modifications. The agencies believe that the credit fund exclusion in the final rule (1) addresses the application of the covered fund provisions to credit-related activities that certain banking entities are permitted to engage in directly and (2) is consistent with Congress’s intent that
section 13 of the BHC Act limit banking
entities’ investment in and relationships with hedge funds and private equity funds, but not limit or restrict banking entities’ ability to extend credit.212 The agencies also believe that the credit fund exclusion in the final rule, with the eligibility criteria described below, will address concerns the agencies expressed in the preamble to the 2013

213See 79 FR 5705.
214Final rule §ll.10(c)(15)(i).
215Final rule §ll.10(c)(15)(i)(D). 216Final rule §ll.10(c)(15)(i)(C). In a minor change from the 2020 proposal, the agencies are making clear that rights or other assets held under paragraph (c)(15)(i)(C) of that section may not include any derivative, other than a derivative that meets the requirements of paragraph (c)(15)(i)(D) of that section. 217 85 FR 12133. 218Final rule §ll.10(c)(15)(iv)(B), (iii)(B). 219Final rule §ll.10(c)(15)(ii)(A). rule about the ability to administer an exclusion for credit funds and the potential evasion of section 13 of the BHC Act.213 Banking entities already have experience using and complying with the loan securitization exclusion. Establishing an exclusion for credit funds based on the framework provided by the loan securitization exclusion allows banking entities to provide traditional extensions of credit regardless of the specific form, whether directly via a loan made by a banking entity, or indirectly through an investment in or relationship with a credit fund that transacts primarily in loans and certain debt instruments. The credit fund exclusion limits the universe of potential funds that can rely on the exclusion by clearly specifying the types of activities in which those funds may engage. Excluded credit funds can transact in or hold only loans; debt instruments that would be permissible for the banking entity relying on the exclusion to hold directly; certain rights or assets that are related or incidental to the loans or debt instruments, including equity securities (or rights to acquire an equity security) received on customary terms in connection with such loans or debt instruments; and certain interest rate and foreign exchange derivatives. The credit fund exclusion, with these eligibility criteria, should not raise evasion concerns. Similarly, the agencies’ expectations regarding the amount of permissible equity securities (or rights to acquire an equity security) held and the requirement that the credit fund not engage in activities that would constitute proprietary trading should help to ensure that the extensions of credit, whether directly originated or acquired from a third party, are held by the credit fund for the purpose of facilitating lending and not for the purpose of evading the requirements of
section 13. Finally, the restrictions on
guarantees and other limitations should eliminate the ability and incentive for either the banking entity sponsoring a credit fund or any affiliate to provide additional support beyond the ownership interest retained by the sponsor. Thus, the agencies expect that, together, the criteria for the credit fund exclusion will prevent a banking entity from having any incentive to bail out such funds in periods of financial stress or otherwise expose the banking entity to the types of risks that the covered fund provisions of section 13 were intended to address. Consistent with commenters’ suggestions, the agencies are keeping separate the credit fund exclusion and the loan securitization exclusion because the structures and purposes of those two types of issuers differ sufficiently to warrant different requirements. For example, loan securitizations and credit funds have different asset composition and different financing and legal structures. Therefore, the agencies are finalizing a credit fund exclusion separate from the loan securitization exclusion. Asset Requirements Under the final rule, a credit fund, for the purposes of the credit fund exclusion, is an issuer whose assets consist solely of:

Loans;
Debt instruments;
Related rights and other assets that
are related or incidental to acquiring, holding, servicing, or selling loans, or debt instruments; and
Certain interest rate or foreign
exchange derivatives.214 Several provisions of the exclusion are similar to and modeled on conditions in the loan securitization exclusion to ease compliance burdens. For example, any derivatives held by the credit fund must relate to loans, permissible debt instruments, or other rights or assets held and reduce the interest rate and/or foreign exchange risks related to these holdings.215 In addition, any related rights or other assets held that are securities must be cash equivalents, securities received in lieu of debts previously contracted with respect to loans held or, unique to the credit fund exclusion, equity securities (or rights to acquire equity securities) received on customary terms in connection with the credit fund’s loans or debt instruments.216 In the 2020 proposal, the agencies requested comment on whether to impose a limit on the amount of equity securities (or rights to acquire equity securities) that may be held by an excluded credit fund.217 After a review of the comments and further deliberation, the agencies are not adopting a quantitative limit on the amount of equity securities (or rights to acquire equity securities) that may be held by an excluded credit fund. Any such equity securities or rights are limited by the requirements that they be (a) received on customary terms in connection with the fund’s loans or debt instruments and (b) related or incidental to acquiring, holding, servicing, or selling those loans or debt instruments. The agencies generally expect that the equity securities or rights satisfying those criteria in connection with an investment in loans or debt instruments of a borrower (or affiliated borrowers) would not exceed five percent of the value of the fund’s total investment in the borrower (or affiliated borrowers) at the time the investment is made. The agencies understand that the value of those equity securities or other rights may change over time for a variety of reasons, including as a result of market conditions and business performance, as well as more fundamental changes in the business and the credit fund’s corresponding management of the investment (e.g., exchanges of debt instruments for equity in connection with mergers and restructurings or a disposition of all portion of the credit investment without a corresponding disposition of the equity securities or rights due to differences in market conditions or other factors). Accordingly, the agencies can foresee various circumstances where the relative value of such equity securities or rights in a borrower (or affiliated borrowers) would over the life of the investment exceed five percent on a basis consistent with the requirements. Nonetheless, the agencies expect that the fund’s exposure to equity securities (or other rights), individually and collectively and when viewed over time, would be managed on a basis consistent with the fund’s overall purpose. The agencies are also not imposing additional restrictions on the types of equity
securities (or rights to acquire an equity security) that a credit fund may hold. The final rule prevents a banking entity from relying on the credit fund exclusion unless any debt instruments and equity securities (or rights to acquire an equity security) held by the credit fund and received on customary terms in connection with the credit fund’s loans or debt instruments are permissible for the banking entity to acquire and hold directly and a sponsor of a credit fund must ensure that the credit fund complies with certain safety and soundness standards.218 Combined with the prohibition on proprietary trading by a credit fund,219 these limitations are expected to prevent evasion of section 13 of the BHC Act and should be sufficient to prevent

220One commenter suggested requiring that equity securities (or rights to acquire an equity security) be acquired via arms-length market transactions and adhere to bank safety and soundness standards. See ABA. Under the final rule, a banking entity may not rely on the credit fund exclusion unless any equity securities (or rights to acquire an equity security) held by the credit fund are permissible for the banking entity to acquire and hold directly under applicable federal banking laws and regulations. Final rule §ll.10(c)(15)(iv)(B). In addition, the final rule requires that equity securities (or rights to acquire an equity security) related or incidental to acquiring, holding, servicing, or selling such loans or debt instruments must be received on customary terms in connection with such loans or debt instruments. Final rule §ll.10(c)(15)(i)(C)(1)(iii). Finally, a banking entity’s investment in, and relationship with, the issuer must comply with the limitations imposed in §ll.15, as if the issuer were a covered fund. Final rule §ll.10(c)(15)(v)(A). 221 85 FR 12132. 222Final rule §ll.10(c)(15)(i)(C)(2). 223The agencies’ rationale, in the preamble to the 2013 rule, for limiting the permissible assets for the loan securitization exclusion is particularly relevant. See 79 FR 5691 (‘‘Under the final rule as adopted, an excluded loan securitization would not be able to hold derivatives that would relate to risks to counterparties or issuers of the underlying assets referenced by these derivatives because the operation of derivatives, such as these, that expand potential exposures beyond the loans and other assets, would not in the Agencies’ view be consistent with the limited exclusion contained in the rule of construction under section 13(g)(2) of the BHC Act, and could be used to circumvent the restrictions on proprietary trading and prohibitions in section 13(f) of the BHC Act. The Agencies believe that the use of derivatives by an issuing entity for asset-backed securities that is excluded from the definition of covered fund under the loan securitization exclusion should be narrowly tailored to hedging activities that reduce the interest rate and/or foreign exchange risks directly related to the asset-backed securities or the loans supporting the asset-backed securities because the use of derivatives for purposes other than reducing interest rate risk and foreign exchange risks would introduce credit risk without necessarily relating to or involving a reduction of interest rate risk or foreign exchange risk.’’). 224The agencies note that banking entities must otherwise comply with applicable law. See infra, Additional Banking Entity Requirements. 225Final rule §ll.10(c)(15)(ii)(A). banking entities from investing in or sponsoring credit funds that hold excessively risky equity securities (or rights to acquire an equity security).220 The agencies are, however, clarifying that the provision allowing related rights and other assets does not
separately permit the holding of derivatives. The preamble to the 2020 proposal made clear that ‘‘any derivatives held by the credit fund must relate to loans, permissible debt instruments, or other rights or assets held, and reduce the interest rate and/ or foreign exchange risks related to these holdings.’’ 221 The agencies suggested then and currently believe that allowing a credit fund issuer to hold derivatives not related to interest rate or foreign exchange hedging would not be necessary to facilitate the indirect extension of credit by banking entities and may pose the very risks that section 13 of the BHC Act was intended to reach. To ensure that the credit fund exclusions does not inadvertently allow the holding of certain derivatives unrelated to interest rate and/or foreign exchange risks, the final rule explicitly excludes derivatives from permissible related right and other assets.222 The agencies are not adopting a broad expansion of permissible assets, as recommended by several commenters. Contrary to commenters’ suggestions, allowing credit funds to hold unlimited amounts of non-debt instruments or derivatives, such as credit default or total return swaps, could present evasion concerns and is not necessary for effectuating the rule of construction.223 The agencies believe that only those instruments that facilitate the extension of credit and directly-related hedging activities should be permitted under the exclusion. For example, allowing the unlimited holding of credit default swaps by a majority owned or sponsored credit fund could raise the risks that section 13 of the BHC Act was intended to address. Moreover, permitting excluded credit funds to invest up to 25 percent of total assets in any type of asset could turn the exclusion for credit funds into an exclusion for the type of funds that
section 13 of the BHC Act was intended
to address. Such a result would be contrary to section 13 of the BHC Act. There are several additional changes recommended by commenters that the agencies are not including in the final rule. Specifically, the final rule does not:

Allow excluded credit funds to
hold commodity forward contracts. Although these contracts have legitimate value as hedging instruments, the agencies do not believe this type of hedging activity is consistent with the purpose of the exclusion for credit funds, which is to allow banking entities to share the risks of their permissible lending activities or to engage in permissible lending activities indirectly through a fund structure.
Permit banking entities that are
insured depository institutions or their operating subsidiaries to invest in credit funds through a contribution to a credit fund of troubled loans and debt previously contracted assets from the banking entity’s portfolio. The conditions in the final rule are intended to ensure that a credit fund generally engages in activities that the banking entity may engage in directly and that the banking entity’s investment in and relationship with the fund are conducted in a safe and sound manner. The agencies decline to deviate from these standards for any particular type of credit fund because doing so could permit activities that raise the type of concerns that section 13 of the BHC Act was intended to address.
Further specify the holding period
for securities held in lieu of debts previously contracted held by a credit fund. Generally, a banking entity may not rely on this exclusion unless any debt instruments and equity securities (or rights to acquire equity securities) held by the fund would be permissible for the banking entity to acquire and hold directly under applicable federal banking laws and regulations. However, the requirement that a banking entity be able to hold a given asset directly does not apply to securities held in lieu of debts previously contracted under the final regulations. Because a banking entity’s ability to invest in or sponsor an excluded credit fund is not contingent on how long the credit fund holds securities held in lieu of debts previously contracted, the agencies do not believe it is necessary to amend the regulations to impose a specific holding period on securities held by a credit fund in lieu of debts previously contracted.224
Revise or expand on the definition
of debt instrument. The agencies believe that the term debt instrument already has a general meaning that is used in the marketplace and by regulators and that a new definition is unnecessary given this widely understood meaning and could cause confusion.
Adopt a safe harbor for banking
entities that rely, in good faith, on a representation by the credit fund that it only invests in permissible assets. It is the responsibility of the banking entity to ensure that it complies with section 13 of the BHC Act and the implementing regulations, and such responsibility cannot be substituted solely with a representation from a credit fund. Activity Requirements The agencies are adopting the activity requirements for issuers in the 2020 proposal without revision. Under the final rule, a credit fund is not a covered fund, provided that:
The fund does not engage in
activities that would constitute proprietary trading, as defined in § ll.3(b)(1)(i) of the rule, as if the fund were a banking entity; 225 and

226Final rule §ll.10(c)(15)(ii)(B). 227The agencies recognize, however, that compliance with certain requirements and conditions in §§ll.4, ll.5, and ll.6 of the implementing regulations may be inapt and/or highly impractical in the context of a credit fund, particularly given the asset and activity restrictions contained in §ll.10(c)(15). For example, the exemptions for underwriting and market makingrelated activities in §ll.4 require that a banking entity relying on such exemptions, among other things, be licensed or registered to engage in the applicable activity in accordance with applicable law. Moreover, to the extent that a credit fund is a banking entity with significant trading assets and liabilities (i.e., because it, together with its affiliates and subsidiaries, has trading assets and liabilities that equal or exceed $20 billion over the four previous calendar quarters), it also would be required to maintain a separate compliance program specific to those exemptions. 228Similarly, trading activity that satisfies the 60- day rebuttable presumption in §ll.3(b)(4) would be presumed not to be proprietary trading for these purposes. 229 Implementing regulations §ll.10(d)(2). 230See 12 CFR 244 (Credit Risk Retention). 231Final rule §ll.10(c)(15)(iii)(A). These disclosures include, among other things, that losses are borne solely by investors and not the banking entity, that investors should examine fund documents, and that ownership interests are not insured by the FDIC or guaranteed. Final rule §ll.11(a)(8). 232Final rule §ll.10(c)(15)(iii)(B). 233 Implementing regulations §ll.10(a)(1).

The fund does not issue assetbacked securities.226
The agencies decline to adopt changes recommended by commenters because the agencies believe the activity requirements are clear and appropriate. The first provision explicitly references the prohibition on proprietary trading by a banking entity in § ll.3 of the implementing regulations and, in particular, the short-term intent prong contained in § ll.3(b)(1)(i). For the avoidance of doubt, a credit fund would not be able to elect a different definition of proprietary trading or trading account. Varying the definition of proprietary trading depending on the type of banking entity that sponsors or invests in the credit fund, as suggested by a commenter, could result in conflicting requirements for credit funds with multiple banking entity investors and generally increase compliance burdens on credit funds. The agencies also note that activities permitted under § ll.10(c)(15) generally would not be considered proprietary trading, provided that an excluded credit fund does not purchase or sell one or more financial instruments principally for the purpose of short-term resale, benefit from actual or expected short-term price movements, realize short-term arbitrage profits, or hedge one or more of the positions resulting from the purchases or sales of financial instruments. The agencies are not expressly incorporating the permitted activities in §§ ll.4, ll.5, and ll.6 of the implementing regulations into the text of the final credit fund exclusion. The exclusion for credit funds is intended to allow banking entities to share the risks of otherwise permissible lending activities. Accordingly, the agencies would not expect that a credit fund would be formed for the purpose of engaging, or in the ordinary course would be engaged, in the activities permitted under §§ ll.4, ll.5, and ll.6 of the implementing regulations. Nevertheless, to the extent that a credit fund seeks to engage in any of those activities as an exemption from the prohibition on engaging in proprietary trading, as defined in §ll.3(b)(1)(i) of the final rule, and does so in compliance with the requirements and conditions of the applicable exemption, then the final rule would not preclude such activities.227 Similarly, with respect to the exclusions from the definition of proprietary trading contained in § ll.3(d) of the implementing regulations, the agencies note that the trading activities identified in §ll.3(d) are by definition not deemed to be proprietary trading, such that the performance by an excluded credit fund of those activities would not be inconsistent with the final credit fund exclusion.228 Finally, the agencies are not revising the definition of ‘‘asset-backed security’’ in the implementing regulations. The definition of ‘‘asset-backed security’’ in the implementing regulations specifically refers to the meaning specified in section 3(a)(79) of the Exchange Act (15 U.S.C. 78c(a)(79)).229 This definition is used elsewhere in banking law,230 and banking entities and
others in the loan securitization industry have adapted their operations in reliance of the definition contained in the Exchange Act. Moreover, the 2013 rule included the requirement that the fund issue asset backed securities as
part of the loan securitization criteria,
and banking entities have become familiar with this definition, as they have implemented and utilized the exclusion. Requirements for a Sponsor, Investment Adviser, or Commodity Trading Advisor The agencies are adopting the proposed requirements for a sponsor, investment adviser, or commodity trading advisor to an excluded credit fund with one modification. Investors in a credit fund that a banking entity sponsors or for which the banking entity serves as an investment adviser or commodity trading advisor may have expectations related to the performance of the credit fund that raise bailout concerns. To ensure that these investors are adequately informed of the banking entity’s role in the credit fund, the final rule requires a banking entity that acts as a sponsor, investment adviser, or commodity trading advisor to an excluded credit fund to provide prospective and actual investors the disclosures specified in § ll.11(a)(8) of the implementing regulations.231 Second, a banking entity that acts as a sponsor, investment adviser, or commodity trading advisor must ensure that the activities of the credit fund are consistent with safety and soundness standards that are substantially similar to those that would apply if the banking entity engaged in the activities directly.232 The agencies note, contrary to the suggestion of a commenter, that this provision does not apply to any investment adviser or commodity trading advisor to a credit fund who does not also sponsor or acquire an ownership interest in the credit fund. Rather, the requirements in § ll.10(c)(15) apply only to a sponsor, investment adviser, or commodity trading adviser that relies on the exclusion to sponsor or acquire an ownership interest in the credit fund. The covered fund provisions in § ll.10 of the implementing regulations only affect the operations of banking entities that, as principal, directly or indirectly, acquire or retain any ownership interest in or sponsor a covered fund.233 Thus, the safety and soundness provision only applies to banking entities that sponsor an excluded credit fund or that have an ownership interest in an excluded credit fund and also serve as an investment adviser or commodity trading advisor to the fund. More generally, to clarify an issue raised by some commenters, the agencies note that whether a specific banking entity may use the credit fund exclusion to make or have an otherwise impermissible investment in or relationship with a credit fund is contingent on the permissible activities of the banking entity. That is, the same fund may be a covered fund with respect to one banking entity and an excluded credit fund with respect to a different banking entity. A banking entity continues to be responsible for ensuring that its particular investment, sponsorship, or adviser activities comply with section 13 of the BHC Act and its implementing regulations. This principle applies to paragraphs (iii), (iv), and (v) of the credit fund exclusion.

234Final rule §ll.14(a)(1).
235Final rule §ll.10(c)(15)(iii)(C). 236Final rule §ll.10(c)(15)(iv). 237Final rule §ll.10(c)(15)(iv)(B). 238For example, banking entities that are organized under state or foreign laws may, depending on the nature of the organization, need to comply with other laws. 239Final rule §ll.10(c)(15)(v)(A). 240Final rule §ll.10(c)(15)(v)(B). 241The agencies also note that §ll.10(c)(15)(v)(B) does not impose any additional burdens and should not generate confusion. 242For example, a banking entity’s investment in or relationship with a credit fund could be subject to the regulatory capital adjustments and deductions relating to investments in financial subsidiaries or in the capital of unconsolidated financial institutions, if applicable. See 12 CFR 217.22. 243 2020 proposal §ll.10(c)(16). The final rule moves the requirement that the banking entity must comply with §ll.14 of the implementing regulations to § ll.10(c)(15)(iii). This organizational change is in response to commenters that requested the agencies confirm that that the §ll.14 limitations do not apply to a banking entity that merely invests in a credit fund, as opposed to a banking entity that sponsors or advises the fund. The agencies believe this change is appropriate because the limitations on banking entities’ relationships with a covered fund in §ll.14 only apply when a banking entity serves, directly or indirectly, as the investment manager, investment adviser, commodity trading advisor, or sponsor to a covered fund.234 In addition, the agencies appreciate that mere investment by a banking entity in a credit fund does not raise the type of concerns Super 23A was intended to address, and thus the agencies are applying §ll.14 only when a banking entity acts as a sponsor, investment adviser, or commodity trading advisor to a credit fund, in each case as though the credit fund were a covered fund.235 The limitations in §ll.15 of the implementing regulations regarding material conflicts of interest, high-risk investments, and safety and soundness and financial stability remain applicable to banking entities’ investment in, and relationship with, excluded credit funds. Additional Banking Entity Requirements As provided in the 2020 proposal, a banking entity may not rely on the credit fund exclusion if it guarantees the performance of the fund.236 In a revision to the 2020 proposal, under the final rule a banking entity may not rely on the credit fund exclusion if the fund holds any debt instruments or equities (or rights to acquire an equity security) received on customary terms in connection with loans or debt instruments held by the credit fund that the banking entity is not permitted to acquire and hold directly under applicable federal banking laws and regulations.237 This change is to clarify, as suggested by a commenter, that this requirement is specific only to federal banking laws and regulations. Whether a credit fund’s holdings are permissible for a banking entity to hold under
state or foreign laws is not relevant to compliance with section 13 of the BHC Act. That said, the agencies note that banking entities must comply with the laws of the jurisdiction applicable to its activities and operations and should be cognizant of whether a credit fund it sponsors or in which it invests complies with the laws of the jurisdictions in which the credit fund operates.238 Investment and Relationship Limits Finally, the agencies are adopting the proposed provisions related to a banking entity’s investment in and relationship with a credit fund with one revision. Under the final rule, a banking entity’s investment in, and relationship with, the issuer must comply with the limitations in § ll.15 of the implementing regulations regarding material conflicts of interest, high-risk investments, and safety and soundness and financial stability, in each case as though the credit fund were a covered fund.239 In addition, a banking entity’s investment in, and relationship with, a credit fund must be conducted in compliance with, and subject to, applicable banking laws and regulations, including the safety and soundness standards applicable to the banking entity.240 The agencies believe it is important to highlight that the requirements applicable to the banking entity also govern the ability of the banking entity to invest in a fund that relies on the credit fund exclusion as well as the types of transactions that a banking entity may conduct with such funds.241 This means, for example, that a banking entity that invests in or has a relationship with a credit fund is subject to capital charges and other requirements under applicable banking law.242
2. Venture Capital Funds
i. Venture Capital Funds
2020 Proposal
The 2020 proposal included an exclusion for ‘‘qualifying venture capital funds.’’ 243 As described in the 2020 proposal, venture capital funds that provide capital to small and start-up businesses are covered funds unless they can rely on an exclusion other than
section 3(c)(1) or 3(c)(7) to avoid
registration under the Investment Company Act of 1940 (Investment Company Act) or qualify for an exclusion under the implementing regulations. Under the 2020 proposal, the exclusion would have been available to ‘‘qualifying venture capital funds,’’ which the 2020 proposal defined as an issuer that meets the definition in 17 CFR 275.203(l)–1 (Rule 203(l)–1), as well as several additional criteria. Specifically, the agencies proposed to exclude from the definition of covered fund an issuer that:

Is a venture capital fund as defined
in Rule 203(l)–1; and
Does not engage in any activity that
would constitute proprietary trading, under §ll.3(b)(1)(i), as if it were a banking entity. With respect to any banking entity that acts as sponsor, investment adviser, or commodity trading advisor to the issuer, and that relies on the exclusion to sponsor or acquire an ownership interest in the qualifying venture capital fund, the banking entity would have been required to:
Provide in writing to any
prospective and actual investor the disclosures required under § ll.11(a)(8), as if the issuer were a covered fund; and
Ensure that the activities of the
issuer are consistent with the safety and soundness standards that are substantially similar to those that would apply if the banking entity engaged in the activities directly. In addition, a banking entity that relied on the exclusion would not have been permitted, directly or indirectly, to guarantee, assume, or otherwise insure the obligations or performance of the issuer. Finally, the 2020 proposal would have required a banking entity’s ownership interest in or relationship with a qualifying venture capital fund to:
Comply with the limitations
imposed in § ll.14 (except the banking entity may acquire and retain any ownership interest in the issuer) and §ll.15 of the implementing regulations, as if the issuer were a covered fund; and
Be conducted in compliance with
and subject to applicable banking laws and regulations, including applicable safety and soundness standards.

244Representatives Gonzalez, Steil, Stivers, Barr, Hill, Riggleman, Zeldin, Davidson, Budd, Gooden, Rose, Emmer, Timmons, Posey, Kustoff, and Loudermilk (Gonzalez et al.); Crapo; FSF; SIFMA; CCMC; IIB; Goldman Sachs; Credit Suisse; AIC; National Venture Capital Association (NVCA); ABA; and SAF. 245E.g., Gonzalez et al. and NVCA. 246 Gonzalez et al.; NVCA; and CCMC. 247 Id. 248E.g., FSF; SIFMA; and Goldman Sachs. 249SAF. 250FSF; SIFMA; CCMC; and NVCA. 251NVCA. 252 Id. 253FSF and SIFMA. 254FSF; SIFMA; and Goldman Sachs. 255SIFMA. 256NVCA. 257FSF and SIFMA. 258SIFMA; NVCA; FSF; and ABA. 259SIFMA; NVCA; FSF; and ABA. 260 Id. 261Better Markets. 262CCMC. 263FSF and SIFMA. 264FSF and SIFMA. 265FSF. 266SIFMA. 267SIFMA. 268 Id. 269NVCA and ABA. 270Better Markets and Data Boiler. Another commenter said an exemption for venture capital funds was not supported by the 2020 proposal and not permitted under the law. Occupy. 271Better Markets. Comments Several commenters supported an exclusion for venture capital funds.244 Some of these commenters argued the Volcker Rule has severely impacted investment in venture funds and businesses and that venture capital is a critical financing source for innovative businesses.245 These commenters described their view of the positive economic impact of venture capital investment.246 For example, these commenters said companies funded with venture capital promote research and development and job creation.247 Similarly, several commenters argued that venture capital investments by banking entities can contribute to economic growth, innovation, and job creation.248 At least one commenter said increased venture capital investment may increase employment by small employers.249 Several commenters said an exclusion for venture capital funds would benefit underserved regions where venture capital funding is not readily available currently.250 One commenter said venture capital fund sizes are often too small for institutional investors, and banks have historically served an important source of investment for small and regional venture capital funds.251 This commenter said the loss of banking entities as limited partners in venture capital funds has had a disproportionate impact on cities and regions with emerging entrepreneurial ecosystems areas outside of Silicon Valley and other traditional technology centers.252 Two commenters noted that an exclusion for venture capital funds would promote investments in and financing to small businesses and startups in a broad range of geographic areas, industries, and sectors.253 Commenters said that an exclusion for venture capital funds would promote the safety and soundness of banking entities.254 One commenter said the exclusion would allow banks to diversify and to compete with nonbanking entities.255 Commenters also said that the proposed exclusion allows banking entities to make investments indirectly through a fund structure that they could make directly 256 and incorporates criteria
and activity restrictions that address any concerns about safety and soundness or evasion.257 Several commenters supported defining a qualifying venture capital fund by reference to Rule 203(l)–1 as proposed.258 These commenters also said the rule should not incorporate additional criteria as discussed in the preamble to the 2020 proposal, such as additional limitations on revenues or qualifying investments.259 These commenters said additional criteria are unnecessary to ensure that the fund is a bona fide venture capital fund and could unnecessarily limit the scope of qualifying venture capital funds.260 On the other hand, one commenter said the rule should include additional criteria to ensure qualifying venture capital funds serve the public interest and do not cause the harms at which section 13 of the Bank Holding Company Act was directed.261 One commenter argued defining venture capital fund by reference to Rule 203(l)–1 would be too narrow because it would exclude shares of emerging growth companies (EGCs) from being classified as qualifying investments and would not reflect certain companies that operate as venture investors and are exempt from having to register as an investment company but may not meet the technical definition of a venture capital fund under Rule 203(l)–1 (e.g., startup incubators).262 While supporting an exclusion for qualifying venture capital funds generally, a few commenters recommended revisions to the proposed exclusion.263 Some commenters proposed changes to the requirement that the fund not engage in any activity that would constitute proprietary trading, under § ll.3(b)(1)(i), as if it were a banking entity.264 One of these commenters said qualifying venture capital funds should be permitted to engage in permitted proprietary trading consistent with §§ ll.4, ll.5, and ll.6 of the implementing regulations.265 Another commenter said the definition of proprietary trading for funds should be the same as the definition that applies to the banking entity and that having two definitions is not reasonable or cost-effective.266 Commenters also supported changes to the requirement that the banking entity’s investment in and relationship with qualifying venture capital funds must comply with §ll.14 of the implementing regulations. One commenter recommended eliminating the requirement that would apply § ll.14 to a banking entity’s relationship with a venture capital fund.267 This commenter said that other proposed conditions adequately address bailout and safety and soundness concerns.268 Other commenters said the agencies should clarify that §ll.14 does not apply to a banking entity that simply invests in a qualifying venture capital fund (as opposed to a banking entity that sponsors or advises the fund).269 Other commenters did not support the proposed exclusion for qualifying venture capital funds.270 One of these commenters said if the agencies do adopt an exclusion for qualifying venture capital funds, the exclusion
must include additional requirements to ensure that excluded venture capital funds serve the public interest and do not cause the harms at which section 619 of the Dodd-Frank Act was directed. Specifically, this commenter said the rule should: (1) Restrict all fund investments to ‘‘qualifying investments’’ or at least very significantly restrict investments in non-qualifying investments (e.g., limit them to no more than five percent of the fund’s aggregate capital), (2) impose a minimum securities holding period and portfolio company revenue limitation of $35 million (or a similarly appropriate and low figure) to ensure the fund is truly focused on medium-to-long term venture (as opposed to growth stage) investments, and (3) quantitatively limit the use of leverage as a key means for distinguishing excluded venture capital funds from statutorily prohibited activities involving private equity funds.271

272Final rule §ll.10(c)(16)(i).
273Final rule §ll.10(c)(16)(ii). 274Final rule §ll.10(c)(16)(iii). 275Final rule §ll.10(c)(16)(iv). 276 79 FR 5671. 277 12 U.S.C. 1851(a)(1)(B). 278 15 U.S.C. 80b–3(l). 279 In the preamble to the 2013 final rule, the agencies cited to Congressional reports related to Title IV that characterized venture capital funds as ‘‘a subset of private investment funds specializing in long-term equity investment in small or start-up businesses.’’ 79 FR 5704 (quoting S. Rep. No. 111– 176 (2010)). However, there is no indication in the statutory text itself that Congress intended to treat venture capital funds identically to private equity funds. Moreover, the agencies did not address the difference in terminology that Congress used in
section 402 of the Dodd-Frank Act (‘‘private funds’’)
and section 619 (‘‘hedge funds’’ and ‘‘private equity funds’’). The difference between these two terms— specifically, the broader term ‘‘private funds’’ used in Title IV—may indicate why Congress found it necessary to exclude venture capital explicitly in
section 407 but not in section 619.
280See 156 Cong. Rec. E1295 (daily ed. July 13,
2010) (statement of Rep. Eshoo) (‘‘the purpose of the
Volcker Rule is to eliminate risk-taking activities by banks and their affiliates while at the same time preserving safe, sound investment activities that serve the public interest . . . Venture capital funds do not pose the same risk to the health of the financial system. They promote the public interest by funding growing companies critical to spurring innovation, job creation, and economic competitiveness. I expect the regulators to use the broad authority in the Volcker Rule wisely and clarify that funds . . . such as venture capital funds, are not captured under the Volcker Rule and fall outside the definition of ‘private equity.’ ’’); 156 Cong. Rec. S5905 (daily ed. July 15, 2010) (statement of Sen. Dodd) (confirming ‘‘the purpose of the Volcker rule is to eliminate excessive risk taking activities by banks and their affiliates while at the same time preserving safe, sound investment activities that serve the public interest’’ and stating ‘‘properly conducted venture capital investment will not cause the harms at which the Volcker rule is directed. In the event that properly conducted venture capital investment is excessively restricted by the provisions of section 619, I would expect the appropriate Federal regulators to exempt it using their authority under section 619[d]1 . . .’’); and 156 Cong. Rec. S6242 (daily ed. July 26, 2010) (statement of Sen. Scott Brown) (‘‘One other area of remaining uncertainty that has been left to the regulators is the treatment of bank investments in venture capital funds. Regulators should carefully consider whether banks that focus overwhelmingly on lending to and investing in start-up technology companies should be captured by one-size-fits-all restrictions under the Volcker rule. I believe they should not be. Venture capital investments help entrepreneurs get the financing they need to create new jobs. Unfairly restricting this type of capital formation is the last thing we should be doing in this economy.’’). 281SIFMA; NVCA; FSF; ABA; and Goldman Sachs. 282 85 FR 12135–12136. Final Exclusion The final rule adopts the proposed exclusion for qualifying venture capital funds with one clarifying change. The exclusion for qualifying venture capital funds will be available to an issuer that:

Is a venture capital fund as defined
in Rule 203(l)–1; and
Does not engage in any activity that
would constitute proprietary trading, under §ll.3(b)(1)(i), as if it were a banking entity. 272 With respect to any banking entity that acts as sponsor, investment adviser, or commodity trading advisor to the issuer, and that relies on the exclusion to sponsor or acquire an ownership interest in the qualifying venture capital fund, the banking entity will be required to:
Provide in writing to any
prospective and actual investor the disclosures required under § ll.11(a)(8), as if the issuer were a covered fund;
Ensure that the activities of the
issuer are consistent with the safety and soundness standards that are substantially similar to those that would apply if the banking entity engaged in the activities directly; and
Comply with the restrictions
imposed in § ll.14 (except the banking entity may acquire and retain any ownership interest in the issuer), as if the issuer were a covered fund.273 Like the 2020 proposal, a banking entity that relies on the exclusion may not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or performance of the issuer.274 Finally, like the 2020 proposal, the final rule requires a banking entity’s ownership interest in or relationship with a qualifying venture capital fund to:
Comply with the limitations
imposed in § ll.15 of the implementing regulations, as if the issuer were a covered fund; and
Be conducted in compliance with
and subject to applicable banking laws and regulations, including applicable safety and soundness standards.275 The agencies believe the exclusion for qualifying venture capital funds will support capital formation, job creation, and economic growth, particularly with respect to small businesses and start-up companies. These banking entity investments in qualifying venture capital funds can benefit the broader financial system by improving the flow of financing to small businesses and start-ups. The agencies expect that the new exclusion for qualifying venture capital funds will provide banking entities with an additional avenue for providing funding to smaller businesses, which can help to support job creation and economic growth. As described further below, the requirements of the exclusion, including the SEC’s definition of venture capital fund in Rule 203(l)–1, address the concerns the agencies expressed in the preamble to the 2013 rule that the activities and risk profiles of venture capital funds are not readily distinguishable from those of funds that
section 13 of the BHC Act was intended
to capture. Accordingly, the agencies determined these requirements will give effect to the language and purpose of
section 13 of the BHC Act without
allowing banking entities to evade the requirements of section 13. An exclusion for qualifying venture capital funds is permitted by the statutory language of section 13 of the BHC Act. As the agencies discussed in the preamble to the 2013 final rule, the language, structure, and purpose of
section 13 of the BHC Act authorize the
agencies to adopt a tailored definition of ‘‘covered fund’’ that focuses on vehicles used for purposes that were the target of the funds prohibition.276 The agencies do not believe the fact that Congress expressly distinguished venture capital funds from other types of private funds in other contexts is dispositive. In this context, the agencies do not believe that the differences in how the terms private equity fund and venture capital fund are used in the Dodd-Frank Act prohibit this exclusion. Rather, the text of
section 619 and the Dodd-Frank Act as
a whole indicate that venture capital funds were not the intended target of the funds prohibition. The plain language of the statutory prohibition applies to hedge funds and private equity funds.277 This language is silent with respect to venture capital funds. In Title IV of the Dodd-Frank Act, Congress mandated specific treatment for venture capital funds for purposes of the registration requirements under the Investment Advisers Act of 1940 (‘‘Advisers Act’’).278 This provision suggests that Congress knew how to accord specific treatment for venture capital funds. Yet, Congress did not list venture capital funds among the types of funds that were restricted under
section 13.279 That Congress did not
intend to prohibit venture capital fund investments is further supported by the legislative history of section 13, in which several Members of Congress specifically addressed venture capital funds in the context of the funds prohibition.280 Like the 2020 proposal, the final rule incorporates the definition of venture capital fund from Rule 203(l)–1. Most commenters accepted or supported the proposed approach to incorporate the definition of venture capital fund in Rule 203(l)–1.281 For the reasons discussed in the 2020 proposal,282 the agencies believe this definition

283For purposes of 17 CFR 275.203(l)–1, ‘‘private fund’’ is defined as ‘‘an issuer that would be an investment company, as defined in section 3 of the Investment Company Act, but for section 3(c)(1) or 3(c)(7) of that Act.’’ 15 U.S.C. 80b–2(a)(29). 284 17 CFR 275.203(l)–1(a). 285 17 CFR 275.203(l)–1(c)(3). 286 17 CFR 275.203(l)–1(c)(4). 287See Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers With Less Than $150 Million in Assets Under Management, and Foreign Private Advisers, 76 FR 39646, 39657 (Jul. 6, 2011). 288 76 FR 39656. 289See, e.g., 76 FR 39653 (explaining that a limitation on secondary market purchases of a qualifying portfolio company’s shares would recognize ‘‘the critical role this condition played in differentiating venture capital funds from other types of private funds’’). 290 76 FR 39662. See also 76 FR 39657 (‘‘We proposed these elements of the qualifying portfolio company definition because of the focus on leverage in the Dodd-Frank Act as a potential contributor to systemic risk as discussed by the Senate Committee report, and the testimony before Congress that stressed the lack of leverage in venture capital investing.’’). 291 76 FR 39662. 292CCMC. accurately identifies venture capital funds and addresses the concerns the agencies identified in declining to adopt an exclusion for venture capital funds in the 2013 rule. The SEC has defined ‘‘venture capital fund’’ as any private fund 283 that:

Represents to investors and
potential investors that it pursues a venture capital strategy;
Immediately after the acquisition of
any asset, other than qualifying investments or short-term holdings, holds no more than 20 percent of the amount of the fund’s aggregate capital contributions and uncalled committed capital in assets (other than short-term holdings) that are not qualifying investments, valued at cost or fair value, consistently applied by the fund;
Does not borrow, issue debt
obligations, provide guarantees or otherwise incur leverage, in excess of 15 percent of the private fund’s aggregate capital contributions and uncalled committed capital, and any such borrowing, indebtedness, guarantee or leverage is for a non-renewable term of no longer than 120 calendar days, except that any guarantee by the private fund of a qualifying portfolio company’s obligations up to the amount of the value of the private fund’s investment in the qualifying portfolio company is not subject to the 120 calendar day limit;
Only issues securities the terms of
which do not provide a holder with any right, except in extraordinary circumstances, to withdraw, redeem or require the repurchase of such securities but may entitle holders to receive distributions made to all holders pro rata; and
Is not registered under section 8 of
the Investment Company Act, and has not elected to be treated as a business development company pursuant to
section 54 of that Act.284
‘‘Qualifying investment’’ is defined in the SEC’s regulation to be: (1) An equity security issued by a qualifying portfolio company that has been acquired directly by the private fund from the qualifying portfolio company; (2) any equity security issued by a qualifying portfolio company in exchange for an equity security issued by the qualifying portfolio company described in (1); or (3) any equity security issued by a company of which a qualifying portfolio company is a majority-owned subsidiary, as defined in section 2(a)(24) of the Investment Company Act, or a predecessor, and is acquired by the private fund in exchange for an equity security described in (1) or (2).285 ‘‘Qualifying portfolio company,’’ in turn, is defined in the SEC’s regulation to be a company that: (1) At the time of any investment by the private fund, is not reporting or foreign traded and does not control, is not controlled by or under common control with another company, directly or indirectly, that is reporting or foreign traded; (2) does not borrow or issue debt obligations in connection with the private fund’s investment in such company and distribute to the private fund the proceeds of such borrowing or issuance in exchange for the private fund’s investment; and (3) is not an investment company, a private fund, an issuer that would be an investment company but for the exemption provided by 17 CFR 270.3a–7, or a commodity pool.286 The SEC explained that the definitions of ‘‘qualifying investment’’ and ‘‘qualifying portfolio company’’ reflect the typical characteristics of investments made by venture capital funds and that these definitions work together to cabin the definition of venture capital fund to only the funds that Congress understood to be venture capital funds during the passage of the Dodd-Frank Act.287 In the preamble to the regulation adopting this definition of venture capital fund, the SEC explained that the definition’s criteria distinguish venture capital funds from other types of funds, including private equity funds and hedge funds. For example, the SEC explained that it understood the criteria for ‘‘qualifying portfolio companies’’ to be characteristic of issuers of portfolio securities held by venture capital funds and, taken together, would operate to exclude most private equity funds and hedge funds from the venture capital fund definition.288 The SEC also explained that the criteria for ‘‘qualifying investments’’ under the SEC’s regulation would help to differentiate venture capital funds from other types of private funds, such as leveraged buyout funds.289 The SEC further explained that its regulation’s restriction on the amount of borrowing, debt obligations, guarantees or other incurrence of leverage was appropriate to differentiate venture capital funds from other types of private funds that may engage in trading strategies that use financial leverage and may contribute to systemic risk.290 This definition of venture capital fund helps to
distinguish the investment activities of venture capital funds from those of hedge funds and private equity funds, which was one of the agencies’ primary concerns in declining to adopt an exclusion for venture capital funds in the 2013 rule. Further, this definition includes criteria reflecting the characteristics of venture capital funds that the agencies believe may pose less potential risk to a banking entity sponsoring or investing in venture capital funds and to the financial system—specifically, the smaller role of leverage financing and a lesser degree of interconnectedness with the public markets.291 These characteristics help to address the concern expressed in the preamble to the 2013 rule that the activities and risk profiles for banking entities regarding sponsorship of, and investment in, venture capital fund activities are not readily distinguishable from those funds that section 13 of the BHC Act was intended to capture. One commenter said requiring that a fund satisfy the requirements of Rule 203(l)–1 would have the effect of making the exclusion too narrow. This commenter said the exclusion for qualifying venture capital funds should permit investments in EGCs and, more generally, should ‘‘reflect the evolving nature of the venture capital industry and not rely solely on the existing SEC definition.’’ 292 The final rule does not modify the requirement that a qualifying venture capital fund must satisfy the requirements of Rule 203(l)–1. These requirements focus the exclusion on the types of less mature and start-up portfolio companies that characterize traditional venture capital activities. At the same time, the definition of qualifying venture capital fund does not preclude investments in EGCs because a qualifying venture capital fund could make investments in EGCs within the 20 percent limit for non-qualifying investments. Because the requirement that a qualifying venture capital fund

293Final rule §ll.10(c)(16)(i)(B). 294 85 FR 12136. 295As the agencies noted in the discussion of the final credit fund exclusion, compliance with certain requirements and conditions in ll.4, ll.5, and ll.6 of the implementing regulations may be inapt and/or highly impractical in the context of a qualifying venture capital fund, particularly given the activity restrictions contained in §ll.10(c)(16). For example, the exemptions for underwriting and market making-related activities in ll.4 require that a banking entity relying on such exemptions, among other things, be licensed or registered to engage in the applicable activity in accordance with applicable law. Moreover, to the extent that a qualifying venture capital fund is a banking entity with significant trading assets and liabilities (i.e., because it, together with its affiliates and subsidiaries, has trading assets and liabilities that equal or exceeds $20 billion over the four previous calendar quarters), it also would be required to maintain a separate compliance program specific to those exemptions. 296Similarly, and consistent with the discussion of the final credit fund exclusion, trading activity that satisfies the 60-day rebuttable presumption in §ll.3(b)(4) would be presumed not to be proprietary trading for these purposes. 297See 12 CFR part 3, subpart F; part 217, subpart F; part 324, subpart F. 298 84 FR 61986. must satisfy the requirements of Rule 203(l)–1 does not preclude investments in EGCs and helps to distinguish qualifying venture capital funds from the type of funds that section 13 of the BHC Act was intended to restrict, the agencies have determined to adopt the requirement that a qualifying venture capital fund must be a venture capital fund as defined in Rule 203(l)–1. The final rule adopts the requirement that a qualifying venture capital fund may not engage in any activity that would constitute proprietary trading under §ll.3(b)(1)(i), as if the issuer were a banking entity.293 As described in the 2020 proposal, this requirement helps to promote the specific purposes of section 13 of the BHC Act.294 The agencies are not adopting any changes to this requirement, as recommended by some commenters. The agencies are not expressly incorporating the permitted activities in §§ ll.4, ll.5, and ll.6 of the implementing regulations into the text of the qualifying venture capital fund exclusion. The exclusion for qualifying venture capital funds is intended to allow banking entities to share the risks of otherwise permissible long-term venture capital activities. Accordingly, the agencies would not expect that a qualifying venture capital fund would be formed for the purpose of engaging, or in the ordinary course would be engaged, in the activities permitted under §§ ll.4, ll.5, and ll.6 of the implementing regulations. Moreover, such activities could reflect a purpose other than making long-term venture capital investments. Nevertheless, to the extent that a qualifying
venture capital fund seeks to engage in any of those activities as an exemption from the prohibition on engaging in proprietary trading, as defined in § ll.3(b)(1)(i) of the final rule, and does so in compliance with the requirements and conditions of those permitted activities, then the final rule would not preclude such activities.295 Similarly, with respect to the exclusions from the definition of proprietary trading in §ll.3(d) of the implementing regulations, the agencies note that that the trading activities identified in § ll.3(d) are by definition not deemed to be proprietary trading, such that the performance by an qualifying fund of those activities would not be inconsistent with the final qualifying venture capital fund exclusion.296 The final rule does not define proprietary trading by reference to the prong of paragraph ll.3(b)(1) that would apply to the banking entity, as recommended by some commenters, because the agencies do not believe this change would be effective or simplify the exclusion. Unlike some banking entities, venture capital funds (that are not themselves banking entities) are not subject to the market risk capital rule, and thus there is generally no need to evaluate a venture capital fund’s investments under the market risk capital framework. Moreover, applying the prong that would apply to the relevant banking entity could result in one venture capital fund becoming subject to both prongs. The agencies believe this would complicate evaluation of a qualifying venture capital fund’s eligibility for the exclusion, both for banking entities and the agencies. The agencies do not agree with one commenter’s argument that requiring funds sponsored by banking entities that are subject to the market risk capital rule test to apply the shortterm intent test for purposes of the covered funds provisions would introduce unnecessary complexity and compliance costs for these banking entities. As the agencies described in the preamble to the 2019 final rule, the Federal banking agencies’ market risk capital rule 297 incorporates the same short-term intent standard as the shortterm intent test in §ll.3(b)(1)(i).298 Therefore, market risk capital rule covered banking entities continue to apply the short-term intent standard as
part of their compliance with the market
risk capital rule. Similar processes may be employed to apply the short-term intent standard to qualifying venture capital funds. The final rule adopts the requirement that a banking entity that serves as a sponsor, investment adviser, or commodity trading advisor to a qualifying venture capital fund may not rely on the exclusion for qualifying venture capital funds unless it provides the disclosures required under § ll.11(a)(8) to prospective and actual investors in the fund. This requirement promotes one of the purposes of section 13 of the BHC Act, which is to prevent banking entities from bailing out funds that they sponsor or advise. The final rule also adopts the requirement that a banking entity that serves as a sponsor, investment adviser, or commodity trading advisor to a qualifying venture capital fund must ensure the activities of the qualifying venture capital fund are consistent with safety and soundness standards that are substantially similar to those that would apply if the banking entity engaged in the activity directly. Therefore, a banking entity may not rely on this exclusion to sponsor or invest in an investment fund that exposes the banking entity to the type of high-risk trading and investment activities that the covered fund provisions of section 13 of the BHC Act were intended to restrict. In the final rule, the requirement that the banking entity must comply with § ll.14 of the implementing regulations is moved to § ll.10(c)(16)(ii). This change clarifies that this requirement applies to a banking entity that acts as sponsor, investment adviser, or commodity trading adviser to the qualifying venture capital fund and does not apply to a banking entity that merely invests in a qualifying venture capital fund. The final rule does not eliminate the requirement that a banking entity’s investment in or relationship with a qualifying venture capital fund must comply with § ll.14 of the implementing regulations, as recommended by one commenter. The agencies do not agree that applying the requirements of § ll.14 is duplicative of the requirement that the banking entity not directly or indirectly guarantee, assume, or otherwise insure the obligations or performance of the issuer. In addition to prohibiting guarantees, §ll.14 also prohibits other types of transactions that function as extensions of credit or that could raise the type of bail-out concerns that
section 13 of the BHC Act was intended
to address. The agencies also do not agree that applying the requirements of § ll.14 is duplicative of the requirement that the banking entity’s investment in and relationships with

299See infra, Section IV.D (Limitations on Relationships with a Covered Fund). 300The commenter that recommended eliminating the requirement that the banking entity’s investment in or relationship with a qualifying venture capital fund said that doing so would ‘‘limit the utility and related benefits of the qualifying venture capital fund exclusion, regardless of the proposed new exceptions to Super 23A.’’ SIFMA. However, the commenter did not provide any examples or further explain how the utility of the exclusion would be impacted. 301Final rule §ll.10(c)(16)(iii). 302Final rule §ll.10(c)(16)(iv). 303Better Markets. 304 76 FR 39683. 305 17 CFR 275.203(l)–(1)(a)(1). 306Final rule §ll.10(c)(16)(i)(B). 307 76 FR 39649. the qualifying venture capital fund must comply with the backstop provisions in § ll.15. The backstop provisions in § ll.15 address high-risk assets and high-risk trading strategies, and material conflicts of interest, but do not address extensions of credit that may not entail a ‘‘substantial financial loss’’ to the banking entity. The agencies do not expect that applying §ll.14 to a banking entity that sponsors or advises a qualifying venture capital fund will unduly interfere with the effectiveness of the exclusion. The final rule incorporates revisions to §ll.14 that will improve banking entities’ ability to enter into certain ordinary course transactions with sponsored and advised funds.299 The agencies expect these changes will mitigate concerns that applying the requirements of § ll.14 to qualifying venture capital funds will limit the exclusion’s utility.300 The final rule adopts the requirement that the banking entity must not guarantee, assume, or otherwise insure the obligations or performance of a qualifying venture capital fund.301 The final rule also adopts the requirements that a banking entity’s ownership in or relationship with a qualifying venture capital fund must comply with the limitations in § ll.15 of the implementing regulations, as if the issuer were a covered fund, and be conducted in compliance with, and subject to, applicable banking laws and regulations, including applicable safety and soundness standards.302 These requirements promote several of the purposes of section 13 of the BHC Act. The requirement that the banking entity not guarantee, assume, or otherwise ensure the obligations or performance of a qualifying venture capital fund promotes the purpose of preventing banking entities from bailing out the fund. The requirements that a banking entity’s ownership in or relationship with a qualifying venture capital fund must comply with the limitations in § ll.15 of the implementing regulations, as if the issuer were a covered fund, and be conducted in compliance with, and subject to, applicable banking laws and regulations, including applicable safety and soundness standards, prevent a qualifying venture capital fund from being used to expose a banking entity to the type of high-risk trading and
investment activities that the covered fund provisions of section 13 of the BHC Act were intended to restrict. To the extent a fund would expose a banking entity to a high-risk assets or a high-risk trading strategy, the fund would not be a qualifying venture capital fund. Therefore, prior to making an investment in a qualifying venture capital fund, a banking entity would need to ensure that the fund’s investment mandate and strategy would satisfy the requirements of §ll.15. In addition, a banking entity would need to monitor the activities of a qualifying venture capital fund to ensure it satisfies these requirements on an ongoing basis. The agencies do not believe that any additional conditions to the exclusion for qualifying venture capital funds are necessary. One commenter said that the exclusion should (1) restrict all fund investments to ‘‘qualifying investments’’ or at least very significantly restrict investments in non-qualifying investments (e.g., limit them to no more than five percent of the fund’s aggregate capital), (2) impose a minimum securities holding period and portfolio company revenue limitation of $35 million (or a similarly appropriate and low figure) to ensure the fund is truly focused on medium-to-long term venture (as opposed to growth stage) investments, and (3) quantitatively limit the use of leverage as a key means for distinguishing excluded venture capital funds from statutorily prohibited activities involving private equity funds.303 The agencies have determined not to impose any additional criteria for the reasons discussed below. First, the agencies decline to limit a qualifying venture capital fund’s nonqualifying investments to five percent or less of total assets. The agencies agree with commenters that it is necessary to provide some amount of flexibility for a venture capital fund to make investments that deviate from the typical form of venture capital investment activity. For example, the agencies understand that certain common venture capital fund activities, such as secondary acquisition of portfolio company shares from founders, are not qualifying investments under Rule 203(l)–1. The agencies agree with commenters, as well as with the rationale the SEC provided in the 2011 adopting release, that said providing flexibility for this type of non-qualifying investment is consistent with the overall goal of identifying funds engaged in a venture capital strategy. In making this determination, the agencies find it significant that the SEC considered this issue as part of its 2011 rulemaking and concluded that a 20 percent bucket for non-qualifying investments was appropriate.304 Moreover, all activities of a qualifying venture capital fund, including any investments that would be non-qualifying investments under Rule 203(l)–1, will be subject to the other requirements in §ll.10(c)(16), including the requirement that the fund not engage in proprietary trading and not result in a material exposure by the
banking entity to a high-risk asset or high-risk trading strategy. The agencies also decline to impose additional requirements, such as a minimum securities holding period or a portfolio company revenue limitation. The agencies believe a minimum securities holding period is unnecessary in light of the requirements that the fund (1) represent to investors and potential investors that it pursues a venture capital strategy 305 and (2) not engage in any activity that would constitute proprietary trading under § ll.3(b)(1)(i), as if it were a banking entity.306 The agencies also considered whether to include a portfolio company revenue limitation, as discussed in the preamble to the 2020 proposal. Most commenters did not support imposing a revenue limitation, while one commenter supported imposing a limitation of $35 million. After considering all comments received, the agencies determined that a revenue limit could unnecessarily disadvantage certain companies because the revenues of startups can vary greatly based on industry and geography. The agencies determined it would be unnecessarily restrictive to create a revenue limit that could limit funding to otherwise eligible portfolio companies. Again, the agencies found it significant that the SEC expressly considered this issue as part of the 2011 rulemaking and determined that any ‘‘single factor test could ignore the complexities of doing business in different industries or regions’’ and ‘‘could inadvertently restrict venture capital funds from funding otherwise promising young small companies.’’ 307 In addition, the definition of ‘‘qualifying portfolio company’’ in the SEC’s rule

308 17 CFR 275.203(l)–1(c)(4).
309 17 CFR 275.203(l)–1(c)(5).
310 15 U.S.C. 78l(g).
311 76 FR 39656.
312 Gonzalez et al.; Crapo; FSF; SIFMA; CCMC; CCMR; IIB; Goldman Sachs; AIC; and ABA. One commenter said the final rule should exclude an issuer with the following characteristics: (1) Its investment strategy or business purpose is to invest in assets in which a financial holding company would be permitted to invest directly; (2) it holds itself out to investors as acquiring and holding longterm assets for at least two years; (3) it does not engage in activities that would constitute impermissible proprietary trading (as defined in the implementing regulations) if conducted directly by a banking entity; and (4) if it is sponsored by a banking entity, (A) the sponsoring banking entity and its affiliates cannot, directly or indirectly, guarantee, assume or otherwise insure its obligations, (B) it must comply with the disclosure obligations under §ll.11(a)(8) of the rule and (C) the sponsoring banking entity must comply with the limitations imposed by §ll.14 (except that the banking entity may acquire and retain any ownership interest in the issuer) and §ll.15, as if the vehicle were a covered fund. The commenter said these conditions would adequately address concerns regarding evasion, promote long-term capital formation, and exclude certain entities that are inadvertently captured by the definition of ‘‘covered fund’’ such as certain incubators. Goldman Sachs. 313SIFMA; AIC; and CCMR. One commenter said an exclusion for long-term investment funds is necessary because the proposed exclusion for qualifying venture capital funds would not address incubators and other issuers that do not hold themselves out as pursuing a venture capital strategy. Goldman Sachs. Two commenters said excluding long-term investment funds would provide certainty for banking entities that hold interests in ‘‘inadvertent’’ or ‘‘accidental’’ investment companies. SIFMA and Goldman Sachs. 314 Id. 315FSF; CCMR; AIC; CCMC; and SIFMA. 316ABA and CCMC. 317Robert Rutowski. 318Under §ll.10(c)(17)(iii)(B) of the final rule, a ‘‘family customer’’ is a ‘‘family client,’’ as defined in Rule 202(a)(11)(G)–1(d)(4) of the Advisers Act (17 CFR 275.202(a)(11)(G)–1(d)(4)); or any natural person who is a father-in-law, mother-in-law, brother-in-law, sister-in-law, son-in-law or daughter-in-law of a family client, or a spouse or incorporates appropriate standards that distinguish newer ventures from more established companies. In particular, a ‘‘qualifying portfolio company’’ may not be ‘‘reporting or foreign traded’’ and may not control, be controlled by or under common control with another company that is reporting or foreign traded.308 A ‘‘reporting or foreign traded’’ company for these purposes means a company that is subject to the reporting requirements under section 13 or 15(d) of the Securities Exchange Act of 1934 or having a security listed or traded on any exchange or organized market operating in a foreign jurisdiction.309 In addition to publicly offered companies, this definition
excludes issuers if they have more than $10 million in total assets and a class of equity securities, such as common stock, that is held of record by either 2,000 or more persons or 500 or more persons who are not accredited investors.310 In adopting the ‘‘reporting or foreign traded’’ requirement of Rule 203(l)–1, the SEC explained that it found ‘‘a key consideration by Congress’’ was that venture capital funds ‘‘are less connected with the public markets and may involve less potential systemic risk.’’ 311 This condition that qualifying portfolio companies not be capitalized by the public markets serves to limit the type of companies in which a qualifying venture capital fund may invest. Finally, the agencies determined it is unnecessary to include an additional quantitative limit on the use of leverage because the exclusion incorporates a leverage limit. Specifically, Rule 203(l)– 1 provides that a venture capital fund may not borrow or otherwise incur leverage in excess of 15 percent of the fund’s aggregate capital contributions and uncalled capital commitments, and then only on a short-term basis. Because the exclusion already incorporates a limit on leverage for a qualifying venture capital fund, it is not necessary for the final rule to incorporate an additional limit on leverage.
ii. Long-Term Investment Funds
In the preamble to the 2020 proposal, the agencies asked whether the final rule should include an exclusion for long-term investment funds. In the preamble, the agencies asked if an exclusion should be provided for issuers (1) that make long-term investments that a banking entity could make directly, (2) that hold themselves out as entities or arrangements that make investments that they intend to hold for a set minimum time period, such as two years, (3) whose relevant offering and governing documents reflect a long-term investment strategy, and (4) that meet all other requirements of the proposed qualifying venture capital fund exclusion (other than that the issuers would be venture capital funds as defined in Rule 203(l)–1. Several commenters supported an exclusion for long-term investment funds.312 Many of these commenters said an exclusion for qualifying longterm investment funds would help to close gaps in the availability of financing that exist under the implementing regulations while promoting and protecting the safety and soundness of the banking entity and the financial stability of the U.S.313 These commenters said the exclusion would allow banking entities to diversify their assets and income streams, thereby reducing the overall risk of their assets and operations and increasing their resiliency against failure.314 Several of these commenters supported an exclusion for long-term investment funds because they said it would allow banking entities to do indirectly through a fund structure the same activities they may conduct directly.315 Some commenters said long-term investment vehicles do not engage in short-term proprietary trading or the high-risk activities that section 619’s backstop provisions are intended to address.316 One commenter said the rule should not establish an exclusion for long-term investment vehicles because section 619 of the Dodd-Frank Act was put in place to reorient banks away from risky speculative activities and toward responsible lending to businesses and households.317 The final rule does not include an exclusion for long-term investment funds. After reviewing all comments received, the agencies determined that it remains difficult to distinguish effectively such funds from the type of funds that section 13 of the BHC Act was designed to restrict. A general exclusion for long-term investment funds would be too broad of an approach for addressing specific types of issuers, such as inadvertent investment companies and incubators that do not hold themselves out as engaging in a venture capital strategy, as described by some commenters. An exclusion based primarily on the length of time that an issuer holds its investments could be overbroad because it could also permit funds that are engaged in the type of investment activity that section 13 of the BHC Act was designed to restrict. Moreover, the agencies believe the exclusions for credit funds and qualifying venture capital funds will improve banking
entities’ ability to provide long-term financing through certain fund structures in a manner that is consistent with the statute.
3. Family Wealth Management Vehicles
The agencies are adopting an exclusion from the definition of ‘‘covered fund’’ under §ll.10(b) of the rule for any entity that acts as a ‘‘family wealth management vehicle.’’ This exclusion is available to an entity that is not, and does not hold itself out as being, an entity or arrangement that raises money from investors primarily for the purpose of investing in securities for resale or other disposition or otherwise trading in securities. For family wealth management vehicles that are trusts, the grantor(s) must be family customers.318 For non-trust family

spousal equivalent of any of the foregoing. All terms defined in Rule 202(a)(11)(G)–1 of the Advisers Act (17 CFR 275.202(a)(11)(G)–1) have the same meaning in the family wealth management vehicle exclusion. 319Under §ll.10(c)(17)(iii)(A) of the final rule, ‘‘closely related person’’ means ‘‘a natural person (including the estate and estate planning vehicles of such person) who has longstanding business or personal relationships with any family customer.’’ 320This 0.5 percent ownership interest represents the aggregate amount of a family wealth management vehicle’s ownership interests that may be acquired or retained by all entities that are neither a family customer nor a closely related person. 321 ‘‘Riskless principal transaction’’ means a transaction in which a banking entity, after receiving an order to buy (or sell) a security from a customer, purchases (or sells) the security in the secondary market for its own account to offset a contemporaneous sale to (or purchase from) the customer. Final rule §ll.10(d)(11). The allowance for riskless principal transactions in the final rule does not affect the independent application of the Board’s Regulation W (12 CFR part 223). 322Final rule §ll.10(c)(17)(ii). 323 85 FR 12120. 324See, e.g., Goldman Sachs; FSF; CCMR; IAA; ABA; BPI; PNC; and SIFMA. 325See, e.g., Better Markets, Data Boiler; SIFMA; BPI; ABA. 326Several commenters supported the exclusion, with two stating that many family wealth management vehicles do not rely on the exclusions in 3(c)(1) and (c)(7) of the Investment Company Act and are not covered funds under the implementing regulations. See ABA and PNC. Banking entities that sponsor or invest in family wealth management vehicles that are not subject to the covered funds provisions under section 13 of the BHC Act or the implementing regulations would not need to rely on this exclusion. 327See 79 FR 5541 (describing the 2013 rule as ‘‘permitting banking entities to continue to provide, and to manage and limit the risks associated with providing, client-oriented financial services that are critical to capital generation for businesses of all sizes, households and individuals, and that facilitate liquid markets. These client-oriented financial services, which include underwriting, market making, and asset management services, are important to the U.S. financial markets and the participants in those markets.’’). 328See Better Markets. 329 12 U.S.C. 1851(d)(1)(D). 330 Data Boiler. wealth management vehicles, family customers must own a majority of the voting interests (directly or indirectly) as well as a majority of interests in the entity. Ownership of non-trust family wealth management vehicles is generally limited to family customers and up to five closely related persons of the family customers.319 However, there is a de minimis ownership allowance that permits one or more entities, including a banking entity, that are not family customers or closely related persons, to acquire or
retain, as principal, up to an aggregate 0.5 percent of the family wealth management vehicle’s outstanding ownership interests for the purpose of and to the extent necessary for establishing corporate separateness or addressing bankruptcy, insolvency, or similar concerns.320 In addition, a banking entity may rely on the exclusion only if the banking entity: (1) Provides bona fide trust, fiduciary, investment advisory, or commodity trading advisory services to the entity; (2) does not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or performance of such entity; (3) complies with the disclosure obligations under § ll.11(a)(8), as if such entity 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 entity; (4) does not acquire or retain, as principal, an ownership interest in the entity, other than up to an aggregate 0.5 percent of the family wealth management vehicle’s outstanding ownership interests for the purpose of and to the extent necessary for establishing corporate separateness or addressing bankruptcy, insolvency, or similar concerns; (5) complies with the requirements of §§ll.14(b) and ll.15, as if such entity were a covered fund; and (6) except for riskless principal transactions as defined in § ll.10(d)(11),321 complies 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.322 In the 2020 proposal, the agencies requested comment on whether to exclude family wealth management vehicles from the definition of ‘‘covered fund.’’ 323 Several commenters supported this exclusion stating, generally, that it would reduce uncertainty for banking entities about the permissibility of providing traditional banking, investment management, and trust and estate planning services to family wealth management vehicle clients.324 As discussed below, other commenters opposed the exclusion or recommended revisions to it.325 The agencies believe that the exclusion for family wealth management vehicles will appropriately allow banking entities to structure 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 implementing regulations.326 The agencies believe the exclusion for family wealth management vehicles will effectively tailor the definition of covered fund by permitting banking entities to continue to provide traditional banking and asset management services that do not involve the types of risks section 13 of the BHC Act was designed to address. As the agencies noted in the preamble to the 2013 rule, section 13 and the implementing regulations were designed in part to permit banking entities to continue to provide clientoriented financial services, including asset management services.327 Furthermore, the agencies believe that the provisions of the exclusion will work together to sufficiently reduce the likelihood that these vehicles could be used to evade the requirements of
section 13 or the implementing
regulations.
One of the commenters that opposed the exclusion expressed concern with the agencies adding an exclusion from the definition of ‘‘covered fund’’ that they believed would only benefit a few wealthy families.328 Banking entities may provide asset management services to families through a trust structure. The agencies believe that banking entities should have flexibility to offer such asset management services to families through a fund structure subject to appropriate limits. As noted above, the agencies believe the exclusion for family wealth management vehicles will effectively tailor the definition of covered fund by permitting banking entities to continue to provide traditional banking and asset management services that do not involve the types of risks section 13 was designed to address. The agencies continue to believe that the exclusion for family wealth management vehicles is consistent with
section 13(d)(1)(D), which permits
banking entities to engage in transactions on behalf of customers, when those transactions would otherwise be prohibited under section
13.329 The exclusion will similarly
allow banking entities to provide traditional services to customers through vehicles used to manage the wealth and other assets of those customers and their families. Another commenter suggested that, rather than providing an exclusion for family wealth management vehicles through a rulemaking, the agencies should instead provide no-action relief on a case-by-case basis.330 The agencies do not believe that a case-by case approach would further the aims of
section 13 or the implementing
regulations. The agencies believe that a case-by-case approach would be

331See, e.g., SIFMA; BPI; and ABA. 332See Better Markets. 333See, e.g., SIFMA; BPI; and ABA. 334Final rule §ll.10(c)(17)(i)(B)(2). 335See ABA. 336See Data Boiler. 337Final rule §ll.10(c)(17)(i)(B)(3). 338See, e.g., BPI; SIFMA; PNC; and ABA. 339See, e.g., BPI; SIFMA; ABA; and PNC. 340See, e.g., SIFMA; BPI; ABA; and PNC. 341See SIFMA. 342See SIFMA. 343See, e.g., BPI; ABA; and PNC. 344Final rule §ll.10(c)(17)(iii)(A). 345See, e.g., Better Markets. unnecessarily burdensome and difficult to administer. This approach would also unnecessarily deviate from the agencies’ treatment of other excluded entities under the implementing regulations and hinder transparency and consistency. The agencies believe that the adopted exclusion for a family wealth management vehicle will appropriately distinguish it from the type of entity that the covered funds provisions of
section 13 of the BHC Act were
intended to capture. The exclusion requires that a family wealth management vehicle not raise money from investors primarily for the purpose of investing in securities for resale or other disposition or otherwise trading in securities. This aspect of the exclusion will help to differentiate family wealth management vehicles from covered funds, which raise money from investors for this purpose. In addition, the family wealth management vehicle exclusion contains ownership limits designed to ensure that the vehicle is used to manage the wealth and other assets of customers and their families. One such limit is the definition of ‘‘family customer.’’ As proposed, the definition of ‘‘family customer’’ is based on the definition of ‘‘family client’’ in rule 202(a)(11)(G)– 1(d)(4) under the Advisers Act (the family office rule), and also incorporates certain in-laws and their spouses and spousal equivalents. Several commenters supported this approach,331 however, one commenter suggested that the agencies exclude in-laws, their spouses and their spousal equivalents from the definition of ‘‘family customer.’’ 332 The agencies believe that in-laws, their spouses and spousal equivalents share the same close familial relations as others included in the definition of ‘‘family client.’’ Furthermore, the agencies believe that the final rule’s definition of ‘‘family customer’’ reflects the types of relationships typically present in family wealth management vehicles.333 Reflecting those relationships prevents unnecessary constraints on the utility of the exclusion and will allow banking entities to provide traditional banking services to these clients. Another ownership limit designed to ensure that a family wealth management vehicle is used to manage the wealth and other assets of customers and their families is the requirement that a majority of the interests in the entity are owned by family customers.334 The inclusion of this limit in the final rule is a modification from the 2020 proposal which only required family customers to own a majority of the voting interests (directly or indirectly) in the entity. One commenter suggested this modification to ensure that the exclusion is not used to evade the intent of section 13 and the implementing regulations.335 The agencies believe this modification is an appropriate means of ensuring that the exclusion is used by banking entities that are providing services to family wealth management vehicles, rather than to hedge funds or private equity funds. Another commenter suggested additional ownership limits for family wealth management vehicles, including limits on the vehicle’s ability to restructure, to prevent evasion of the prohibitions of section 13 and the implementing regulations.336 However, as discussed above, the agencies believe that the requirements of the exclusion, along with the conditions a banking entity must meet in order to rely on it, will help to ensure that banking entities will not be able to
use family wealth management vehicles as a means to evade section 13 and the implementing regulations. Another ownership limit designed to ensure that a family wealth management vehicle is used to manage the wealth and other assets of customers and their families is the requirement that only up to five closely related persons of family customers may hold ownership interests in the vehicle.337 The agencies proposed to permit three closely related persons to hold ownership interests. Several commenters supported allowing a finite number of closely related persons of family customers to hold ownership interests.338 However, some commenters suggested that the proposed limit of three closely related persons did not reflect the typical manner in which family wealth management vehicles are constituted and would unnecessarily constrain the availability of the exclusion.339 These commenters recommended that the agencies modify the proposed rule to allow for up to ten closely related persons to invest in family wealth management vehicles.340 One of these commenters stated that increasing the number of closely related persons would allow banking entities to provide traditional wealth management and estate planning services to family wealth management vehicles and that the other conditions imposed by the proposed rule would keep such vehicles from evading the covered fund provisions of the implementing regulations.341 The commenter further noted that a limit of ten closely related persons would align the exclusion with the numerical limitation of unaffiliated owners provided for in the joint venture exclusion.342 The final rule will allow up to five closely related persons to hold ownership interests in a family wealth management vehicle. Commenters indicated that many family wealth management vehicles currently include more than three closely related persons.343 The agencies believe that the final rule will more closely align the exclusion with the current composition of family wealth management vehicles, thereby increasing the utility of the exclusion without allowing such a large number of non-family customer owners to suggest the entity is in reality a hedge fund or private equity fund. Additionally, the agencies believe that requiring family customers to own a majority of the interests in the family wealth management vehicle will serve as an additional safeguard against evasion of the provisions of section 13 of the BHC Act. As proposed, the final rule’s definition of ‘‘closely related person’’ is ‘‘a natural person (including the estate and estate planning vehicles of such person) who has longstanding business or personal relationships with any family customer.’’ 344 One commenter suggested that the definition of ‘‘closely related person’’ should include only persons with personal relationships with family customers and not also business relationships.345 The agencies believe that it is not practical or worthwhile to exclude business relationships from
the definition of ‘‘closely related person’’ because it would require banking entities to engage in an assessment of relationships that are likely to include elements common in both personal and business relationships. The agencies also believe that requiring these relationships to be ‘‘longstanding’’ will help ensure that they are bona fide established relationships and not simply related to the planned investment activities through the family wealth management vehicle.

346Final rule §ll.10(c)(17)(i)(C). 347See, e.g., SIFMA and BPI. 348Final rule §ll.10(c)(17)(ii). 349See implementing regulations §§ll.11(a)(5) (imposing, as a condition of the exemption for organizing and offering a covered fund, that a banking entity and its affiliates do not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or performance of the covered fund or of any covered fund in which such covered fund invests); ll.11(a)(8) (imposing, as a condition of the exemption for organizing and offering a covered fund, that the banking entity provide certain disclosures to any prospective and actual investor in the covered fund); ll.10(c)(2)(ii) (allowing, as a condition of the exclusion from the 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 ll.14(b) (subjecting certain transactions with covered funds to section 23B of the Federal Reserve Act). 350See SIFMA (stating that it agreed with the agencies’ approach of not applying §ll.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). 351Final rule §ll.10(c)(17)(ii)(F). 352 12 CFR 223.15(a). 353See, e.g., BPI and SIFMA. 354See, e.g., BPI and SIFMA. 355See, e.g., SIFMA and BPI. 356See SIFMA. 357See 67 FR 76597. In a change to the 2020 proposal, the final rule permits any entity, or entities—not only banking entities—to acquire or retain, as principal, up to an aggregate 0.5 percent of the entity’s outstanding ownership interests, for the purpose of and to the extent necessary for establishing corporate separateness or addressing bankruptcy, insolvency, or similar concerns.346 Some commenters requested that the agencies include this modification because often, family wealth management vehicles use unaffiliated third parties—such as thirdparty trustees or similar service providers—when structuring family wealth management vehicles.347 The agencies believe that permitting de minimis ownership by non-banking entity third parties is appropriate and in some cases necessary to reflect the typical structure of family wealth management vehicles. The de minimis ownership provision recognizes that ownership by an entity other than a family customer or closely related person may be necessary under certain circumstances—such as establishing corporate separateness or addressing bankruptcy, insolvency, or similar matters. Whether the entity that owns a de minimis amount is a banking entity or some other third party does not raise any concerns that are not sufficiently addressed by the aggregate ownership limit and the narrow circumstances in which such
entities may take an ownership interest. The agencies recognize that without this modification, family wealth management vehicles may be forced to engage in less effective and/or efficient means of structuring and organization because the exclusion would limit the vehicle’s access to some customary service providers that have traditionally taken small ownership interests for structuring purposes. The agencies are therefore expanding the types of entities that may acquire or retain the de minimis ownership interest to include any third party. However, the aggregate de minimis amount and the purpose for which it may be owned is unchanged from the 2020 proposal. As stated above, under the final rule, a banking entity may only rely on the exclusion with respect to a family wealth management vehicle if the banking entity meets certain conditions.348 The agencies believe that, collectively, the conditions of the exclusion will help to ensure that family wealth management vehicles are used for client-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 implementing regulations. In addition, these conditions are based on existing conditions in other provisions of the implementing regulations,349 which the agencies believe will facilitate banking entities’ compliance with the exclusion. As proposed, the agencies are not applying §ll.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 §ll.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 §§ll.14(b) and ll.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. 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 thirdparty 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 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

358 12 CFR 223.3(ee).
359See, e.g., ABA and PNC.
360See, e.g., BPI.
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 §ll.11(a)(8) to accurately reflect the specific circumstances of the family wealth management vehicle. 362Final rule §ll.10(c)(18)(i). 363Notwithstanding 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 §ll.10(c)(18)(ii)(B). commenters, the condition will explicitly exclude from those requirements transactions that meet the definition of riskless principal transactions as defined in § ll.10(d)(11). The definition of riskless principal transactions adopted in §ll.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. Several commenters requested that the agencies remove the condition that banking entities and their affiliates comply with the disclosure obligations under §ll.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 § ll.11(a) of the final rule and therefore would be confusing.359 In particular, these commenters stated that the required disclosure under § ll.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 The agencies are adopting the condition that banking entities and their affiliates comply with the disclosure obligations under § ll.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 § ll.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. For example, § ll.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 § ll.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 § ll.11(a)(8)(i)(A) to reflect its lack of ownership. Moreover, § ll.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 §ll.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 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 § ll.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

364Final rule §ll.10(c)(18)(ii). 365See, e.g., SIFMA; BPI; ABA; Credit Suisse; FSF; Goldman Sachs; and IAA. 366See, e.g., SIFMA; BPI; ABA; and Goldman Sachs. 367See, e.g., SIFMA; FSF; and SAF. 368See Better Markets and Data Boiler. 369See Better Markets. 370For 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 riskmitigating 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 §ll.13(a)(1)(ii). See also 2019 amendments §ll.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). 371This 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 §ll.11(a) of the 2013 rule. See 79 FR 5716. The agencies indicated that section 13(d)(1)(G), under which the exemption under §ll.11(a) was adopted, did not explicitly require that the customer relationship be preexisting. Similarly, section 13(d)(1)(D) does not explicitly require a pre-existing customer relationship. 372 85 FR 12120. 373See SIFMA and ABA. 374Final rule §ll.10(c)(18)(i). 375SIFMA (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. 377Final rule §ll.10(c)(18)(i). 378See Data Boiler. 379See SIFMA. 380Final rule §ll.10(c)(18)(ii). 381See, e.g., SIFMA; FSF; and SAF. 382See, e.g., SIFMA; BPI; and FSF. requirements of §§ ll.14(b) and ll.15, as if such issuer were a covered fund; and (vi) except for riskless principal transactions as defined in § ll.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 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 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 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 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 customeroriented 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. 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 §ll.11(a)(8), as discussed below. 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

383See 2020 proposed rule §ll.10(c)(18)(ii)(B)(4). 384See SIFMA; BPI; and FSF. 385Final rule §ll.10(c)(18)(ii)(B). 386Final rule §ll.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). 387See, e.g., BPI and SIFMA. See supra, Section IV.C.3 (Family Wealth Management Vehicles). 388See BPI. 389See 85 FR 12120. 390Final rule §ll.10(c)(18)(ii)(C)(6). 391Final rule §ll.10(c)(18)(ii)(C)(3). 392See supra, Section IV.C.3 (Family Wealth Management Vehicles). 393 Id. 394Final rule §§ll.10(c)(18)(ii)(A)–(B). 395Final rule §ll.10(c)(18)(ii)(C)(1). 396Final rule §ll.10(c)(18)(ii)(C)(2). 397See, e.g., SIFMA; FSF; and Data Boiler. 398Final rule §ll.10(c)(18)(ii)(C)(5). 399See FSF (stating that if banking entities were required to comply with all of §ll.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). 400See FSF. 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 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 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 § ll.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. The agencies are modifying the condition that the banking entity and its affiliates comply with the disclosure obligations under § ll.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 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 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 Finally, the agencies are adopting, as proposed, the condition that the banking entity and its affiliates comply with the requirements of §§ll.14(b) and ll.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 § ll.14. One commenter argued that requiring compliance with the requirements of all of §ll.14 would eliminate the utility of this exclusion.399 The same commenter supported the condition, as proposed, stating that requiring compliance with only § ll.14(b), which would apply the requirements in section 23B of the Federal Reserve Act, and the application of the prudential backstops under § ll.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. The agencies continue to believe that, collectively, the conditions on the exclusion will help to ensure that

401See, e.g., SIFMA and BPI.
402See SIFMA.
403See 2020 proposal §ll.14(a)(2), (3); 85 FR 12143–12146. 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. 407 12 U.S.C. 1851(b)(2), (d)(1)(J), (d)(2). 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). 413See 12 U.S.C. 371c(b)(7)(E); 12 CFR 223.3(h)(4). 414See 76 FR 68912 n.313. 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 §ll.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 §ll.14(a) to these vehicles would undo any practical utility of the exclusion.402 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
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 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.
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 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

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). 418See, e.g., ABA; BPI; CBA; Data Boiler; EBF; FSF; IIB; PNC; and SIFMA. 419ABA; BPI; FSF; and SIFMA. 420BPI and PNC. 421CBA; EBF; and IIB. 422See 12 U.S.C. 371c(d); 12 CFR 223.42. 423For 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). 424See 12 U.S.C. 371c(d); 12 CFR 223.42. 425 12 CFR 223.42(f), (g), (m). 426 67 FR 76591 (December 12, 2002); see 67 FR 76593, 76597. 427For 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. 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 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. 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 § ll.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
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 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 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 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,

428ABA; 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). 430Cf. 12 CFR 223.42(m). 431See 67 FR 76597. 432 Id. 433 12 CFR 223.42. 434See 12 CFR 223.3(ee). 435See 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 riskbased 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). 436For example, an investment fund with respect to which a member bank or its affiliate is an Continued 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. 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 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 § ll.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 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

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). 437See 85 FR 12144. 438The 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. 439 12 U.S.C. 1851(d)(1). 440 12 U.S.C. 1851(d)(2); see also 2013 rule §§ll.7 and ll.15. 441 12 U.S.C. 1851(f)(2); see 12 U.S.C. 371c– 1(a)(1). 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. 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 thirdparty 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 § ll.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 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 §ll.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
Sections ll.14(b) and ll.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

442 2013 rule §ll.10(d)(6)(i).
443 83 FR 33481.
444 Id.
445See, e.g., SFIG; JBA; LSTA; and IAA. 446See SFIG. 447See, e.g., Capital One et al. and BPI. 448See, e.g., ABA and CAE. 449See SFIG. 450See Data Boiler. 451The definition of ‘‘ownership interest’’ in the implementing regulations is independent from the definition of ‘‘voting securities’’ in the Board’s Regulation Y. The agencies therefore have determined that the amendments to § ll.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

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 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 § ll.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 A number of comments received on the 2018 proposal supported the agencies’ suggestion to modify § ll.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. 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 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 §ll.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

452See, e.g., SIFMA. 453See SFIG. 454See, e.g., SIFMA; BPI; LSTA; Mortgage Bankers Association; and PNC. 455See SIFMA. 456See, e.g., LSTA and SFA. 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. 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 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 § ll.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:
(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-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 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

457See SFA.
458See Data Boiler.
459 2013 rule §ll.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 §ll.10(d)(6)(ii)(C). 461 2013 rule §ll.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 §ll.10(d)(6)(C); §§ll.12(c)(1), (d). See also 12 U.S.C. 1851(d)(1)(G). 463BPI; FSF; IIB; and SIFMA. agencies have included the conditions from the 2020 proposal for the safe harbor with a modification to § ll.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 contractuallydetermined 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 equitylike 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 § ll.10(d)(6)(i)(B) of the implementing regulations and § ll.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 §ll.10(d)(6)(i)(B) of the implementing regulations or § ll.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.
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 § ll.12(b)(1)(iv), the 2020 proposal would have modified §§ ll.12(c) and ll.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 § ll.12 of the 2013 rule.460 Under §ll.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 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 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

464See 84 FR 62017.
465 Id.
466 12 U.S.C. 1851(d)(1)(G)(iii). 467See 85 FR 12149. 468See id. at 12148; implementing regulations §ll.12. 469See implementing regulations §ll.12(b)(1)(i). 470Prohibitions 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. 472 12 U.S.C. 1851(d)(4). 473Any 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. 475See id. 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 thirdparty 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 § ll.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 thirdparty 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. F. Parallel Investments The 2020 proposal included a new rule of construction in §ll.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. 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 § ll.11.468 Section ll.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 §ll.12 directly by the banking entity, including any affiliate of the banking entity.’’ 469
Section ll.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. 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 The 2013 rule restricts a banking entity’s investment in a covered fund organized and offered pursuant to § ll.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 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

476See 85 FR 12149.
477 Id. See also 79 FR 5734.
478 85 FR 12149.
479See 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 §ll.15(b) prior to making the investments. Id. 480See FSF; SIFMA; BPI; IIB; Goldman Sachs; PNC; and ABA. 481See FSF; SIFMA; and BPI. 482See FSF; SIFMA; and BPI. 483See ABA and PNC. 484See Data Boiler. 485See id. 486Final rule §ll.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. 487See Data Boiler. 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 §ll.12(b)(5) provided that:
(1) A banking entity shall not be required to include in the calculation of the investment limits under § ll.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 § ll.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 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 §ll.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 § ll.15.479 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 After carefully considering the comments received, the agencies are adopting the rule of construction in § ll.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 § ll.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. 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 §ll.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

488See 2013 rule §ll.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). 489See 2013 rule §ll.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). 490See ABA and PNC. 491See 12 U.S.C. 1851(d)(1)(G)(vii). 492Public Law 106–102, section 722, 113 Stat. 1338, 1471 (1999). 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 caseby-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, §ll.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 ll.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 § ll.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 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 G. Technical Amendments The agencies proposed five sets of clarifying technical edits to the implementing regulations. Specifically, the agencies proposed to (1) amend § ll.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 § ll.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 § ll.12(b)(4)(ii) to replace the phrase ‘‘ownership interest of the fund’’ with the phrase ‘‘ownership interest in the fund;’’ (4) amend §§ll.10(c)(3)(i) and ll.10(c)(10)(i) to replace the word ‘‘comprised’’ with the word ‘‘composed;’’ and (5) amend § ll.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-LeachBliley 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. 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 Reservesupervised 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 ll.10(c)(18)(ii)(C)(1) and the modified disclosure requirements are found in section ll.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 ll.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 ll.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 ll.4(c)(3)(i)—0.25 hours for
an average of 20 times per year.
Section ll.12(e)—20 hours (Initial
set-up 50 hours) for an average of 10 times per year.
Section ll.20(d)—41 hours (Initial
set-up 125 hours) quarterly.
Section ll.20(i)—20 hours.
Recordkeeping
Section ll.3(d)(3)—1 hour (Initial
set-up 3 hours).
Section ll.4(b)(3)(i)(A)—2 hours
quarterly.
Section ll.4(c)(3)(i)—0.25 hours for
an average of 40 times per year.
Section ll.5(c)—40 hours (Initial
setup 80 hours).
Section ll.10(c)(18)(ii)(C)(1)—10
hours.
Section ll.11(a)(2)—10 hours.
Section ll.20(b)—265 hours (Initial
set-up 795 hours).
Section ll.20(c)—100 hours (Initial
set-up 300 hours).
Section ll.20(d)—10 hours.
Section ll.20(e)—200 hours.
Section ll.20(f)(1)—8 hours.
Section ll.20(f)(2)—40 hours
(Initial set-up 100 hours).
Disclosure
Section ll.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 setup 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 setup 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.

493 5 U.S.C. 601 et seq.
494U.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-sizestandards. 495See 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). 496The 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). 497Public Law 115–174 (May 24, 2018). 498Under EGRRCPA, a community bank and its affiliates are generally excluded from the definition of banking entity, and thus section 13 of the BHC Act, if the bank and all companies that control the bank have total consolidated assets equal to $10 billion or less and trading assets and liabilities equal to five percent or less of total consolidated assets. 499The OCC bases its estimate of the number of small entities on the SBA’s size thresholds for commercial banks and savings institutions, and trust companies, which are $600 million and $41.5 million, respectively. Consistent with the General Principles of Affiliation, 13 CFR 121.103(a), the OCC counts the assets of affiliated financial institutions when determining if the OCC should classify an OCC-supervised institution as a small entity. The OCC uses December 31, 2019, to determine size because a ‘‘financial institution’s assets are determined by averaging the assets reported on its four quarterly financial statements for the preceding year.’’ See footnote 8 of the SBA’s
Table of Size Standards.
500 5 U.S.C. 601 et seq.
501The SBA defines a small banking organization as having $600 million or less in assets, where an organization’s ‘‘assets are determined by averaging the assets reported on its four quarterly financial statements for the preceding year.’’ See 13 CFR
121.201 (as amended by 84 FR 34261, effective
August 19, 2019). In its determination, the ‘‘SBA counts the receipts, employees, or other measure of size of the concern whose size is at issue and all of its domestic and foreign affiliates.’’ See 13 CFR
121.103. Following these regulations, the FDIC uses
a covered entity’s affiliated and acquired assets, averaged over the preceding four quarters, to 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 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. 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 definition of ‘‘small entity’’ that are subject to section 13 of the BHC Act and its implementing regulations following the enactment of EGRRCPA. Furthermore, to the extent that any Board-regulated entities that meet the definition of ‘‘small entity’’ are or become subject to section 13 of the BHC Act and its implementing regulations, the Board does not expect the total number of such entities to be substantial. Accordingly, the Board’s final rule is not expected to have a significant economic impact on a substantial number of small entities. OCC The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., requires an agency, in connection with a final rule, to prepare a Final Regulatory Flexibility Analysis describing the impact of the rule on small entities (defined by the Small Business Administration (SBA) for purposes of the RFA to include commercial banks and savings institutions with total
assets of $600 million or less and trust companies with total assets of $41.5 million or less) or to certify that the final rule would not have a significant economic impact on a substantial number of small entities. The OCC currently supervises approximately 745 small entities.499 Under the EGRRCPA, banking entities with total consolidated assets of $10 billion or less generally are not ‘‘banking entities’’ within the scope of
section 13 of the BHC Act if their
trading assets and trading liabilities do not exceed five percent of their total consolidated assets. In addition, section 13 of the BHC Act generally excludes certain institutions that function only in a trust or fiduciary capacity from the definition of ‘‘banking entity. As a result, no OCC-supervised small entities are subject to section 13 of the BHC Act. Thus, the final rule will not impact any OCC-supervised small entities. Therefore, the OCC certifies that the final rule will not have a significant impact on a substantial number of OCCsupervised small entities. FDIC The RFA generally requires that, in connection with a final rulemaking, an agency prepare and make available for public comment a final regulatory flexibility analysis describing the impact of the final rule on small entities.500 However, a regulatory flexibility analysis is not required if the agency certifies that the final rule will not have a significant economic impact on a substantial number of small entities. The SBA has defined ‘‘small entities’’ to include banking organizations with total assets of less than or equal to $600 million that are independently owned and operated or owned by a holding company with less than or equal to $600 million in total assets.501 Generally, the FDIC considers

determine whether the covered entity is ‘‘small’’ for the purposes of RFA. 502FDIC-supervised institutions are set forth in 12 U.S.C. 1813(q)(2). 503FDIC Call Report data, December 31, 2019. 504Public Law 115–174, May 24, 2018. https:// www.congress.gov/bill/115th-congress/senate-bill/ 2155. 505FDIC Call Report data, December 2019. 506See ‘‘Supervisory Guidance on the Capital Treatment of Certain Investments in Covered Funds.’’ FDIC FIL–50–2015: November 6, 2015. https://www.fdic.gov/news/news/financial/2015/ fil15050a.pdf. 507FDIC Call Report data, March 2015–December 2019. 508The final rule may also apply to other types of CFTC registrants that are banking entities, such as introducing brokers, but the CFTC believes it is unlikely that such other registrants will have significant activities that would implicate the final rule. See 79 FR 5808, 5813 (Jan. 31, 2014) (CFTC version of 2013 final rule). 509See Policy Statement and Establishment of Definitions of ‘‘Small Entities’’ for Purposes of the Regulatory Flexibility Act, 47 FR 18618 (Apr. 30,
1982) (futures commission merchants and
commodity pool operators); Registration of Swap Dealers and Major Swap Participants, 77 FR 2613, 2620 (Jan. 19, 2012) (swap dealers and major swap participants). 510See Policy Statement and Establishment of Definitions of ‘‘Small Entities’’ for Purposes of the Regulatory Flexibility Act, 47 FR 18618, 18620 (Apr. 30, 1982). a significant effect to be a quantified effect in excess of five percent of total annual salaries and benefits per institution, or 2.5 percent of total noninterest expenses. The FDIC believes that effects in excess of these thresholds typically represent significant effects for FDIC-supervised institutions. For the reasons described below and under
section 605(b) of the RFA, the FDIC
certifies that this final rule will not have a significant economic impact on a substantial number of small entities. As of December 31, 2019, the FDIC supervised 3,344 depository institutions,502 of which 2,581 were considered small entities for the purposes of RFA.503 The Economic Growth, Regulatory Relief, and Consumer Protection Act excluded entities from the requirements of section 13 of the BHC Act that do not have and are not controlled by a company that has total assets of more than $10 billion or trading assets and liabilities comprising more than five percent of total consolidated assets.504 Only one small, FDIC-supervised institution is subject to section 13 of the BHC Act, because its trading assets and liabilities exceed five percent of total consolidated assets.505
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. As previously discussed, the final rule modifies existing definitions and exclusions and introduces new exclusions to the implementing regulations. The final rule permits covered entities to engage in additional activities with respect to covered funds, including acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with covered funds, subject to certain restrictions. This final rule excludes certain types of investment funds from the definition of a ‘‘covered fund’’ for the purposes of
section 13 of the BHC Act. Investments
in funds that are affected by this final rule could be reported as deductions from capital on Call Report schedule RC–R Part 1 Lines 11 or 13 if the investments qualify as ‘‘investments in the capital of an unconsolidated financial institution’’ or as additional deductions on Lines 17 or 24 of
schedule RC–R otherwise.506 The one
affected small, FDIC-supervised institution did not report any such deductions over the past five years.507 Based on this supporting information, the FDIC certifies that this final rule will not have a significant economic impact on a substantial number of small entities. SEC In the 2020 proposal, the SEC certified that, pursuant to 5 U.S.C. 605(b), the 2020 proposal would not, if adopted, have a significant economic impact on a substantial number of small entities. Although the SEC solicited written comments regarding this certification, no commenters responded to this request. As discussed in the SUPPLEMENTARY INFORMATION, the amendments clarify and simplify compliance with the implementing regulations, refine the extraterritorial application of the section 13 of the BHC Act, and permit additional fund activities that do not present the risks that section 13 was intended to address. The amendments will generally apply to banking entities, including certain SEC-registered entities. These entities include bank-affiliated SEC-registered investment advisers, broker-dealers, and security-based swap dealers. Based on information in filings submitted by these entities, the SEC believes that there are no banking entity registered investment advisers or broker-dealers that are small entities for purposes of the RFA. For this reason, the SEC certifies that the amendments will not have a significant economic impact on a substantial number of small entities. CFTC Pursuant to 5 U.S.C. 605(b), the CFTC hereby certifies that the final rule will not have a significant economic impact on a substantial number of small entities for which the CFTC is the primary financial regulatory agency. As discussed in this SUPPLEMENTARY INFORMATION, the final rule clarifies and simplifies compliance with the implementing regulations, refines the extraterritorial application of section 13 of the BHC Act, and permits additional fund activities that do not present the risks that section 13 was intended to address. To reduce the extraterritorial impact of the implementing regulations, the final rule exempts the activities of certain funds that are organized outside of the United States and offered to foreign investors from certain restrictions of the implementing regulations. The final rule also revises several existing exclusions from the covered fund provisions, to provide clarity and simplify compliance with the requirements of the implementing regulations. The final rule adopts several new exclusions from the covered fund definition in order to more closely align the regulation with the purpose of the statute. Last, the final rule adopts revisions to the provisions that govern the relationship between a banking entity and a fund and the definition of ownership interest. The final rule will generally apply to banking entities, including certain CFTC-registered entities. These entities include bank-affiliated CFTC-registered swap dealers, futures commission merchants, commodity
trading advisors and commodity pool operators.508 The CFTC has previously determined that swap dealers, futures commission merchants and commodity pool operators are not small entities for purposes of the RFA and, therefore, the requirements of the RFA do not apply to those entities.509 As for commodity trading advisors, the CFTC has found it appropriate to consider whether such registrants should be deemed small entities for purposes of the RFA on a case-by-case basis, in the context of the particular regulation at issue.510 In the context of the final rule, the CFTC believes it is unlikely that a substantial number of the commodity trading advisors that are potentially affected are small entities for purposes of the RFA. In this regard, the CFTC notes that only commodity trading advisors that are registered with the CFTC are covered by the implementing regulations, and generally those that are registered have larger businesses.

511 12 U.S.C. 4802(a).
512 12 U.S.C. 4802(b).
513Additionally, the Administrative Procedure Act generally requires that the effective date of a rule be no less than 30 days after publication in the Federal Register. 5 U.S.C. 553(d)(1). The effective date, October 1, 2020, will be more than 30 days after publication in the Federal Register. 514See 12 U.S.C. 1851(h)(1). 515See supra note 504. 516These and other aspects of the regulatory baseline against which the SEC is assessing the economic effects of the final rule being adopted here on SEC-regulated entities are discussed in the economic baseline. On July 22, 2019, the agencies adopted a final rule amending the definition of ‘‘insured depository institution’’ in a manner consistent with EGRRCPA. See Revisions to Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships with, Hedge Funds and Private Equity Funds, 84 FR 35008 (July 22, 2019). In November 2019, the agencies adopted the 2019 amendments, which tailored certain proprietary trading and covered fund restrictions of the 2013 rule. See supra note 8. 517Throughout this economic analysis, the terms ‘‘banking entity’’ and ‘‘entity’’ generally refer only to banking entities for which the SEC is the primary financial regulatory agency. While section 13 of the BHC Act and its associated rules apply to a broader set of banking entities, this economic analysis is limited to those banking entities for which the SEC is the primary financial regulatory agency as defined in section 2(12)(B) of the Dodd-Frank Act. See 12 U.S.C. 1851(b)(2), 5301(12)(B). Compliance with SBSD registration requirements is not yet required and there are currently no registered SBSDs. However, the SEC has previously estimated that as many as 50 entities may potentially register as SBSDs and that as many as 16 of these entities may already be SEC-registered broker-dealers. See Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital and Segregation Requirements for Broker-Dealers, 84 FR 43872 (Aug. 22, 2019) (‘‘Capital, Margin, and Segregation Adopting Release’’). For the purposes of this economic analysis, the term ‘‘dealer’’ generally refers to SEC-registered broker-dealers and SBSDs. Similarly, the final rule applies to only those commodity trading advisors that are affiliated with banks, which the CFTC expects are larger businesses. The CFTC requested that commenters address in particular whether any of these commodity trading advisors, or other CFTC registrants covered by the proposed revisions, are small entities for purposes of the RFA. The CFTC did not receive any public comments on this or any other aspect of the RFA as it relates to the rule. Because the CFTC believes that there are not a substantial number of registered, banking entity-affiliated commodity trading advisors that are small entities for purposes of the RFA, and the other CFTC registrants that may be affected by the proposed
revisions have been determined not to be small entities, the CFTC believes that the final rule will not have a significant economic impact on a substantial number of small entities for which the CFTC is the primary financial regulatory agency. D. Riegle Community Development and Regulatory Improvement Act
Section 302(a) of the Riegle
Community Development and Regulatory Improvement Act of 1994 (RCDRIA) 511 requires that each Federal banking agency, in determining the effective date and administrative compliance requirements for new regulations that impose additional reporting, disclosure, or other requirements on insured depository institutions, consider, consistent with principles of safety and soundness and the public interest, any administrative burdens that such regulations would place on depository institutions, including small depository institutions, and customers of depository institutions, as well as the benefits of such regulations. The agencies have considered comment on these matters in other parts of this SUPPLEMENTARY INFORMATION. In addition, under section 302(b) of the RCDRIA, new regulations that impose additional reporting, disclosures, or other new requirements on insured depository institutions generally must take effect on the first day of a calendar quarter that begins on or after the date on which the regulations are published in final form.512 Therefore, the effective date for the Federal banking agencies is October 1, 2020, the first day of the calendar quarter.513 E. OCC Unfunded Mandates Reform Act The OCC has analyzed the final rule under the factors in the Unfunded Mandates Reform Act of 1995 (UMRA). Under this analysis, the OCC considered whether the final rule includes a Federal mandate that may result in the expenditure by state, local, and tribal governments, in the aggregate, or by the private sector, of $100 million or more in any one year (adjusted annually for inflation). The UMRA does not apply to regulations that incorporate requirements specifically set forth in law. The final rule does not impose new mandates. Therefore, the OCC finds that the final rule does not trigger the UMRA cost threshold. Accordingly, the OCC has not prepared the written statement described in section 202 of the UMRA. F. SEC Economic Analysis

Broad Economic Considerations
i. Background
As discussed above, section 13 of the Bank Holding Company (BHC) Act generally prohibits banking entities from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with, a hedge fund or private equity fund (covered funds), subject to certain exemptions. Section 13(h)(1) of the BHC Act defines the term ‘‘banking entity’’ to include (1) any insured depository institution (as defined by statute), (2) any company that controls an insured depository institution, (3) any company that is treated as a bank holding company for purposes of section 8 of the International Banking Act of 1978, and (4) any affiliate or subsidiary of such an entity.514 In addition, the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA),515 enacted on May 24, 2018, amended section 13 of the BHC Act to exclude from the definition of ‘‘insured depository institution’’ any institution that does not have and is not controlled by a company that has (1) more than $10 billion in total consolidated assets; and (2) total trading assets and trading liabilities, as reported on the most recent applicable regulatory filing filed by the institution, that are more than 5% of total consolidated assets.516 Certain SEC-regulated entities, such as broker-dealers, security-based swap dealers (SBSDs), and registered investment advisers (RIAs) affiliated with an insured depository institution, fall under the definition of ‘‘banking entity’’ and are subject to the prohibitions of section 13 of the BHC Act.517 The SEC’s economic analysis is limited to areas within the scope of the SEC’s function as the primary securities markets regulator in the United States. In particular, the SEC’s economic analysis focuses primarily on the potential effects of the rule amendments being adopted here (the ‘‘final rule’’) on (1) SEC registrants, in their capacity as such, (2) the functioning and efficiency of the securities markets, (3) investor protection, and (4) capital formation. SEC registrants that may be affected by the final rule include SEC-registered broker-dealers, SBSDs, and RIAs. Thus, the analysis below does not consider the direct effects of the final rule on brokerdealers, SBSDs, and registered investment advisers that are not banking entities, or banking entities that are not SEC registrants. In addition, potential spillover effects on these and other entities are reflected in the SEC’s analysis of effects on efficiency,

518There is significant overlap between the definitions of ‘‘private fund’’ and ‘‘covered fund.’’ For purposes of this economic analysis, ‘‘private fund’’ means an issuer that would be an investment company, as defined in section 3 of the Investment Company Act (15 U.S.C. 80a–3(a)), but for section 3(c)(1) or section 3(c)(7) of that Act (15 U.S.C. 80– 3(c)(1) or (7)). See also 15 U.S.C. 80b–2(a)(29).
Section 13(h)(2) of the BHC Act defines ‘‘hedge
fund’’ and ‘‘private equity fund’’ to mean an issuer that would be an investment company, but for
section 3(c)(1) or 3(c)(7) of the Investment Company
Act, or ‘‘such similar funds’’ as the agencies determine by rule (see 12 U.S.C. 1851(h)(2)). In the 2013 rule, the agencies combined the definitions of ‘‘hedge fund’’ and ‘‘private equity fund’’ into a single term ‘‘covered fund’’ and defined this term to include any issuer that would be an investment company as defined in the Investment Company Act but for section 3(c)(1) or 3(c)(7) of that Act with a number of express exclusions and additions as determined by the agencies. Implementing regulations §ll.10(b) and (c). 519See, e.g., 79 FR 5536, 5541, 5574, 5659, 5666. An extensive body of research has examined moral hazard arising out of federal deposit insurance, implicit bailout guarantees, and systemic risk issues. See, e.g., Andrew G. Atkeson et al., Government Guarantees and the Valuation of American Banks, 33 NBER Macroeconomics Ann. 81 (2018). See also Javier Bianchi, Efficient Bailouts? 106 Amer. Econ. Rev. 3607 (2016); Bryan Kelly, Hanno Lustig, & Stijn Van Nieuwerburgh, Too-Systematic-to-Fail: What Option Markets Imply about Sector-Wide Government Guarantees, 106 Amer. Econ. Rev. 1278 (2016); Deniz Anginer, Asli Demirguc-Kunt, & Min Zhu, How Does Deposit Insurance Affect Bank Risk? Evidence from the Recent Crisis, 48 J. Banking & Fin. 312 (2014); Andrea Beltratti & Rene M. Stulz, The Credit Crisis Around the Globe: Why Did Some Banks Perform Better?, 105 J. Fin. Econ. 1 (2012); Pietro Veronesi & Luigi Zingales, Paulson’s Gift, 97 J. Fin. Econ. 339 (2010). For a literature review, see, e.g., Sylvain Benoit et al., Where the Risks Lie: A Survey on Systemic Risk, 21 Rev. Fin. 109 (2017). 520See 12 U.S.C. 1851(d)(1)(G). 521See 2013 rule §§ll.4, ll.5, ll.6, ll.11, and ll.13. 522See 2013 rule §ll.20. See also 2019 amendments, 84 FR 62021–25, which, among other things, modified these requirements for banking entities with limited trading assets and liabilities. This SEC Economic Analysis follows earlier sections by referring to the regulations implementing section 13 of the BHC Act, as amended through June 1, 2020 as the ‘‘implementing regulations.’’ See supra note 8. 523See, e.g., 2019 amendments, 84 FR 62037–92. 524See id. 525See, e.g., U.S. Dep’t of the Treasury, A Financial System That Creates Economic Opportunities: Banks and Credit Unions (June 2017), at 77, available at https://www.treasury.gov/ press-center/press-releases/Documents/ A%20Financial%20System.pdf. competition, investor protection, and capital formation in securities markets. This economic analysis also discusses the impact of the final rule on private funds,518 to the degree that it may flow through to SEC registrants, such as RIAs, SEC-registered broker-dealers and SBSDs, and securities markets and investors. In implementing section 13 of the BHC Act, the agencies sought to increase the safety and soundness of banking entities, promote financial stability, and reduce conflicts of interest between banking entities and their customers.519 The regulatory regime created by the
2013 rule may have enhanced regulatory oversight and compliance with the substantive prohibitions of section 13 of the BHC Act, but could also have impacted capital formation and liquidity, as well as the provision by banking entities of a variety of financial services for customers.
Section 13 of the BHC Act also
provides a number of statutory exemptions to the general prohibitions on proprietary trading and covered funds activities. For example, the statute exempts certain covered funds activities, such as organizing and offering covered funds.520 The 2013 rule implemented these exemptions.521 Banking entities engaged in activities and investments covered by section 13 of the BHC Act and the implementing regulations are required to establish a compliance program reasonably designed to ensure and monitor compliance with the implementing regulations.522 In the 2020 proposal, the SEC solicited comment on all aspects of the costs and benefits associated with the proposed amendments for SEC registrants, including spillover effects the proposed amendments may have on efficiency, competition, and capital formation in securities markets. The SEC has considered these comments, as discussed in greater detail in the sections that follow.
ii. Broad Economic Effects
Certain aspects of the implementing regulations may have resulted in a complex and costly compliance regime that is unduly restrictive and burdensome on some affected banking entities. Distinguishing between permissible and prohibited activities may be complex and costly, resulting in uncertain determinations for some entities. Moreover, the implementing regulations may include in their scope some groups of market participants that do not necessarily engage in the activities or pose the risks that section 13 of the BHC Act intended to address. For example, definition of the term ‘‘covered fund’’ may include entities that do not engage in the activities contemplated by section 13 of the BHC Act or may include entities that do not pose the risks that section 13 is intended to mitigate. The final rule includes amendments that (1) reduce the scope of entities that may be treated as covered funds (e.g., credit funds, venture capital funds, family wealth management vehicles, and customer facilitation vehicles), (2) modify existing covered fund exclusions under the implementing regulations (e.g., foreign public funds, public welfare funds, and small business investment companies), and (3) affect the types of permitted activities between certain banking entities and certain covered funds (e.g., restrictions on relationships between banking entities and covered funds, definition of ‘‘ownership interest,’’ and treatment of loan securitizations). The final rule also reduces the burden on affected banking entities by codifying an existing policy statement by the Federal banking agencies that addresses the potential issues related to a foreign banking entity controlling a qualifying foreign excluded fund and adopting a rule of construction to provide clarity regarding a banking entity’s permissible investments alongside a covered fund. Broadly, to the extent that the final rule directly changes the scope of permissible covered fund activities, and indirectly reduces costs to banking entities and covered funds by reducing uncertainty regarding the scope of permissible activities, the final rule may enhance the beneficial economic effects of the implementing regulations.523 The SEC’s economic analysis continues to recognize that the overall risk exposure of banking entities generally reflects a combination of activities, including proprietary trading, market making, traditional banking, asset management, investment activities, and the extent to which banking entities engage in hedging and other risk-mitigating activities. The overall risk exposure is also a function of the magnitude, structure, and manner in which banking entities engage in such activities, both within such activities individually and across all of these activities collectively. As discussed elsewhere,524 the SEC recognizes the complex baseline effects of section 13 of the BHC Act, as amended by sections 203 and 204 of EGRRCPA, and the implementing regulations (including those made with respect
to sections 203 and 204 of EGRRCPA) on overall levels and structure of banking entity risk exposures. The final rule may promote the ability of the capital markets to intermediate between suppliers and users of capital through, for example, increased ability and willingness of banking entities and investors in ‘‘covered funds’’ to facilitate capital formation through sponsorship and participation in certain types of funds and to transact with certain groups of counterparties.525 For

526See supra Section IV.B.1. (Foreign Public Funds). 527See 2019 amendments, 84 FR 62044–54. example, exclusions from the ‘‘covered fund’’ definition of specific types of entities may benefit banking entities by providing clarity and removing certain constraints around potentially profitable business opportunities and by reducing compliance costs, and may benefit excluded funds and their banking entity sponsors and advisers by increasing the spectrum of available counterparties and improving the quality or cost of financial services available to customers. The final rule, however, may also facilitate risk mitigation as well as risktaking activities of banking entities. The final rule also may change aspects of the relationships among banking entities and certain other groups of market participants, including potentially introducing new conflicts of interest, and increasing or reducing the potential effects of conflicts of interest. To the degree that some banking entities react to the final rule by restructuring activities involving covered funds to take advantage of the exclusions contained in the final rule, there may be shifts in the structure and levels of activities of banking entities that would, in turn, decrease or increase risk exposure. Recognizing these various potential effects, each of the exclusions includes a number of conditions aimed at facilitating banking entity compliance while also allowing for customer oriented financial services provided on arms-length, market terms, and preventing evasion of the requirements of section 13. In evaluating these various potential effects, it is important to acknowledge that the exclusions made available by the final rule, such as for credit funds and qualifying venture capital funds, allow banking entities to engage indirectly through fund structures in the same activities in which they are currently permitted to engage directly (e.g., extensions of credit or direct ownership stakes). Thus, the type of exposure permitted by engaging in those activities directly, and indirectly through covered funds, is the same and the banking entities may use fund structures to diversify or otherwise mitigate their risk exposure. Other exclusions permit banking entities to provide traditional banking and asset management services to customers through a legal entity structure, with conditions (e.g., limitation on ownership by the banking entity and prohibition on ‘‘bail outs’’) intended to ensure that the risks that section 13 of the BHC Act was intended to address are mitigated. Finally, nothing in the final rule removes or modifies prudential capital, margin, and liquidity requirements that are applicable to banking entities and that facilitate the safety and soundness of banking entities and the financial stability of the United States. The final rule may also impact competition, allocative efficiency, and capital formation. To the extent that the implementing regulations have constrained banking entities
in their covered fund activities, including providing traditional banking and asset management services to customers through a legal entity structure, the exclusions from the definition of ‘‘covered fund’’ made available by the final rule may increase competition between banking entities and other entities providing services to and otherwise transacting with those types of funds and other entities. Such competition may reduce costs or increase the quality of certain financial services provided to such funds and their counterparties. Finally, the final rule’s costs, benefits, and effects on efficiency, competition, and capital formation will be influenced by a variety of factors, including the prevailing macroeconomic conditions, the financial condition of firms seeking to raise capital and of funds seeking to transact with banking entities, competition between bank and nonbank providers of capital, and many others. Moreover, these effects are likely to vary widely among banking entities and funds. The SEC recognizes that the economic effects of the final rule may be dampened or magnified in different phases of the macroeconomic cycle, depend on monetary and fiscal policy developments and other government actions, and may vary across different types of banking entities. The SEC also considered the implications of the final rule for investors. Broadly, the final rule should increase the number of funds and other entities that will be excluded from the covered fund definition. This is likely to result in an increase in offerings of such funds or an increase in the number of banking entities providing services to customers through entities such as customer facilitation vehicles and family wealth management vehicles. If the final rule increases the ability of investors to access public and private markets through funds and other entities, the final rule may result in the relaxing of constraints on investors’ portfolio optimization and, thus, enhance the efficiency of portfolio allocations. The ability of additional investors to access these markets through funds and other entities may, in addition to providing those investors with greater choice, benefit the issuers of the securities held by those funds and other entities by potentially increasing demand for those securities. Increased demand typically results in increased liquidity which can benefit investors because it may enable them to enter or exit their positions in fund instruments, products, and portfolios in a more timely manner and at a more attractive price. Moreover, investors who seek access to public capital markets investments or other investments through foreign public funds may benefit to the extent the final rule results in banking entities offering more foreign public funds or offering these funds at a lower cost. Further, investors that prefer to implement a trading or investing strategy through a legal entity structure may benefit from the final rule, which allows banking
entities to implement or facilitate such a trading or investing strategy while providing other banking and asset management services to the investor.526 At the same time, it is possible that, as a result of banking entities sponsoring or investing in more funds that are excluded from the definition of covered fund by the final rule, general market risk could increase and that risk could adversely affect markets generally, including through the impact on financial stability. However, due to the mitigation effects of the various conditions of the exclusions from the definition of covered fund contained in the final rule as well as expectations regarding the relative size and mix of the investments in the aggregate, the SEC believes this risk to be small. For example, the final rule permits a banking entity to act as a sponsor, investment adviser, or commodity trading advisor to certain excluded funds (e.g., credit funds and qualifying venture capital funds) only to the extent the banking entity ensures that the activities of the funds are consistent with safety and soundness standards that are substantially similar to those that would apply if the banking entity engaged in the activities directly.
iii. Analytical Approach
The SEC’s economic analysis is informed by research 527 on the effects of section 13 of the BHC Act and the 2013 rule, comments received by the agencies from a variety of interested parties, and experience administering the implementing regulations. Throughout this economic analysis, the SEC discusses how different market

528As discussed above, supra Section V.F.1.i. (Background), the SEC’s economic analysis is focused on the potential effects of the final rule on (1) SEC registrants, (2) the functioning and efficiency of the securities markets, (3) investor protection, and (4) capital formation. Thus, the below analysis does not consider the direct effects of the final rule on broker-dealers, SBSDs, or investment advisers that are not banking entities, or banking entities that are not SEC registrants, in either case for purposes of section 13 of the BHC Act, beyond the potential spillover effects on these entities and effects on efficiency, competition, investor protection, and capital formation in securities markets. See infra Section V.F.2.i. (Affected Participants). 529See, e.g., 2013 rule at 5541. 530With respect to the 2019 amendments, supra note 8, analysis of the effects is difficult because of the relatively short time that has passed since they became effective. 531See U.S. Sec. & Exch. Comm’n, Access to Capital and Market Liquidity (Aug. 2017), available at https://www.sec.gov/files/access-to-capital-andmarket-liquidity-study-dera-2017.pdf. participants 528 may respond to various aspects of the final rule. This analysis also considers the potential effects of the final rule on activities by banking entities that involve risk, their willingness and ability to engage in client-facilitation activities, and competition, market quality, and capital formation. The final rule tailors, removes, or alters the scope of various covered fund requirements in the implementing regulations. Since section 13 of the BHC Act and the implementing regulations impose a number of different requirements, and, as discussed above, the type and level of risk exposure of a banking entity is the result of a combination of activities,529 it is difficult to attribute the observed effects to a specific provision or subset of requirements. In addition, analysis of the effects of the implementation of the 2013 rule is confounded by macroeconomic factors, other policy interventions, and post-crisis changes to market participants’ risk aversion and return expectations.530 Because of the extended timeline of implementation of
section 13 of the BHC Act and the
overlap of the period during which the 2013 rule was in effect with other postcrisis changes affecting the same group or certain sub-groups of SEC registrants, the SEC cannot rely on quantitative methods that might otherwise provide insight into causal attribution and quantification of the effects of section 13 of the BHC Act and the 2013 rule on measures of capital formation, liquidity, competition, and informational or allocative efficiency. Moreover, empirical measures of capital formation or liquidity are substantially limited by the fact that they do not provide insight into security issuance and transaction activity that does not occur (or occurs in a sector of the market for which data is not readily available) as a result of the implementing regulations. Accordingly, it is difficult to quantify the primary security issuance and secondary market liquidity that would have been observed since the financial crisis absent various provisions of section 13 of the BHC Act and the implementing regulations. Importantly, the existing securities markets—including market participants, their business models, market structure, etc.—differ in significant ways from the securities markets that existed prior to enactment of section 13 of the BHC Act and the implementation of the 2013 rule. For example, the role of dealers in intermediating trading activity has changed in important ways, including the following: (1) In recent years, on both an absolute and relative basis, bank dealers generally committed less capital to intermediation activities while nonbank dealers generally committed more, although not always in the same manner or on the same terms as bank dealers; (2) the volume and profitability of certain trading activities after the financial crisis may have decreased for bank dealers while it may have increased for other intermediaries, including nonbank entities that provide intraday liquidity, but generally not overnight liquidity, including in some sectors of the market through the use of electronic trading algorithms and high speed access to data and trading venues; and (3) the introduction of alternative credit markets, including non-bank direct lending markets, may have contributed to liquidity fragmentation across markets while potentially increasing access to capital.531 Where possible, the SEC has attempted to quantify the costs and benefits it expects to result from the final rule. In many cases, however, the SEC is unable to quantify these potential economic effects. Some of the primary economic effects, such as the effect on incentives that may give rise to conflicts of interest in various regulated entities and the degree to which the implementing regulations may be impeding activity of banking entities with respect to certain investment vehicles, are inherently difficult to quantify. Moreover, some of the intended benefits of the implementing regulations’ definitions and prohibitions that the agencies are amending include the
potential for more resilient markets during a financial crisis or during periods of severe market stress. These intended benefits are less readily observable under periods of strong economic conditions, periods of significant government credit accommodation, and when markets have significant liquidity and are less volatile. Even following an economic shock, identification of these intended benefits requires a sufficient amount of data covering a relevant sample period. Moreover, identifying these benefits following an economic shock could prove difficult if the effects of past regulation are confounded by other interventions aimed at mitigating the impact of the shock on financial markets, including regulation, credit accommodation, and fiscal stimulus. Finally, it is difficult to quantify the net economic effects of any individual amendment because of overlapping implementation periods of various postcrisis regulations. Further, it is difficult to quantify the net economic effects of any individual amendment because of the fact that many market participants changed their behavior in anticipation of future changes in regulation. In some instances, the SEC lacks the information or data necessary to provide reasonable estimates for the economic effects of the final rule. For example, the SEC lacks information and data on how market participants may choose to restructure their relationships with various types of entities in response to the final rule; the amount of capital formation in covered funds that does not occur because of current covered fund provisions, including those concerning the definition of covered fund, restrictions on relationships with covered funds, the definition of ownership interest, and the exclusion for loan securitizations; the volume of loans, guarantees, securities lending, and derivatives activity dealers may wish to engage in with related covered funds; as well as the extent of risk reduction associated with the covered fund provision of the 2013 rule. Where the SEC cannot quantify the relevant economic effects, they are discussed in qualitative terms.
2. Economic Baseline
In the context of this economic analysis, the economic costs and benefits, and the impact of the final rule on efficiency, competition, and capital formation, are considered relative to a baseline that includes the implementing regulations (including the 2013 rule and the 2019 amendments), legislative amendments in EGRRCPA, and current practices aimed at compliance with these regulations.
i. Regulation
The SEC is assessing the economic impact of the final rule against a baseline that includes the legal and regulatory framework as it exists at the

532See supra note 14.
533See supra Section VI.A. (Qualifying Foreign Excluded Funds) and notes 26 and 28 (discussion of ‘‘the policy statement’’). 534See 84 FR 61974. 535The exclusions from the covered fund definition are set forth in §ll.10(c) of the implementing regulations. 536See implementing regulations §§ll.10(c)(12)(i) and ll.10(c)(12)(iii). 537See implementing regulations §ll.14(a). 538For purposes of this analysis, ‘‘foreign banking entity’’ has the same meaning as used in the policy statement, supra note 27, i.e., a banking entity that is not, and is not controlled directly or indirectly by, a banking entity that is located in or organized under the laws of the United States or any state. 539See supra note 26 and 28. For purposes of the policy statement, a ‘‘qualifying foreign excluded fund’’ means, with respect to a foreign banking entity, an entity that (1) is organized or established outside the United States and the ownership interests of which are offered and sold solely outside the United States; (2) would be a covered fund were the entity organized or established in the United States, or is, or holds itself out as being, an entity or arrangement that raises money from investors primarily for the purpose of investing in financial instruments for resale or other disposition or otherwise trading in financial instruments; (3) would not otherwise be a banking entity except by virtue of the foreign banking entity’s acquisition or retention of an ownership interest in, or sponsorship of, the entity; (4) is established and operated as part of a bona fide asset management business; and (5) is not operated in a manner that enables the foreign banking entity to evade the requirements of section 13 or implementing regulations. 540 Implementing regulations §ll.10(a). time of this release. Thus, the regulatory baseline for the SEC’s economic analysis includes section 13 of the BHC Act as amended by EGRRCPA, and the 2013 rule. Further, the baseline accounts for the fact that since the adoption of the 2013 rule, the agencies have adopted the 2019 amendments, which, among other things, relate to the ability of banking entities to engage in certain activities, including underwriting, market-making, and risk-mitigating hedging, with respect to ownership interests in covered funds, as well as amendments conforming the 2013 rule to sections 203 and 204 of EGRRCPA. In addition, the agencies’ staffs have provided FAQ responses related to the regulatory obligations of banking entities, including SEC-regulated entities that are also banking entities under the 2013 rule, which likely influenced these entities’ decisions about how to comply with the 2013 rule and may influence these entities’ decisions about how to comply with the 2019 amendments.532 The Federal banking agencies also issued the policy statement in 2017 with respect to foreign excluded funds, and has since extended the policy statement to 2021.533 Although the 2013 rule also included restrictions on proprietary
trading and compliance requirements (as modified by the 2019 amendments), the most relevant portion of the 2013 rule for establishing an economic baseline is that involving covered fund restrictions.534 The features of the regulatory framework under the 2013 rule most relevant to the baseline include the definition of the term ‘‘covered fund’’; restrictions on a banking entity’s relationships with covered funds; and restrictions on parallel investment, co-investment, and investments in the fund by banking entity employees. Scope of the Covered Fund Definition The definition of ‘‘covered fund’’ impacts the scope of the substantive prohibitions on banking entities acquiring or retaining an ownership interest in, sponsoring, and having certain relationships with, covered funds. The implementing regulations define covered funds, in part, as issuers that would be investment companies but for section 3(c)(1) or 3(c)(7) of the Investment Company Act and then excludes specific types of entities from the definition. The definition also includes certain commodity pools as well as certain foreign funds. Funds that rely on the exclusions in sections 3(c)(1) or 3(c)(7) of the Investment Company Act are covered funds unless an exclusion from the covered fund definition is available. Funds that rely on any exclusion or exemption from the definition of ‘‘investment company’’ under the Investment Company Act, other than the exclusion contained in
section 3(c)(1) or 3(c)(7), such as real
estate and mortgage funds that rely on the exclusion in section 3(c)(5)(C), are not covered funds under the implementing regulations. The covered fund provisions of the implementing regulations may reduce the ability and incentives of banking entities to bail out affiliated funds to mitigate reputational risk, limit conflicts of interest with clients, customers, and counterparties, and reduce the ability of banking entities to engage in proprietary trading indirectly through funds. The broad definition of covered funds encompasses many different types of vehicles, and the implementing regulations exclude some of them from the definition of a covered fund.535 The excluded fund types relevant to the baseline are funds that are regulated by the SEC under the Investment Company Act: Registered investment companies (RICs) and business development companies (BDCs). Seeding vehicles for these funds are also excluded from the covered fund definition during their seeding period.536 Restrictions on Relationships Between Banking Entities and Covered Funds Under the baseline, banking entities are limited in the types of transactions in which they are able to engage with covered funds with which they have certain relationships. Banking entities that serve, directly or indirectly, as the investment manager, adviser, or sponsor to a covered fund are prohibited from engaging in a ‘‘covered transaction,’’ as defined in section 23A of the Federal Reserve Act, with the covered fund or with any other covered fund that is controlled by such covered fund.537 Similarly, a banking entity that organizes and offers a covered fund pursuant to § ll.11 or that continues to hold an ownership interest in a covered fund in accordance with § ll.11(b) is prohibited from engaging in such a ‘‘covered transaction.’’ This prohibits all ‘‘covered transactions’’ that cause the banking entity to have credit exposure to the affiliated covered fund, including short-term extensions of credit and various other transactions required for a banking entity to provide an affiliated covered fund payment, clearing, and settlement services. Definition of ‘‘Banking Entity’’ For foreign banking entities,538 certain funds organized under foreign law and offered to foreign investors (‘‘foreign excluded funds’’) are not ‘‘covered funds’’ under the implementing regulations, but may be subject to the implementing regulations as ‘‘banking entities’’ under certain circumstances. Through the policy statement, the Federal banking agencies (in consultation with the staffs of the SEC and the CFTC) have provided temporary relief, that is currently scheduled to expire on July 21, 2021, for qualifying foreign excluded funds that may otherwise be subject to the implementing regulations as banking entities.539 Definition of ‘‘Ownership Interest’’ The implementing regulations prohibit a banking entity, as principal, from directly or indirectly acquiring or retaining an ‘‘ownership interest’’ in a covered fund.540 The
implementing regulations define an ‘‘ownership interest’’ in a covered fund to mean any equity, partnership, or other similar interest. Under the implementing regulations, ‘‘other similar interest’’ is defined as an interest that:
(A) Has the right to participate in the selection or removal of a general partner, managing member, member of the board of directors or trustees,

541 Implementing regulations §ll.10(d)(6)(i). 542 Implementing regulations §§ll.12(a)(1)(ii) and ll.12(a)(2)(ii)(A). The implementing regulations also require that the aggregate value of all ownership interests of a banking entity and its affiliates in all covered funds acquired or retained under §ll.12 may not exceed three percent of the tier 1 capital of the banking entity. Implementing regulations §ll.12(a)(2)(iii) (the aggregate funds limit). 543 13 U.S.C. 1851(g)(2). See also supra Section IV.B.2 (Loan Securitizations). 544See implementing regulations §ll.10(c)(8). Loan is further defined as any loan, lease, extension of credit, or secured or unsecured receivable that is not a security or derivative. Implementing regulations rule §ll.2(t). 545See supra Section IV.B.2 (Loan Securitizations, discussion of servicing assets). 546See implementing regulations §ll.10(c)(11)(ii). 547See implementing regulations §ll.10(c)(11)(i). 548See implementing regulations §ll.12(a). See also supra Section IV.E.2. (Ownership Interest— Fund Limits and Covered Fund Deduction). 549 79 FR 5734. 550See id. 551 Implementing regulations §§ll.10(d)(6)(ii) and ll.12(c)(1), (d). See also 12 U.S.C. 1851(d)(1)(G). 552 Implementing regulations §§ll.12(c)(1), (d). 553This analysis is based on data from Reporting Form FR Y–9C for domestic holding companies on a consolidated basis and Report of Condition and Income for banks regulated by the Board, FDIC, and Continued investment manager, investment adviser, or commodity trading advisor of the covered fund (excluding the rights of a creditor to exercise remedies upon the occurrence of an event of default or an acceleration event); (B) Has the right under the terms of the interest to receive a share of the income, gains or profits of the covered fund; (C) Has the right to receive the underlying assets of the covered fund after all other interests have been redeemed and/or paid in full (excluding the rights of a creditor to exercise remedies upon the occurrence of an event of default or an acceleration event); (D) Has the right to receive all or a portion of excess spread (the positive difference, if any, between the aggregate interest payments received from the underlying assets of the covered fund and the aggregate interest paid to the holders of other outstanding interests); (E) Provides under the terms of the interest that the amounts payable by the covered fund with respect to the interest could be reduced based on losses arising from the underlying assets of the covered fund, such as allocation of losses, write-downs or charge-offs of the outstanding principal balance, or reductions in the amount of interest due and payable on the interest; (F) Receives income on a pass-through basis from the covered fund, or has a rate of return that is determined by reference to the performance of the underlying assets of the covered fund; or (G) Any synthetic right to have, receive, or be allocated any of the rights above.541 The
implementing regulations permit a banking entity to acquire and retain an ownership interest in a covered fund that the banking entity organizes and offers pursuant to §ll.11, but limits such ownership interests to three percent of the total number or value of the outstanding ownership interests of such fund (the per-fund limit).542 Loan Securitizations As discussed above, section 13 of the BHC Act provides a rule of construction that explicitly allows the sale and securitization of loans as otherwise permitted by law.543 Accordingly, the implementing regulations exclude from the covered fund definition entities that issue asset-backed securities if they meet specified conditions, including that they hold only loans, certain rights and assets, and a small set of other financial instruments (permissible assets).544 In addition, the baseline includes the FAQs issued by agencies’ staff in June 2014 regarding the servicing asset provision of the loan securitization exclusion.545 Public Welfare and SBIC Exclusions Under the implementing regulations, issuers in the business of making investments that are designed primarily to promote the public welfare, of the type permitted under paragraph (11) of
section 5136 of the Revised Statutes of
the United States (12 U.S.C. 24),546 are excluded from the covered fund definition. Similarly, the implementing regulations exclude from the covered fund definition small business investment companies (SBICs) and issuers that have received notice from the Small Business Administration to proceed to qualify for a license as a SBIC and for which the notice or license has not been revoked.547 Attribution of Certain Investments to a Banking Entity As discussed above, the implementing regulations include a per-fund limit and aggregate fund limit on a banking entity’s ownership of covered funds that the banking entity organizes and offers.548 The preamble to the 2013 rule stated, ‘‘if a banking entity makes investments side by side in substantially the same positions as a 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.’’ 549 The agencies also stated that a banking entity that sponsors a covered fund should not make any additional side-byside co-investment with the covered fund in a privately negotiated investment unless the value of such coinvestment is less than 3% of the value of the total amount co-invested by other investors in such investment.550 The 2019 amendments eliminated the aggregate fund limit and capital deduction requirement under § ll.12(d) for the value of ownership interests held by banking entities in third-party covered funds (e.g., covered funds that those banking entities do not organize or offer), acquired or retained as a result of certain underwriting or market-making activities. However, the 2019 amendments did not change or amend the application of the per-fund limit or aggregate funds limit to coinvestments alongside a covered fund. For purposes of calculating the aggregate fund limit and the capital deduction requirement, the implementing regulations require attribution to a banking entity of restricted profit interests in a covered fund as ownership interests in the covered fund for which the banking entity serves as investment manager, investment adviser, commodity trading advisor, or other service provider.551 Under the implementing regulations, for purposes of calculating a banking entity’s compliance with the aggregate fund limit and the capital deduction requirement, a 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.552
ii. Affected Participants
The SEC-regulated entities directly affected by the final rule include brokerdealers, security-based swap dealers, and investment advisers. The implementing regulations impose a range of restrictions and compliance obligations on banking entities with respect to their covered fund activities and investments. To the degree that the final rule reduces or otherwise alters the scope of private funds subject to covered fund restrictions, SECregistered banking entities, including broker-dealers, security-based swap dealers, and investment advisers may be affected. Broker-Dealers 553 Under the implementing regulations, some of the largest SEC-regulated

OCC for the most recent available four-quarter average, as well as data from S&P Market Intelligence LLC on the estimated amount of global trading activity of U.S. and non-U.S. bank holding companies. Broker-dealer bank affiliations were obtained from the Federal Financial Institutions Examination Council’s National Information Center. Broker-dealer assets and holdings were obtained from FOCUS Report data for Q4 2019. 554Broker-dealer total assets are based on FOCUS report data for ‘‘Total Assets.’’ 555Broker-dealer holdings are based on FOCUS report data for securities and spot commodities owned at market value, including bankers’ acceptances, certificates of deposit and commercial paper, state and municipal government obligations, corporate obligations, stocks and warrants, options, arbitrage, other securities, U.S. and Canadian government obligations, and spot commodities. 556This alternative measure excludes U.S. and Canadian government obligations and spot commodities. 557This category includes all bank-affiliated broker-dealers except those exempted by section 203 of EGRRCPA. 558This category includes both bank affiliated broker-dealers subject to section 203 of EGRRCPA and broker-dealers that are not affiliated with banks or holding companies. 559See Recordkeeping and Reporting Requirements for Security-Based Swap Dealers, Major Security-Based Swap Participants, and Broker-Dealers, 84 FR 68550, 68607 (Dec. 16, 2019). 560See id. 561See Capital, Margin, and Segregation Adopting Release, supra note 517, at 43954. See also Rule Amendments and Guidance Addressing CrossBorder Application of Certain Security-Based Swap Requirements, 85 FR 6270, 6345–49 (Feb. 4, 2020). 562These estimates are calculated from Form ADV data as of December 31, 2019. An investment adviser is defined as a ‘‘private fund adviser’’ for the purposes of this economic analysis if it indicates that it is an adviser to any private fund on Form ADV Item 7.B. An investment adviser is defined as a ‘‘banking entity RIA’’ if it indicates on Form ADV Item 6.A.(7) that it is actively engaged in business as a bank, or it indicates on Form ADV Item 7.A.(8) that it has a ‘‘related person’’ that is a banking or thrift institution. For purposes of Form ADV, a ‘‘related person’’ is any advisory affiliate and any person that is under common control with the adviser. The definition of ‘‘control’’ for purposes of Form ADV, which is used in identifying related persons on the form, differs from the definition of ‘‘control’’ under the BHC Act. In addition, this analysis does not exclude SECregistered investment advisers affiliated with banks that have consolidated total assets less than or equal to $10 billion and trading assets and liabilities less than or equal to 5% of total assets. Those banks are no longer subject to the requirements of the 2013 rule following enactment of the EGRRCPA. Thus, these figures may overestimate or underestimate the number of banking entity RIAs. 563RIAs may
also advise foreign public funds that are excluded from the covered fund definition in the implementing regulations, are the subject of the final rule discussed below, and are not reported on Form ADV. broker-dealers are banking entities.
Table 1 reports the number, total assets,
and holdings of broker-dealers affiliated with banks and broker-dealers that are not. While the 3,487 domestic brokerdealers that are not affiliated with banks greatly outnumber the 202 banking entity broker-dealers subject to the implementing regulations, banking entity broker-dealers dominate nonbanking entity broker-dealers in terms of total assets (72% of total broker-dealer assets) and aggregate holdings (66% of total broker-dealer holdings).
TABLE 1—BROKER-DEALER COUNT, ASSETS, AND HOLDINGS BY AFFILIATION
Broker-dealer affiliation Number Total assets, $mln 554 Holdings, $mln 555 Holdings (alternative), $mln 556 Affected bank broker-dealers 557 ..................................................................... 202 3,240,045 777,192 607,086 Non-bank broker-dealers 558 ............................................................................ 3,487 1,258,510 404,754 255,380 Total .......................................................................................................... 3,689 4,498,556 1,181,946 862,466 Security-Based Swap Dealers The final rule may also affect bankaffiliated SBSDs. As compliance with SBSD registration requirements is not yet required, there are currently no registered SBSDs. However, the SEC has previously estimated that as many as 50 entities may potentially register with the SEC as security-based swap dealers and that as many as 16 may already be SECregistered broker-dealers.559 Given the analysis of DTCC Derivatives Repository Limited Trade Information Warehouse (TIW) transaction and positions data on single-name credit-default swaps and consistent with other recent SEC rulemakings, the SEC preliminarily believes that 41 entities that may register with the SEC as SBSDs are bank-affiliated firms, including those that are SEC-registered broker-dealers. Therefore, the SEC preliminarily estimates that, in addition to the bankaffiliated SBSDs that are already registered as broker-dealers and included in the discussion above, as many as 25 other bank-affiliated SBSDs may be affected by the final rule.560 Similarly, the SEC’s analysis of TIW data suggests that none of the entities that may register with the SEC as Major Security-Based Swap Participants are affected by the final rule. October 6, 2021 is the compliance date for the SEC’s registration rules for SBSDs, as well as several rules applicable to those entities, including segregation requirements and non-bank capital and margin requirements, recordkeeping and reporting requirements, business conduct standards, and risk mitigation techniques.561 Accordingly, the SEC recognizes that in anticipation of the compliance date for registration, firms may choose to restructure their securitybased swap trading activity into (or out of) an affiliated bank or an affiliated broker-dealer instead of registering as a standalone SBSD if bank or brokerdealer capital and other regulatory requirements are less (or more) costly than those that may be imposed on SBSDs under Title VII. As a result, the above figures may overestimate or underestimate the number of SBSDs that are not broker-dealers and that may become SEC-registered entities affected by the final rule. Private Funds and Private Fund Advisers 562 This section describes RIAs advising private funds that may be affected by the final rule. Using Form ADV data,
Table 2 reports the number of RIAs
advising private funds by fund type as defined in Form ADV.563 Private funds rely on either section 3(c)(1) or 3(c)(7) of the Investment Company Act and so meet the implementing regulations’ definition of ‘‘covered fund.’’ Table 3

564For purposes of Form ADV, ‘‘private equity fund’’ is defined as ‘‘any private fund that is not a hedge fund, liquidity fund, real estate fund, securitized asset fund, or venture capital fund and does not provide investors with redemption rights in the ordinary course.’’ See Form ADV:
Instructions for Part 1A, Instruction 6. For purposes of Form ADV, ‘‘hedge fund’’ is defined as ‘‘any private fund (other than a securitized asset fund):
(a) With respect to which one or more investment advisers (or related persons of investment advisers) may be paid a performance fee or allocation calculated by taking into account unrealized gains (other than a fee or allocation the calculation of which may take into account unrealized gains solely for the purpose of reducing such fee or allocation to reflect net unrealized losses); (b) that may borrow an amount in excess of one-half of its net asset value (including any committed capital) or may have gross notional exposure in excess of twice its net asset value (including any committed capital); or (c) that may sell securities or other assets short or enter into similar transactions (other than for the purpose of hedging currency exposure or managing duration). 565This table includes only the advisers that list private funds on section 7.B.(1) of Form ADV. The number of advisers in the ‘‘Total Private Fund Advisers’’ row is not the sum of the rows that precede it since an adviser may advise multiple types of private funds. Each listed private fund type (e.g., real estate funds and liquidity funds) is defined in Form ADV, and those definitions are the same for purposes of the SEC’s Form PF. 566 Gross assets include uncalled capital commitments on Form ADV. The large decrease in Gross assets for Liquidity Funds from that reported in the proposing release is due, in part, to the removal of certain Form ADV data from one filer that contained an erroneous value for gross assets. 567See U.S. Sec. and Exchange Comm’n, Div. of Inv. Mgmt. Analytics Office, Private Fund Statistics, Third Calendar Quarter 2019 (May 14, 2020), available at https://www.sec.gov/divisions/ investment/private-funds-statistics/private-fundsstatistics-2019-q3-accessible.pdf. Statistics for preceding quarters are available at https:// www.sec.gov/divisions/investment/private-fundsstatistics.shtml. 568See, e.g., 2019 amendments, 84 FR 61979. 569This estimate includes open-end companies, exchange-traded funds, closed-end funds, and noninsurance unit investment trusts and does not include fund of funds. The inclusion of fund of funds increases this estimate to approximately 16,800. reports the number and gross assets of private funds advised by RIAs and separately reports these statistics for banking entity RIAs. As can be seen from Table 2, the two largest categories of private funds advised by RIAs are hedge funds and private equity funds.564 Banking entity RIAs advise a total of 4,387 private funds with approximately $2.089 trillion in gross assets. From Form ADV data, banking entity RIAs’ gross private fund assets under management are concentrated in hedge funds and private equity funds. The SEC estimates on the basis of this data that banking entity RIAs advise 890 hedge funds with approximately $606 billion in gross assets and 1,518 private equity funds with approximately $466 billion in assets.
TABLE 2—SEC-REGISTERED INVESTMENT ADVISERS ADVISING PRIVATE FUNDS BY FUND TYPE 565
Fund type All RIA Banking entity RIA Hedge Funds ........................................................................................................................................................... 2,620 151 Private Equity Funds ............................................................................................................................................... 1,738 96 Real Estate Funds ................................................................................................................................................... 551 51 Securitized Asset Funds .......................................................................................................................................... 233 44 Venture Capital Funds ............................................................................................................................................. 223 8 Liquidity Funds ......................................................................................................................................................... 44 16 Other Private Funds ................................................................................................................................................ 1,060 140 Total Private Fund Advisers ............................................................................................................................. 4,781 282
TABLE 3—THE NUMBER AND GROSS ASSETS OF PRIVATE FUNDS ADVISED BY SEC-REGISTERED INVESTMENT
ADVISERS 566
Fund type
Number of private funds Gross assets, $bln All RIA Banking entity RIA All RIA Banking entity RIA Hedge Funds ..................................................................................................................................... 10,445 890 8,048 606 Private Equity Funds ......................................................................................................................... 16,217 1,518 4,119 466 Real Estate Funds ............................................................................................................................ 3,699 320 732 94 Securitized Asset Funds ................................................................................................................... 2,000 380 767 145 Venture Capital Funds ...................................................................................................................... 1,387 44 174 3 Liquidity Funds .................................................................................................................................. 76 30 304 231 Other Private Funds .......................................................................................................................... 4,757 1,206 1,543 542 Total Private Funds .................................................................................................................... 38,581 4,387 15,685 2,089 In addition, the SEC’s economic analysis is informed by private fund statistics submitted by certain RIAs of private funds through Form PF as summarized in quarterly ‘‘Private Fund Statistics.’’ 567 Registered Investment Companies and Business Development Companies The baseline also reflects the potential that a RIC or a BDC would be treated as a banking entity where the RIC or BDC’s sponsor is a banking entity that holds 25% or more of the RIC or BDC’s voting securities after a seeding period.568 On the basis of SEC filings and public data, the SEC estimates that, as of December 2019, there were approximately 15,300 RICs 569 and 101 BDCs. Although RICs and BDCs are generally not themselves banking entities subject to the implementing regulations, they may be indirectly affected by the implementing regulations and the final rule, for example, if their sponsors or advisers are banking entities. For instance, bankaffiliated RIAs or their affiliates may reduce their level of investment in the RICs or BDCs they advise, or potentially close those funds, to eliminate the risk of those funds becoming banking entities themselves. Small Business Investment Companies Small business investment companies are generally ‘‘privately owned and managed investment funds, licensed and regulated by the Small Business Administration (SBA), that use their own capital plus funds borrowed with

570See U.S. Small Bus. Admin., SBIC Program Overview, available at https://www.sba.gov/ content/sbic-program-overview. For purposes of the Advisers Act, an SBIC is (other than an entity that has elected to be regulated or is regulated as a business development company pursuant to section 54 of the Investment Company Act of 1940): (A) A small business investment company that is licensed under the Small Business Investment Act of 1958, (B) an entity that has received from the Small Business Administration notice to proceed to qualify for a license as a small business investment company under the Small Business Investment Act of 1958, which notice or license has not been revoked, or (C) an applicant that is affiliated with 1 or more licensed small business investment companies described in subparagraph (A) and that has applied for another license under the Small Business Investment Act of 1958, which application remains pending. 15 U.S.C. 80b–3(b)(7). 571Specifically, the final rule excludes from the definition of ‘‘covered fund’’ any SBIC that has voluntarily surrendered its license to operate as an SBIC in accordance with 13 CFR 107.1900 and does not make any new investments (with some exceptions) after such voluntary surrender. See §ll.10(c)(11)(i). 572See U.S. Small Bus. Admin., SBIC Program Overview as of March 31, 2020, available at:
https://www.sba.gov/sites/default/files/2020-05/ SBIC%20Quarterly%20Report%20as%20of% 20March_31_2020%20Amended%205.14.2020.pdf. 573See U.S. Small Bus. Admin., SBIC Program Overview as of December 31, 2019, available at https://www.sba.gov/sites/default/files/2020-02/ SBIC%20Quarterly%20Report%20as%20of%20 December_31_2019.pdf. 574See id. 575Under the implementing regulations, an SBIC is excluded from the ‘‘covered fund’’ definition. See implementing regulations §ll.10(c)(11)(i). 576See Exemptions from Investment Adviser Registration for Advisers to Certain Rural Business Investment Companies, 85 FR 13734 (Mar. 10, 2020) (‘‘RBIC Investment Adviser Adopting Release’’). 577See the RBIC Advisers Relief Act of 2018, Public Law 115–417, 132 Stat. 5438 (2019) (the ‘‘RBIC Advisers Relief Act’’). To be eligible to participate as an RBIC, the company must be a newly formed for-profit entity or a newly formed for-profit subsidiary of such an entity, have a management team with experience in community development financing or relevant venture capital financing, and invest in enterprises that will create wealth and job opportunities in rural areas, with an emphasis on smaller enterprises. See 7 U.S.C. 2009cc–3(a). 578Following enactment of the RBIC Advisers Relief Act, supra note 577, advisers to solely RBICs and advisers to solely SBICs are exempt from investment adviser registration pursuant to Advisers Act sections 203(b)(8) and 203(b)(7), respectively. The venture capital fund adviser exemption deems RBICs and SBICs to be venture capital funds for purposes of the registration exemption 15 U.S.C. 80b–3(l). Accordingly, the exclusion for certain venture capital funds discussed below (see infra text accompanying notes 672 and 673) which require that a fund be a venture capital fund as defined in the SEC regulations implementing the registration exemption, could include RBICs and SBICs to the extent that they satisfy the other elements of the exclusion. 579See RBIC Investment Adviser Adopting Release, supra note 576. 580Tax Cuts and Jobs Act of 2017, Public Law 115–97, 131 Stat. 2054 (2017). 581See U.S. Sec. and Exchange Comm’n & NASAA, Staff Statement on Opportunity Zones:
Federal and State Securities Laws Considerations, available at https://www.sec.gov/2019_OpportunityZones_FINAL_508v2.pdf (‘‘Opportunity Zone Statement’’). 582See supra note 575. 583As reported by Novogradac, a national professional services organization that collects and reports information on QOFs. See https:// www.novoco.com/resource-centers/opportunityzone-resource-center/opportunity-funds-listing. 584See 12 U.S.C. 1851. an SBA guarantee to make equity and debt investments in qualifying small businesses.’’ 570 The final rule provides relief with respect to banking entity investments in SBICs during the winddown process by excluding from the definition of ‘‘covered fund’’ those SBICs.571 While the SEC does not have data to quantify the number of SBICs undergoing wind-down, trends in the number of SBIC licenses can be indicative of the turnover in the total number of SBIC licensees. For example, according to SBA data, there were 295 SBIC licensees as of March 31, 2020 572 and 299 SBIC licensees as of December 31, 2019.573 By contrast, as of September 30, 2017, there were 315 SBICs licensed by the SBA.574 The final rule includes an exclusion for rural business investment companies (RBICs) from the implementing regulations similar to that provided to SBICs.575 As the SEC has discussed elsewhere,576 an RBIC is defined in
section 384A of the Consolidated Farm
and Rural Development Act as a company that is approved by the Secretary of Agriculture and that has entered into a participation agreement with the Secretary.577 Because SBICs and RBICs share the common purpose of promoting capital formation in their respective sectors, advisers to SBICs and RBICs are treated similarly under the Advisers Act in that they have the opportunity to take advantage of expanded exemptions from investment adviser registration.578 As of August 2019, there were 5 RBICs who were licensed by the USDA managing approximately $352 million in assets.579 The Tax Cuts and Jobs Act established the ‘‘opportunity zone’’ program to provide tax incentives for long-term investing in designated economically distressed communities.580 The program allows taxpayers to defer and reduce taxes on capital gains by reinvesting gains in ‘‘qualified opportunity funds’’ (QOFs) that are required to have at least 90 percent of their assets in designated low-income zones.581 In this regard, QOFs are similar to SBICs and public welfare companies. The final rule provides relief to QOFs from the implementing regulations that is similar to the relief provided to SBICs.582 SEC staff is not aware of an official source for data regarding QOFs that are available for investment, but some private firms collect and report such data. One such firm reports that, as of April 2020, there were 406 QOFs that report raising $10.09 billion in equity, and have a fundraising goal of $31.89 billion.583
3. Costs and Benefits
Section 13 of the BHC Act generally
prohibits banking entities from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with covered funds, subject to certain exemptions.584 The SEC’s economic analysis concerns the potential costs, benefits, and effects on efficiency, competition, and capital formation of the final rule for five groups of market participants. First, the final rule may impact SEC-registered investment advisers that are banking entities, including those that sponsor or advise covered funds and those that do not, as well as SEC-registered investment advisers that are not banking entities that sponsor or advise covered funds and compete with banking entity RIAs. Second, the final rule permits dealers greater flexibility in providing services to more types of funds since dealers can provide a broader array of services to funds that would be excluded from the covered fund definition. Third, banking entities that are broker-dealers or RIAs may enjoy reduced uncertainty and greater flexibility in making direct investments alongside covered funds. Fourth, the final rule may impact private funds and other vehicles, including those entities scoped in or out of the covered fund provisions of the implementing regulations, as well as private funds competing with such funds. One such impact may be seen to the extent that the final rule permits banking entities to provide a full range of traditional customer-facing banking and asset management services to certain entities, such as customer facilitation vehicles and family wealth management vehicles. Fifth, to the extent that the final rule impacts efficiency, competition, and capital formation in covered funds or underlying securities, investors in, and sponsors of, covered funds and underlying securities and issuers may be affected as well. As discussed below, the agencies carefully considered the competing effects that could potentially result from the final rule and alternatives. For example, the final rule could result in enhanced competition among, and capital formation driven by, entities that would be treated as covered funds under the implementing regulations.

585For the purposes of the burden estimates in this release, we are assuming the cost of $423 per hour for an attorney, from SIFMA’s Management and Professional Earnings in the Securities Industry 2013 (available at https://www.sifma.org/resources/ research/management-and-professional-earningsin-the-securities-industry-2013/), modified to account for an 1800-hour work year and multiplied by 5.35 to account for bonuses, firm size, employee benefits, and overhead, and adjusted for inflation. 586 In the 2019 amendments, amendments that sought, among other things, to provide greater clarity and certainty about what activities were prohibited by the 2013 rule—in particular, under the prohibition on proprietary trading—and to better tailor the compliance requirements to the risk of a banking entity’s activities, banking entity PRArelated burdens were apportioned to SEC-regulated entities on the basis of the average weight of brokerdealer assets in holding company assets. See 2019 amendments, 84 FR 62074. The SEC believes that such an approach would be inappropriate for the PRA-related burdens associated with the final rule because we do not have a comparable proxy for an investment adviser’s significance within the holding company. Since we do not have sufficient information to determine the extent to which the costs associated with any of the new recordkeeping and disclosure requirements would be borne by SEC registrants specifically, we report the entire burden estimated based on information in supra
Section V.B (Paperwork Reduction Act).
Initial recordkeeping burdens: (10 hours) × (255 entities) × (Attorney at $423 per hour) = $1,078,650. 587Annual recordkeeping burdens: (10 hours) × (255 entities) × (Attorney at $423 per hour) = $1,078,650. 588 Initial recordkeeping burdens: (0.5 hours) × (255 entities) × (Attorney at $423 per hour) = $53,933. 589Annual recordkeeping burdens: (0.5 hours) × (255 entities) × (26 disclosures per year) × (Attorney at $423 per hour) = $1,402,245. 590See supra Section V.F.1.iii. (SEC Economic Analysis—Analytical Approach). 591See supra Section IV. (Summary of the Final Rule). 592See, e.g., 2019 amendments, 84 FR 62037–92. 593These fund types include hedge funds, private equity funds, real estate funds, securitized asset funds, venture capital funds, liquidity, and other private funds. See supra note 564. 594As noted in the economic baseline, a single RIA may advise multiple types of funds. See supra note 565. 595See 85 FR 12164. The final rule could also potentially increase (or decrease) financial and other risks posed by the ability to make investments in covered funds in addition to or in lieu of direct investments; however, the agencies have sought to mitigate the potential for increased risk and other concerns by imposing various conditions on the exclusions designed to address such risks. In addition, to the extent that the covered fund provisions of the implementing regulations limit fund formation, the final rule could provide a greater ability for banking entities to organize funds and attract capital from third party investors. This could increase revenues for banking entities while reducing long-term compliance costs; increase the availability of venture, credit, and other financing, including for small businesses and startups; and, as a result, increase capital formation. The SEC is not currently aware of any information or data that would allow a quantification of the extent to which the covered fund provisions of the implementing regulations are inhibiting capital formation via funds. Therefore, the bulk of the analysis below is necessarily qualitative. To the extent that the covered fund provisions of the implementing regulations limit alignment of interests between banking entities and their clients, customers, or counterparties, and to the extent the final rule alters the alignment of interests, the final rule could have a positive or negative effect on conflict of interest concerns. The final rule creates new recordkeeping requirements and revise certain disclosure requirements. Specifically, a banking entity may only rely on the exclusion for customer facilitation vehicles if the banking entity and its affiliates maintain documentation outlining how the banking entity intends to facilitate the customer’s exposure to a transaction, investment strategy or service provided by the banking entity. As discussed above in Section V.B. (Paperwork Reduction Act) 585 and discussed further below, these new recordkeeping burdens may impose an
initial burden of $1,078,650 586 and an ongoing annual burden of $1,078,650.587 In addition, under certain circumstances, a banking entity must make certain disclosures with respect to an excluded credit fund, venture capital fund, family wealth vehicle, or customer facilitation vehicle, as if the entity were a covered fund. As discussed above in Section V.B, these disclosure requirements may impose an initial burden of $53,933 588 and an ongoing burden of $1,402,245.589 The sections that follow discuss how each of the amendments in the final rule change the implementing regulations, and the anticipated costs and benefits of the amendments, subject to the caveat that not all anticipated costs and benefits can be meaningfully quantified.590
i. Amendments Related to Specific
Types of Funds
As discussed above, the final rule modifies a number of the provisions of the implementing regulations related to the treatment of certain types of funds (e.g., credit funds, family wealth management vehicles, small business investment companies, qualifying venture capital funds, customer facilitation vehicles, foreign excluded funds, foreign public funds, and loan securitizations).591 Broadly, such modifications reduce the number and types of funds that are within the scope of the implementing regulations, impacting the economic effects of section 13 of the BHC Act and the implementing regulations.592 Form ADV data is not sufficiently granular to allow the SEC to estimate the number of funds and fund advisers affected by the exclusions from the covered fund definition added or modified by the final rule and other relief addressed by the final rule. However, Table 2 and Table 3 in the economic baseline quantify the number and asset size of private funds advised by banking entity RIAs by the type of private fund they advise, as those fund types are defined in Form ADV.593 Using Form ADV data, the SEC estimates that approximately 151 banking entity RIAs advise hedge funds and 96 banking entity RIAs advise private equity funds (as those terms are defined in Form ADV).594 As can be seen from Table 2 in the economic baseline, 44 banking entity RIAs advise securitized asset funds. Table 3 shows that banking entity RIAs advise 380 securitized asset funds with $145 billion in gross assets. Another 51 banking entity RIAs advise real estate funds, and banking entity RIAs advise 320 real estate funds with $94 billion in gross assets. Venture capital funds are advised by only 8 banking entity RIAs, and all 44 venture capital funds advised by banking entity RIAs have in aggregate approximately $3 billion in gross assets. As noted elsewhere, the covered fund provisions of the implementing regulations may limit the ability of banking entities to use covered funds to circumvent the proprietary trading prohibition, reduce bank incentives to bail out their covered funds, and mitigate conflicts of interest between banking entities and their clients, customers, or counterparties. As discussed in the 2020 proposal, the implementing regulations may limit the ability of banking entities to conduct traditional asset management activities and reduce the availability of capital by imposing significant costs on some banking entities without providing commensurate benefits.595 Moreover, the 2013 rule’s limitations on banking entities’ investment in covered funds may be more significant for certain covered funds that are typically small in size such as many venture capital funds, with potentially more negative spillover

596See id.
597See supra Section IV. (Summary of the Final Rule) for discussion of comments and recommendations for each of the proposed amendments. 598See id. 599See supra Section IV.A. (Qualifying Foreign Excluded Funds). 600Foreign banking entity was defined for purposes of the policy statement to mean a banking entity that is not, and is not controlled directly or indirectly by, a banking entity that is located in or organized under the laws of the United States or any State. 601See supra note 26. The policy statement was subsequently extended for a two-year period ending on July 21, 2021. See also supra Section IV.A. (Qualifying Foreign Excluded Funds) and note 28. 602See final rule §§ll.6(f) and ll.13(d). 603SIFMA; BPI; BVI; AIC; ABA; EFAMA; SAF; IIB; JBA; CBA; and Credit Suisse. See also supra
Section IV.A. (Qualifying Foreign Excluded Funds)
for a discussion of individual comments. 604See Occupy and Data Boiler. 605See 85 FR 12123–26. 606See IIB; JBA; CBA; EBF; and Credit Suisse. effects on capital formation in the types of underlying securities in which these types of funds invest.596 The final rule could reduce the scope of funds that need to be analyzed for covered fund status or could simplify this analysis and enable banking entities to own, sponsor, and have relationships with the types of entities that the final rule excludes from the covered fund definition. Accordingly, the final rule may reduce costs of banking entity ownership in, sponsorship of, and transactions with certain funds; may promote greater capital formation in, and competition among such funds; and may improve access to capital for issuers of the underlying debt or equity that those funds may purchase. The final rule may also benefit banking entity dealers through higher profits or greater demand for derivatives, margin, payment, clearing, and settlement services. Reducing restrictions on banking entities by further tailoring the covered fund definition may encourage more launches of funds that are excluded from the definition, capital formation and, possibly, competition in those types of funds. If competition increases the quality of funds available to investors or reduces the fees funds charge, investors in funds may benefit. Moreover, to the degree that the final rule may increase the spectrum of funds available to investors, the final rule may relax constraints around investor portfolio optimization and increase the efficiency of capital allocation. The SEC received comments from a diverse set of commenters. Comments from banking entities and financial services industry trade groups were generally supportive of the proposal, although many recommended additional modifications.597 There were also several organizations and individuals that were generally opposed to the 2020 proposal.598 The sections that follow further discuss the economic costs, benefits, and effects on competition, efficiency, and capital formation with respect to specific types of funds and specific amendments in the final rule. Foreign Excluded Funds Under the baseline, foreign excluded funds are excluded from the covered fund definition, but could be considered banking entities if a foreign banking entity controls the foreign fund in certain circumstances.599 As discussed above, the policy statement released by Federal banking agencies provides that the Federal banking agencies would not propose to take action (1) against a foreign banking entity based on attribution of the activities and investments of a qualifying foreign excluded fund to the foreign banking entity 600 or (2) against a qualifying foreign excluded fund as a banking entity, in each case where the foreign banking entity’s acquisition or retention of any ownership interest in, or sponsorship of, the qualifying foreign excluded fund would meet the requirements for
permitted covered fund activities and investments solely outside the United States, as provided in section 13(d)(1)(I) of the BHC Act and § ll.13(b) of the implementing regulations, as if the qualifying foreign excluded fund were a covered fund.601 As in the 2020 proposal, the final rule provides a permanent exemption from the proprietary trading and covered fund prohibitions for certain foreign excluded funds that is substantively similar to the relief currently provided to qualifying foreign excluded funds by the policy statement.602 Commenters were generally supportive of the proposal to exempt qualifying foreign excluded funds from certain requirements of the rule.603 Two commenters expressed opposition to the proposed exemption.604 The SEC recognizes that failing to exclude such funds from the definition of ‘‘banking entity’’ in the implementing regulations imposed proprietary trading restrictions, covered fund prohibitions, and compliance obligations on qualifying foreign excluded funds that may be more burdensome than the requirements that would apply under the implementing regulations to covered funds. The SEC believes that, absent the qualifying foreign excluded fund exemption and upon expiry of the policy statement, the implementing regulations may have significant adverse effects on foreign banking entities’ ability to organize and offer certain private funds for foreign investments, disrupting foreign asset management activities. The SEC recognizes that the exemption of qualifying foreign excluded funds from the proprietary trading and covered fund prohibitions that apply to ‘‘banking entities’’ may result in increased activity by foreign banking entities in organizing and offering such funds, and that such activity may involve risk for those banking entities. At the same time, the SEC recognizes a statutory purpose of certain portions of section 13 of the BHC Act is to limit the extraterritorial impact on foreign banking entities.605 Accordingly, the final rule may benefit foreign banking entities and their foreign counterparties seeking to transact with and through such funds. The agencies received comments on the 2020 proposal that expressed concern that although qualifying foreign excluded funds would be exempted from the proprietary trading and covered funds restrictions of the implementing regulations, these funds would still be required to put in place compliance programs.606 However, since these qualifying foreign excluded funds are exempted from the proprietary trading requirements of § ll.3(a) and covered fund restrictions of §ll.10(a), the agencies believe that requiring compliance programs to be established for the qualifying foreign excluded fund itself would be overly burdensome and unnecessary. Therefore, under the final rule, in addition to the proposed exemptions from the proprietary trading and covered fund prohibitions, qualifying foreign excluded funds will also not be required to have compliance programs under §
ll.20. However, any banking entity that owns or sponsors a qualifying foreign excluded fund will still be required to have in place the appropriate compliance programs as required by § ll.20. The exemption is also expected to promote capital formation in the United States. While qualifying foreign excluded funds have a limited nexus to the United States, such funds are permitted to invest in U.S. companies. Therefore, to the extent that these funds have any direct impact on capital formation and U.S. financial stability, the exemption would promote U.S. financial stability by providing additional capital and liquidity to U.S. capital markets without a concomitant increase in risk borne by U.S. banking entities.

607See supra Section IV.A. (Qualifying Foreign Excluded Funds). 608See id. 609 79 FR 5678. 610 Id. 611See final rule §ll.10(c)(1)(i)(B). 612See final rule §ll.10(c)(1)(i)(B). 613See final rule §ll.10(c)(1)(iii)(A). 614See final rule §ll.10(c)(1)(iii)(B). 615See final rule §ll.10(c)(1)(ii). 616See 85 FR 12166. 617Such funds could be organized in a particular jurisdiction for reasons including tax treatment, investment strategy, or flexibility to distribute into multiple markets (for instance, in the European Union), even though such funds are authorized to sell interests in other jurisdictions. See also id. 618See 85 FR 12166. 619See id. 620 IIB; SIFMA; BPI; ABA; EBF; EFAMA; FSF; ICI; BVI; and CBA. See also supra Section IV.B.1. (Foreign Public Funds). The final rule may increase the incentive for some foreign banking entities seeking to organize and offer qualifying foreign excluded funds to reorganize their activities so that these funds’ activities qualify for the exemptions. The costs and feasibility of such reorganization will depend on the complexity and existing compliance structures for banking entities, the degree to which there is unmet demand for investment funds that may be organized as qualifying foreign excluded funds, and the profitability of such banking activities. Importantly, the principal risk of foreign banking entities’ activities related to foreign excluded funds generally resides outside the United States. As discussed above,607 because the exemption requires that the foreign banking entity’s acquisition of an ownership interest in or sponsorship of the fund meets the requirements in § ll.13(b) of the final rule, the exemption will help to ensure that the risks of the investments made by these foreign funds would be booked to foreign entities in foreign jurisdictions. The agencies believe that exempting the activities of qualifying foreign excluded funds promotes and protects the safety and soundness of banking entities and U.S. financial stability,608 and relatedly the SEC believes the exemption is unlikely to impact negatively SEC registrants. Foreign Public Funds The implementing regulations exclude from the covered fund definition any foreign public fund that satisfies three sets of conditions. First, the issuer must be organized or established outside of the United States, be authorized to offer and sell ownership interests to retail investors in the issuer’s home jurisdiction (the ‘‘home jurisdiction’’ requirement), and sell ownership interests predominantly through one or more public offerings outside of the United States. The agencies stated in the preamble to the 2013 rule that they generally expect that an offering is made predominantly outside of the United States if 85 percent or more of the fund’s interests are sold to investors that are not residents of the United States.609 Second, for funds that are sponsored by a U.S. banking entity, or by a banking entity controlled by a U.S. banking entity, the ownership
interests in the issuer must be sold ‘‘predominantly’’ to persons other than the sponsoring banking entity, the issuer, their affiliates, directors of such entities, or employees of such entities (the sales limitation). The agencies stated in the preamble to the 2013 rule that, consistent with the agencies’ view concerning whether a foreign public fund has been sold predominantly outside of the United States, the agencies generally expect that a foreign public fund would satisfy this additional condition if 85 percent or more of the fund’s interests are sold to persons other than the sponsoring U.S. banking entity and the specified persons connected to that banking entity.610 Third, such public offerings must occur outside the United States, must comply with applicable jurisdictional requirements (the compliance obligation), may not restrict availability to investors having a minimum level of net worth or net investment assets, and must have publicly available offering disclosure documents filed or submitted with the relevant jurisdiction. The final rule makes several changes to the foreign public fund exclusion. First, the final rule removes the home jurisdiction requirement.611 Second, the final rule makes the exclusion available with respect to issuers authorized to offer and sell ownership interests through one or more public offerings, removing the requirement that the issuer sells ownership interests ‘‘predominantly’’ through such public offerings.612 Third, the agencies are also modifying the definition of ‘‘public offering’’ from the implementing regulations to add a new requirement that the distribution is subject to substantive disclosure and retail investor protection laws or regulations in one or more jurisdictions where ownership interests are sold.613 Fourth, the final rule applies the compliance obligation only in instances in which the banking entity serves as the investment manager, investment adviser, commodity trading advisor, commodity pool operator, or sponsor.614 Finally, the final rule narrows the sales limitation to the sponsoring banking entity, the issuer, affiliates, and directors and senior executive officers of such entities, and requires more than 75 percent of the fund’s interest to be sold to such entities and persons.615 As discussed in the 2020 proposal, the SEC has received comments indicating that the foreign public fund exclusion under the implementing regulations is impractical, overly narrow, and prescriptive, and results in competitive disparities between foreign public funds and RICs.616 The SEC also received comment that the home jurisdiction requirement under the implementing regulations is narrow and fails to recognize the prevalence of nonU.S. retail funds organized in one jurisdiction and authorized to sell interests in other jurisdictions.617 As adopted in the final rule, the elimination of the home jurisdiction requirement may benefit such foreign public funds and may facilitate greater capital
formation through such funds, with the potential to create more capital allocation choices for investors. To the degree that the implementing regulations have disadvantaged foreign public funds relative to otherwise comparable RICs, the elimination of the home jurisdiction requirement may dampen such competitive disparities. As also discussed in the 2020 proposal, the SEC has received comment that the requirement that ownership interests be sold ‘‘predominantly’’ through one or more public offerings outside of the United States has been burdensome and poses significant compliance burdens.618 For example, banking entities may not fully observe and predict both historical and potential future distributions of funds that are sponsored by third parties, listed on exchanges, or sold through third-party intermediaries or distributors.619 In response to the 2020 proposal, commenters supported the elimination of the home jurisdiction requirement and the requirement that the fund be sold predominantly through one or more public offerings.620 To the degree that some banking entities restrict their activities because they are unable to quantify the volumes of distributions through foreign public offerings relative to, for instance, foreign private placements, the final rule may enable greater activity by banking entities relating to foreign public funds. Similar to the above discussion, this aspect of the final rule also treats foreign public funds in a manner more similar to RICs (which are not required to

621 IIB; EFAMA; FSF; ICI; and BVI. 622Final rule §ll.10(c)(1)(ii)(D). 623See 85 FR 12166. 624See id. 625See id. 626BPI; FSF; ICI; and CCMC. See also supra
Section IV.B.1. (Foreign Public Funds).
627Although the implementing regulations do not explicitly prohibit a banking entity from acquiring 25 percent or more of a U.S. registered investment company, a U.S. registered investment company would become a banking entity if it is affiliated with another banking entity (other than as described in §ll.12(b)(1)(ii) of the implementing regulations). See 79 FR 5732 (‘‘[F]or purposes of
section 13 of the BHC Act and the final rule, a
registered investment company . . . will not be considered to be an affiliate of the banking entity if the banking entity owns, controls, or holds with the power to vote less than 25 percent of the voting shares of the company or fund, and provides investment advisory, commodity trading advisory, administrative, and other services to the company or fund only in a manner that complies with other limitations under applicable regulation, order, or other authority.’’). 628See supra note 69. 629 IIB; SIFMA; BPI; ABA; EBF; EFAMA; FSF; ICI; BVI; CBA; CCMR; Data Boiler; GS; IAA; JBA; SAF; and CCMC. 630See supra Section IV.B.1. (Foreign Public Funds). 631See Data Boiler. 632See 2020 proposal at 12166. monitor or assess distributions), with corresponding competitive effects. Commenters on the 2020 proposal also supported the proposed change to the ‘‘public offering’’ definition to include a requirement that the distribution be subject to substantive disclosure and retail investor protection laws or regulations.621 The final rule adopts that change, as proposed. Accordingly, the final rule tailors the scope of disclosure and compliance obligations for those jurisdictions where ownership interests are sold in recognition of the prevalence of foreign retail fund sales across jurisdictions. Similarly, the final rule limits the compliance obligation to settings in which the banking entity serves as the investment manager, investment adviser, commodity trading advisor, commodity pool operator, or sponsor— settings that may involve greater conflicts of interest between banking entities and fund investors than when the banking entity is only an investor in the fund. The final rule also replaces the employee sales limitation with a limitation on sales to senior executive officers.622 As discussed in the 2020 proposal, the SEC has received comment that banking entities may face significant costs and logistical and interpretive challenges monitoring investments by their employees, including those who transact in fund shares through unaffiliated brokers or through independent exchange trading.623 The SEC has also received comment that the employee sales limitation serves no discernible antievasion purpose.624 In addition, commenters noted that employee ownership interest can be a meaningful mechanism of promoting incentive alignment.625 The final rule replaces the employee sales limitation with a corresponding sales limitation with respect only to senior executive officers. This change may reduce these reported compliance challenges and burdens while preserving, in part, the original anti-evasion purpose of the limitations on employee ownership. The SEC received comments to the 2020 proposal that recommended the agencies modify their expectation of the level of ownership of a foreign public fund that would satisfy the requirement that a fund be ‘‘predominantly’’ sold to persons other than its U.S. banking entity sponsor and associated parties,626 which the preamble
to the 2013 rule stated was 85 percent or more (which would permit the U.S. banking entity sponsor and associated parties to own the remaining 15 percent). These commenters asserted that the relevant ownership threshold for U.S. registered investment companies is 25 percent, and that, for foreign public funds, the threshold should be the same. The agencies agree that the permitted ownership level of a foreign public fund by a U.S. banking entity sponsor and associated parties should be aligned with the functionally equivalent threshold for banking entity investments in U.S. registered investment companies, which is 24.9 percent.627 Accordingly, the agencies have amended this provision in the final rule to require that more than 75 percent of a foreign public fund’s interests must be sold to persons other than the U.S. banking entity sponsor and associated parties.628 Commenters on the 2020 proposal generally supported the proposed changes to the foreign public funds exclusion; 629 however, as discussed in this section and above, the agencies are making certain targeted adjustments in response to comments received.630 One commenter stated that the proposed changes were less than ideal for maximum control but acceptable from a practical implementation standpoint to balance compliance costs and benefits.631 As discussed above, the SEC believes that the foreign public fund provisions of the final rule may facilitate greater capital formation through such funds, with the potential to create more capital allocation choices for investors. In particular, to the degree that some banking entities restrict their activities relating to foreign public funds because they are unable to quantify the distributions through public offerings or determine the holdings of their employees, the final rule may enable greater activity by banking entities relating to foreign public funds. The final rule also limits the compliance obligation to settings in which the banking entity serves as the investment manager, investment adviser, commodity trading advisor, commodity pool operator, or sponsor—settings that may involve greater conflicts of interest between banking entities and fund investors than when the banking entity is only an investor in the fund. The agencies could have adopted a variety of alternatives offering more or less relief with respect to foreign public funds. For example, the agencies could have eliminated altogether the limit on sales to affiliated entities, directors and employees, which would have provided an even greater alignment of treatment between foreign public funds and RICs.632 Alternatives providing greater relief with respect to foreign public funds may have facilitated greater banking entity activity and intermediation of such funds on the one hand, but they may also have strengthened the competitive positioning of foreign public funds relative to U.S. registered funds. Moreover, providing greater relief with respect to foreign public funds
may have allowed banking entities greater flexibility in the formation and operation of foreign public funds, but may also have increased the risk that banking entities would be able to use foreign public funds to engage in activities that the restrictions on covered funds were intended to prohibit, thereby reducing the magnitude of the expected economic benefits of section 13 of the BHC Act and the implementing regulations. Similarly, relative to the final rule, alternatives providing less relief with respect to foreign public funds may have strengthened the competitive positioning of U.S. RICs relative to foreign public funds and posed lower compliance or evasion risks, but may also have reduced the benefits of the relief for capital formation in foreign public funds and their investors. Loan Securitizations The 2013 rule excludes from the definition of covered fund any loan securitization that issues asset-backed securities, holds only loans, certain

633See 2013 rule §ll.10(c)(8). Loan is further defined as any loan, lease, extension of credit, or secured or unsecured receivable that is not a security or derivative. See also 2013 rule §ll.2(t). 634See 85 FR 12173. 635 Implementing regulations §§ll.2(s); ll.10(c)(8)(i)(D), (v). 636See supra note 14 (links to the staff-level FAQs) and 78 and referencing paragraph (discussion of Loan Securitization Servicing FAQ). 637 §ll.10(c)(8)(i)(B). 638 2013 rule at 5687–88. 639See 85 FR 12129. 640See, e.g., SIFMA; CCMC; ABA; Credit Suisse; MFA; Goldman Sachs; LSTA; BPI; and SFA. 641See, e.g., LSTA and Goldman Sachs. 642Final rule §ll.10(c)(8)(i)(E). 643The implementing regulations also allow an excluded loan securitization to hold certain interest rate and foreign exchange derivatives for risk management purposes. The final rule makes no change to this provision. 644SIFMA; BPI; ABA; and LSTA. 645SIFMA and BPI. 646 Goldman Sachs. 647Final rule §ll.10(c)(8)(i)(E). rights and assets that arise from the structure of the loan securitization or from the loans supporting a loan securitization, and a small set of other financial instruments (permissible assets), and meets other criteria.633 As discussed in the 2020 proposal, the SEC received comment that, as a result of the 2013 rule, some banking entities may have divested or restructured their interests in loan securitizations due to the narrowly-drawn conditions of the exclusion, and that a limited holding of non-loan assets may enable banking entities to provide traditional securitization products and services demanded by customers, clients, and counterparties.634 The implementing regulations permit loan securitizations to hold rights or other assets (servicing assets) that arise from the structure of the loan securitization or from the loans supporting a loan securitization.635 In response to questions regarding the scope of the provisions permitting servicing assets and a separate provision limiting the types of permitted securities, the staffs of the agencies released the Loan Securitization Servicing FAQ.636 The final rule codifies the staff-level approach to the loan securitization exclusion in the Loan Securitization Servicing FAQ.637 To the degree that market participants may have restructured their activities consistent with the Loan Securitization Servicing FAQ, an effect of the final rule may be to reduce uncertainty. However, the economic effects of the codification of the Loan Securitization Servicing FAQ with respect to enabling greater capital formation through loan securitizations on the one hand, and increasing potential risks related to such activities on the other, may be limited. In the preamble to the 2013 rule, the agencies declined to permit loan securitizations to hold a certain amount of non-loan assets.638 Several commenters on the 2018 proposal disagreed with the agencies’ views and supported expanding the range of permissible assets in an excluded loan securitization.639 The 2020
proposal would have allowed a loan securitization vehicle to hold up to five percent of the fund’s total assets in any non-loan assets. Commenters were generally supportive of allowing loan securitizations to hold a limited amount of non-loan assets.640 These commenters indicated that the requirements under the implementing regulations for the loan securitization exclusion have been too restrictive, excessively limited use of the exclusion, and prevented issuers from responding to investor demand. Further, commenters suggested that a limited bucket of non-loan assets would not fundamentally alter the characteristics and risks of securitizations or otherwise increase risks in banking entities or the financial system.641 In the final rule, the agencies are revising the loan securitization exclusion to permit a loan securitization to hold a limited amount of debt securities.642 To minimize the potential for banking entities to use this exclusion to engage in impermissible activities or take on excessive risk, the final rule permits a loan securitization to hold debt securities (excluding asset-backed securities and convertible securities), as opposed to any non-loan asset, as the 2020 proposal would have allowed.643 The SEC believes that non-loan assets with materially different risk characteristics from loans could change the character and complexity of an issuer and raise the type of concerns that section 13 of the BHC Act was intended to address. Moreover, as described further below, limiting the assets to those with risk characteristics that are similar to loans may allow for a simpler and more transparent calculation of the five percent limit than would have been necessary if loan securitizations could invest in any nonloan asset, which will facilitate banking entities’ compliance with the exclusion. Alternatively, the agencies could have expanded the range of permissible assets in an excluded loan securitization to include any non-loan asset with or without limitations (e.g., the holding of asset-backed securities could have been permitted). Permitting loan securitizations to hold small amounts of non-loan assets may have enabled loan securitizations to respond to investor demand and may have reduced compliance costs associated with ensuring that a loan securitization holds only assets permitted under the exclusion. However, permitting excluded loan securitizations to hold a broader range of non-loan assets could have increased the risk that the character and complexity of excluded loan securitizations would have changed in a manner that raised the type of concerns that section 13 of the BHC Act was intended to address. However, the SEC recognizes that the loan securitization industry may have evolved since the issuance of the 2013 rule. As a result, the SEC believes that, even if the scope of non-loan assets permitted to be held were expanded beyond debt securities, loan securitizations may continue to have excluded non-loan assets. Further,
permitting loan securitizations to hold a small amount of debt securities will not affect the applicable prudential requirements aimed at the safety and soundness of banking entities. Banking entities currently take on a variety of risks arising out of a broad range of permissible activities, including the core traditional banking activity related to the extension of credit and direct and indirect extension of credit by banking entities flows through to the real economy in the form of greater access to capital. In the 2020 proposal, the agencies also requested comment on the methodology for calculating the limit on non-loan assets. Several commenters suggested using as a method for calculating the limit on non-loan assets:
The par value of assets on the day they are acquired.644 These commenters suggested that relying on par value is accepted practice in the loan securitization industry and would obviate concerns related to tracking amortization or prepayment of loans in a securitization portfolio.645 Another commenter indicated that the limit should be calculated as the lower of the purchase price and par value of the nonqualifying assets over the issuer’s aggregate capital commitments plus its subscription based credit facility.646 In response to these comments, the agencies are clarifying the methodology for calculating the five percent limit on non-loan assets.647 As suggested by several commenters, the final rule specifies that the limit on debt securities must be calculated at the most recent

648This limit applies to the debt securities that a loan securitization may hold pursuant to final rule §ll.10(c)(8)(i)(E). 649 Id. 650See 85 FR 12167. 651See id. 652See id. 653 2020 proposal §ll.10(c)(15)(i). 654 2020 proposal §ll.10(c)(15)(ii). 655 2020 proposal §ll.10(c)(15)(iii). 656 2020 proposal §ll.10(c)(15)(iv). 657 2020 proposal §ll.10(c)(15)(v). 658 2020 proposal §ll.10(c)(15)(i)(C)(1)(iii). 659See, e.g., CCMC; AIC; SIFMA; FSF; ABA; Arnold & Porter; and Goldman Sachs. See also supra Section IV.C.1.ii. (Credit Funds—Comments) for a more detailed discussion of comments received. time of acquisition of such assets.648 Specifically, the aggregate value of debt securities may not exceed five percent of the aggregate value of loans, cash and cash equivalents, and debt securities, where the value of the loans, cash and cash equivalents, and debt securities is calculated using par value at the most recent time any such debt security is purchased.649 The agencies have determined a calculation methodology that is intended to reduce compliance costs while ensuring that the investment pool of a loan securitization is composed of loans. The agencies have chosen the most recent time any such debt security is acquired as the moment of calculation to simplify the manner in which the five percent limit applies. This would permit an issuer that, at some point in its life, held debt securities in excess of five percent of its assets to continue to qualify for the exclusion if it came into compliance with the five percent limit prior to the next acquisition of a debt security that is subject to the five percent limit. The SEC believes that this approach balances the cost of calculation with the benefits of addressing the potential for evasion. The SEC believes that the alternative of a continuous monitoring obligation (i.e., requiring an excluded loan securitization to ensure that it held debt securities below or at the five percent limit at all times, regardless of any change in value of the securitization’s assets) would have imposed significant burdens on banking entities and could have caused an issuer to be disqualified from the loan securitization exclusion based on market events not under its control. In the final rule, this calculation is based only on the value of the loans and debt securities held under §§ ll.10(c)(8)(i)(A) and (E) and the cash and cash equivalents held under § ll.10(c)(8)(iii)(A) rather than the aggregate value of all of the issuing entity’s assets. The purpose of the five percent limit is to ensure the investment pool of a loan securitization is composed of loans. Therefore, the calculation takes into account the assets that should make up the issuing entity’s investment pool and excludes the value of other rights or incidental assets, as well as derivatives held for risk management. This further simplifies the calculation methodology by excluding assets that may be more complex to value and that are ancillary to the loan
securitization’s investment activities. This straightforward calculation methodology will ensure that the loan securitization exclusion remains easy to use and will facilitate banking entities’ compliance with the exclusion. The agencies recognize that a loan securitization’s transaction agreements may require that some categories of loans, cash equivalents, or debt securities be valued at fair market value for certain purposes. To accommodate such situations, the exclusion provides that the value of any loan, cash equivalent, or permissible debt security may be based on its fair market value if (1) the issuing entity is required to use the fair market value of such loan or debt security for purposes of calculating compliance with concentration limitations or other similar calculations under its transaction agreements and (2) the issuing entity’s valuation methodology values similarly situated assets, for example non-performing loans, consistently. This provision is intended to provide issuers with the flexibility to leverage existing calculation methodologies while preventing issuers from using inconsistent methodologies in a manner to evade the requirements of the exclusion. Credit Funds Under the baseline, funds that raise capital to engage in loan originations or extensions of credit or purchase and hold debt instruments that a banking entity would be permitted to acquire directly may be ‘‘covered funds’’ under the implementing regulations. As a result, prior to the final rule, banking entities faced limitations on sponsoring or investing in credit funds that engage in traditional banking activities— activities that banking entities are able to engage in directly outside of the fund structure. The SEC received several comments to the 2018 proposal supporting an exclusion for credit funds. For example, some commenters suggested that a fund or partnership structure enables banking entities to engage in permissible activities more efficiently.650 Specifically, one commenter indicated that credit funds facilitate investments by third parties, leading to the creation of a broader and deeper pool of capital, which may allow for more diversification in banking entities’ lending portfolios, the pooling of expertise of groups of market participants, and otherwise reduce the risk for banking entities and the financial system.651 In addition, some commenters stated that to the degree that credit funds require precommitments of capital, they may dampen cyclical fluctuations in loan originations and may facilitate ongoing extensions of credit during times of market stress.652 The agencies included in the 2020 proposal a specific exclusion for credit funds. Under the 2020 proposal, a credit fund would have been an issuer whose assets consist solely of: Loans, debt instruments, related rights and other assets that are related or incidental to acquiring, holding, servicing, or selling loans, or debt instruments; and certain interest rate or foreign exchange
derivatives.653 The proposed exclusion would have been subject to certain additional requirements to reduce evasion concerns and ensure that banking entities invest in, sponsor, or advise credit funds in a safe and sound manner. For example, the proposed exclusion would have imposed (1) certain activity requirements on the credit fund, including a prohibition on proprietary trading; 654 (2) disclosure and safety and soundness requirements on banking entities that sponsor or serve as an advisor for a credit fund; 655 (3) safety and soundness requirements on all banking entities that invest in or have certain relationships with a credit fund; 656 and (4) restrictions on the banking entity’s investment in, and relationship with, a credit fund.657 The proposed exclusion also would have permitted a credit fund to receive and hold a limited amount of equity securities (or rights to acquire equity securities) that were received on customary terms in connection with the credit fund’s loans or debt instruments.658 Commenters on the 2020 proposal were generally supportive of adopting an exclusion for credit funds.659 After consideration of the comments, the agencies are adopting the credit fund exclusion largely as proposed. The final rule creates a separate exclusion from the covered fund definition for credit funds that meet certain conditions, including several conditions that are similar to certain conditions of the loan securitization exclusion, but that reflect

660Final rule §ll.10(c)(15)(iv)(A). 661Final rule §ll.10(c)(15)(v)(B). 662Final rule §ll.10(c)(15)(i)(D). 663Final rule §ll.10(c)(15)(i)(C). 664 85 FR 12133. the structure and operation of credit funds. The final rule permits banking entities to extend credit through a fund structure but also contains provisions to prevent a banking entity from taking the types of risks that the covered fund provisions of section 13 were meant to address. First, the credit fund exclusion specifies the types of activities in which these funds may engage. Excluded credit funds can transact in or hold only loans, debt instruments that would be permissible for the banking entity relying on the exception to hold directly, certain rights or assets that are related or incidental to the loans or debt instruments, and certain interest rate and foreign exchange derivatives. The final rule requires that the credit fund not engage in activities that would constitute proprietary trading. Finally, the restrictions on guarantees and other limitations should eliminate the ability and incentive for either the banking entity sponsoring a credit fund or any affiliate to provide additional support beyond the ownership interest retained by the sponsor. Credit funds are likely to carry similar returns and risks as direct extensions of credit and loan origination outside of the fund structure, including the possibility of losses or gains related to changes in interest rates, borrower default or delinquent payments, fluctuations in foreign currencies, and overall market conditions. While the presence of a fund structure may introduce certain common risks associated with pooled investments, e.g., those related to governance of the fund and those related to relying on third-party investors providing capital to the fund, the SEC believes those risks to banking entities to be limited. Moreover, fund structures also entail certain common risk mitigating features (such as diversification across a larger number of borrowers) as well as significant cost efficiencies for banking entities. The SEC believes that the credit fund exclusion may allow banking entities to engage, indirectly, in more loan origination and traditional extension of credit relative to the current baseline. To the degree that banking entities are currently constrained in their ability to engage in extensions of credit through credit funds because of the implementing regulations, the exclusion may increase the volume of intermediation of credit by banking entities and make intermediation more efficient and less costly. In addition, permitting banking entities to extend financing to businesses through credit funds could allow banking entities to compete more effectively with nonbanking entities that are not subject to the same prudential regulation or supervision as banking entities subject to section 13 of the BHC Act and thereby likely result in an increase in lending activity in banking entitysponsored credit funds
without negatively affecting capital formation or the availability of financing. In this respect, the final rule could result in greater competition between bank and non-bank provision of credit with both expected lower costs that typically result from increased competition and a larger volume of permissible banking and financial activities to occur in the regulated banking system. In addition, since cost reductions and increased efficiencies are commonly passed along to customers, the exclusion may also benefit banking entities’ borrowers and facilitate the extension of credit in the real economy. The SEC continues to recognize that banking entities already engage in a variety of permissible activities involving risk, including extensions of credit, underwriting, and marketmaking. To the degree that credit funds may enable greater formation of capital by banking entities through various debt instruments, this may influence the risks and returns of banking entities individually and of banking entities as a whole. However, the SEC recognizes that the activities of credit funds largely replicate permissible and traditional activities of banking entities and undertaking similar activities largely results in the same risk exposures. Moreover, banking entities subject to the implementing regulations may also be subject to multiple prudential, capital, margin, and liquidity requirements that facilitate the safety and soundness of banking entities and promote the financial stability of the United States. These requirements would necessarily limit the risk that banks could take on by lending through a credit fund structure in a similar manner that would apply if the banking entity were to undertake similar lending activities directly. In addition, the final rule includes a set of conditions on the credit fund exclusion, including limitations on banking entities’ guarantees, assumption or other insurance of the obligations or performance of the fund,660 and compliance with applicable safety and soundness standards.661 Several provisions of the exclusion are similar to and modeled on conditions in the existing loan securitization exclusion to ease compliance burdens. For example, any derivatives held by the credit fund must relate to loans, permissible debt instruments, or other rights or assets held and reduce the interest rate and/or foreign exchange risks related to these holdings.662 In addition, any related rights or other assets held that are securities must be cash equivalents, securities received in lieu of debts previously contracted with respect to loans or debt instruments held or, unique to the credit fund exclusion, equity securities (or rights to acquire equity securities) received on customary terms in connection with the credit fund’s loans or debt instruments.663 Establishing an exclusion for credit funds based on the framework provided by the loan securitization exclusion will allow banking entities to provide traditional extensions of
credit regardless of the specific form, whether directly via a loan made by a banking entity, or indirectly through an investment in or relationship with a credit fund that transacts primarily in loans and certain debt instruments. In the 2020 proposal, the agencies requested comment on whether to impose a limit on the amount of equity securities (or rights to acquire equity securities) that may be held by an excluded credit fund.664 After a review of the comments and further deliberation, the agencies are not adopting a quantitative limit on the amount of equity securities (or rights to acquire equity securities) that may be held by an excluded credit fund. Any such equity securities or rights are limited by the requirements that they be (1) received on customary terms in connection with the fund’s loans or debt instruments and (2) related or incidental to acquiring, holding, servicing, or selling those loans or debt instruments. The agencies generally expect that the equity securities or rights satisfying those criteria in connection with an investment in loans or debt instruments of a borrower (or affiliated borrowers) would not exceed five percent of the value of the fund’s total investment in the borrower (or affiliated borrowers) at the time the investment is made. The agencies could have imposed a quantitative limit on the amount of equity securities (or rights to acquire equity securities) held by the fund. However, the value of those equity securities or other rights may change over time for a variety of reasons, including as a result of market

665Final rule §§ll.10(c)(15)(iv)(B), (iii)(B). 666Final rule §§ll.10(c)(15)(v)(B). 667Final rule §ll.10(c)(15)(ii)(A). 668See 85 FR 12132. 669Final rule §ll.10(c)(15)(i)(C)(2). 670Final rule §ll.10(c)(15)(iii)(A). 671Final rule §ll.10(c)(15)(iii)(B). 672Final rule §ll.10(c)(16). 673See supra Section IV.C.2. (Venture Capital Funds). 674See id. for a discussion of the SEC’s definition of ‘‘venture capital fund’’ in 17 CFR 275.203(l)–1. Following enactment of the RBIC Advisers Relief Act, supra note 577, the SEC’s definition of ‘‘venture capital fund’’ includes any RBIC and any SBIC. See 15 U.S.C. 80b–3(l). conditions and business performance, as well as more fundamental changes in the business and the credit fund’s corresponding management of the investment (e.g., exchanges of debt instruments for equity in connection with mergers and restructurings or a disposition of all portion of the credit investment without a corresponding disposition of the equity securities or rights due to differences in market conditions or other factors). Accordingly, the agencies can foresee various circumstances where the relative value of such equity securities or rights in a borrower (or affiliated borrowers) would over the life of the investment exceed five percent on a basis consistent with the requirements. Therefore, a quantitative limit on the amount of equity securities held by the fund could have imposed compliance, opportunity, and performance costs on a fund without a substantial reduction in risk to the fund. Nonetheless, the agencies expect that the fund’s exposure to equity securities (or other rights), individually and collectively and when viewed over time, would be managed on a basis consistent with the fund’s overall purpose. The credit fund exclusion prevents a banking entity from relying on the exclusion unless any debt instruments and equity securities (or rights to acquire an equity security) held by the credit fund and received on customary terms in connection with the credit fund’s loans or debt instruments are permissible for the banking entity to acquire and hold directly. A banking entity that acts as sponsor, investment adviser or commodity trading advisor of a credit fund must ensure that the activities of the credit fund are consistent with certain safety and soundness standards.665 In addition, a banking entity’s investment in, and relationship with, a credit fund must be conducted in compliance with, and subject to, applicable banking laws and regulations, including applicable safety and soundness standards.666 Combined with the prohibition on proprietary trading by a credit fund,667 these limitations are expected to prevent evasion of section 13 of the BHC Act. The final rule does not separately permit credit funds to hold derivatives under the provision allowing related rights and other assets. The preamble to the 2020 proposal made clear that ‘‘any derivatives held by the credit fund must relate to loans, permissible debt instruments,
or other rights or assets held, and reduce the interest rate and/ or foreign exchange risks related to these holdings.’’ 668 The agencies suggested then and currently believe that allowing a credit fund to hold derivatives not related to interest rate or foreign exchange hedging would not be necessary to facilitate the indirect extensions of credit by banking entities that are the goal of the exclusion and may pose the very risks that section 13 of the BHC Act was intended to reach. To help ensure that the credit fund exclusion does not inadvertently allow the holding of certain derivatives unrelated to hedging interest rate and/ or foreign exchange risks, the final rule explicitly excludes derivatives from permissible related rights and other assets.669 Importantly, extensions of credit and loan origination by banking entities, whether directly or indirectly, are influenced by a wide variety of factors, including the prevailing macroeconomic conditions, the creditworthiness of borrowers and potential borrowers, competition between bank and nonbank credit providers, and many others. Moreover, the efficiencies of credit funds relative to direct extensions of credit described above are likely to vary considerably among banking entities and funds. The SEC recognizes that the potential effects described above of the credit fund exclusion may be dampened or magnified in different phases of the macroeconomic cycle and across various types of banking entities. Investors in a credit fund that a banking entity sponsors or for which the banking entity serves as an investment adviser or commodity trading advisor may have expectations related to the performance of the credit fund that raise bailout concerns. To ensure that these investors are adequately informed of the banking entity’s role in the credit fund, the final rule requires a banking entity that acts as a sponsor, investment adviser, or commodity trading advisor to an excluded credit fund to provide prospective and actual investors the disclosures specified in § ll.11(a)(8) of the implementing regulations as if the credit fund were a covered fund.670 In addition, a banking entity that acts as a sponsor, investment adviser, or commodity trading advisor must ensure that the activities of the credit fund are consistent with safety and soundness standards that are substantially similar to those that would apply if the banking entity engaged in the activities directly.671 As an alternative, the agencies could have adopted a credit fund exclusion that restricted permissible assets to only loans or debt instruments and not equity. The SEC recognizes that many banking entities are permitted to take as consideration for a loan to a borrower a warrant or option issued by the borrower that may result in an equity holding. The SEC recognizes that if banking entities are to be allowed to provide credit through a fund structure that they would otherwise be allowed to provide outside of a fund structure, an
allowance for equity holdings is necessary. However, allowing a credit fund to hold an unlimited amount of equity in connection with an extension of credit could turn the exclusion for credit funds into an exclusion for the type of funds that section 13 of the BHC Act was intended to address. Accordingly, the agencies indicate above that they generally expect that the equity securities or other rights acquired by a credit fund would not exceed five percent of the value of the fund’s total investment in a borrower at the time the investment is made. Venture Capital Funds As discussed above, the agencies are adopting amendments in the final rule to exclude certain venture capital funds from the definition of ‘‘covered fund,’’ which allow banking entities to acquire or retain an ownership interest in, or sponsor, those venture capital funds to the extent the banking entity is otherwise permitted to engage in such activities under applicable law.672 The exclusion is available with respect to qualifying venture capital funds, which includes an issuer that meets the definition of ‘‘venture capital fund’’ in 17 CFR 275.203(l)–1 and that meets several additional criteria.673 A qualifying venture capital fund is an issuer that, among other criteria, is a venture capital fund as defined in 17 CFR 275.203(l)–1.674 In the preamble to the regulations adopting this definition of venture capital fund, the SEC explained that the definition’s criteria distinguish venture capital funds from other types of funds, including private

675See, e.g., Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers With Less Than $150 Million in Assets Under Management, and Foreign Private Advisers, 76 FR 39645, 39652 (July 6, 2011). 676See id. at 39648 (‘‘[T]he proposed definition of venture capital fund was designed to . . . address concerns expressed by Congress regarding the potential for systemic risk.’’); and at 39656 (‘‘Congressional testimony asserted that these funds may be less connected with the public markets and may involve less potential for systemic risk. This appears to be a key consideration by Congress that led to the enactment of the venture capital exemption. As we discussed in the Proposing Release, the rule we proposed sought to incorporate this Congressional understanding of the nature of investments of a venture capital fund, and these principles guided our consideration of the proposed venture capital fund definition.’’). 677See id. at 39661–62. See also id. at 39657 (‘‘We proposed these elements of the qualifying portfolio company definition because of the focus on leverage in the Dodd-Frank Act as a potential contributor to systemic risk as discussed by the Senate Committee report, and the testimony before Congress that stressed the lack of leverage in venture capital investing.’’). 678See 85 FR 12168. 679See id. 680See id. 681See supra note 244. 682See supra note 270. 683The one change from the proposal is moving the requirement that the banking entity must comply with §§ll.14 to ll.10(c)(16)(ii). This change clarifies that this requirement applies to a banking entity that acts as sponsor, investment adviser, or commodity trading advisor to the qualifying venture capital fund and does not apply to a banking entity that merely invests in a qualifying venture capital fund. 684Final rule §ll.10(c)(16)(i). 685Final rule §ll.10(c)(16)(ii). 686Final rule §ll.10(c)(16)(iii). 687Final rule §ll.10(c)(16)(iv). 688See, e.g., Richard Florida, Venture Capital Remains Highly Concentrated in Just a Few Cities, CITYLAB (Oct. 3, 2017), available at https:// www.citylab.com/life/2017/10/venture-capitalconcentration/539775/; PRICEWATERHOUSECOOPERS & CB INSIGHTS, MoneyTree Report (Q3 2019), available at https:// www.pwc.com/us/en/moneytree-report/assets/ moneytree-report-q3-2019.pdf. 689See FSF; SIFMA; CCMC; and NVCA. equity funds and hedge funds.675 Moreover, the SEC explained that these criteria reflect the Congressional understanding that venture capital funds are less connected with the public markets and therefore may have less potential for systemic risk.676 The SEC further explained that the restriction on the amount of borrowing, debt obligations, guarantees or other incurrence of leverage are appropriate to differentiate venture capital funds from other types of private funds that may engage in trading strategies that use financial leverage and may contribute to systemic risk.677 The SEC believes that its definition includes criteria reflecting the
characteristics of venture capital funds that may pose less potential risk to a banking entity sponsoring or investing in venture capital funds and to the financial system—specifically, the smaller role of leverage financing and a lesser degree of interconnectedness with public markets. As discussed in the 2020 proposal, the SEC has received comments supporting an exclusion for venture capital funds and stating that venture capital funds do not commonly engage in short-term, high-risk activities, and that, by their nature, venture capital funds make long-term investments in private firms.678 Moreover, the SEC received comment that venture capital funds promote economic growth and competitiveness of the United States more effectively than investments in expressly permissible vehicles, such as small business investment companies.679 The SEC has also received comment that, by virtue of their investment strategy, long-term investment horizon, and intermediation between companies in need of capital and institutional investors seeking to deploy capital in efficient ways, venture capital funds may play a significant role in capital formation, economic growth, and efficient market function.680 In response to the 2020 proposal, the agencies received comments supporting the proposed definition of ‘‘qualifying venture capital fund.’’ 681 At the same time, two commenters expressed opposition to the 2020 proposal.682 The final rule largely adopts the exclusion as proposed.683 As adopted, the exclusion for qualifying venture capital funds is available to an issuer that is a venture capital fund as defined in 17 CFR 275.203(l)–1 and does not engage in any activity that would constitute proprietary trading, under § ll.3(b)(1)(i), as if it were a banking entity.684 With respect to any banking entity that acts as sponsor, investment adviser, or commodity trading advisor to the issuer, the banking entity is required (1) to provide in writing to any prospective and actual investor the disclosures required under § ll.11(a)(8), as if the issuer were a covered fund, (2) to ensure that the activities of the issuer are consistent with the safety and soundness standards that are substantially similar to those that would apply if the banking entity engaged in the activities directly, and (3) to comply with the restrictions in § ll.14 (except the banking entity may acquire and retain any ownership interest in the issuer), as if the issuer were a covered fund.685 As in the 2020 proposal, a banking entity that relies on the exclusion may not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or performance of the issuer.686 Finally, the banking entity’s ownership interest in or relationship with a qualifying venture capital fund must comply with the limitations imposed in § ll.15 of the implementing regulations (regarding, among other subjects, material conflicts of interest and high-risk investments), as if the issuer were a covered fund; and
must be conducted in compliance with and subject to, applicable banking laws and regulations, including applicable safety and soundness standards.687 The qualifying venture capital fund exclusion being adopted may provide banking entities with greater flexibility in their investments in private firms generally and in private firms with a broader range of financing sources, in each case to the extent that those investments are made through a fund structure. In addition, it is widely noted that the availability of venture capital and other financing from funds is not uniform throughout the United States and is generally available on a competitive basis for companies with a significant presence in certain geographic regions (e.g., the New York metropolitan area, the Boston metropolitan area, and ‘‘Silicon Valley’’ and surrounding areas).688 This view was shared by several commenters on the 2020 proposal, who indicated that an exclusion for venture capital funds would benefit underserved regions where venture capital funding is not readily available currently.689 In this respect, the qualifying venture capital fund exclusion could allow banking entities with a presence in and knowledge of the areas where venture capital and other types of financing are less readily available to businesses to provide this type of financing in those areas, further promoting capital formation. The SEC remains cognizant of the fact that the overall level and structure of activities of banking entities that involve risk stems from a variety of permissible sources, including traditional capital provision, underwriting, and market-making. To the degree that qualifying venture capital funds may enable greater formation of capital by banking entities, this may influence the risks and returns of such funds individually and of banking entities as a whole. However, the exclusion has a number of conditions, including a prohibition on direct or indirect guarantees by the banking entity, disclosures to investors, and compliance with applicable safety and soundness standards. The SEC recognizes that venture capital funds commonly invest in

690See 2019 amendments, 84 FR 62037–92. 691Final rule §ll.10(c)(11)(i). 692See 85 FR 12169. 693See id. 694See 85 FR 12131. 695See id. 696See SIFMA; BPI; ABA; PNC; and SBIA. illiquid private firms with few sources of market price information, with corresponding risks and returns. To the degree that the exclusion for qualifying venture capital funds facilitates banking entity activities related to venture capital funds, this exclusion could increase the volume and alter the structure of banking entities’ activities, affecting the risks associated with those activities. At the same time, as discussed elsewhere,690 many other traditional and permissible activities of banking entities involve risk, and the provision of capital to private firms is an important function of banking entities within the financial system and securities markets that benefits the real economy. As an alternative, the agencies considered an additional restriction for which they are requested specific comment as part of the 2020 proposal. Under this additional restriction, and notwithstanding 17 CFR 275.203(1)– 1(a)(2), the venture capital fund exclusion would be limited to funds that do not invest in companies that, at the time of the investment, have more than a limited dollar amount of total annual revenue. The agencies considered several alternative thresholds that could have been appropriate in this regard to further differentiate qualifying venture capital funds from other types of private funds. The potential benefit of including a revenue or other similar test is that it could have been more difficult for banking entities to use the exclusion to make investments through the fund that the agencies may not have intended to be permissible. However, any such antievasion benefits of this alternative could have been offset by the extent to which anti-evasion concerns are already addressed by the other conditions of the exclusion. In addition, such a revenue test or other similar test could have facilitated the indirect investment by banking entities in smaller companies that may have been particularly risky or would have required qualifying venture capital funds to pass up investment opportunities that would otherwise be considered typical venture capital-type investments. Such an additional restriction as contemplated in the alternative would have made it more difficult for banking entities to sponsor and invest in qualifying venture capital funds by limiting the pool of possible investments in which those funds could invest. This difficulty may have been particularly pronounced for banking entities that would use the qualifying venture capital fund exclusion to make investments in third-party funds, which may not have been willing to restrict— and could have been prohibited from restricting under other applicable laws—the fund’s investments in companies that met any such revenue or other similar test. As a result, such an additional condition could have diminished the
benefits discussed above, both by limiting the utility of the exclusion for banking entities to make permissible investments and potentially reducing the availability of financing for businesses, including small businesses and start-ups in areas outside of certain major metropolitan areas. Small Business Investment Companies The implementing regulations exclude from the covered fund definition small business investment companies. The implementing regulations include within the scope of the exclusion SBICs and issuers that have received notice to proceed to qualify for a license as an SBIC and which have not received a revocation of the notice or license. The final rule expands the exclusion to incorporate SBICs that have voluntarily surrendered their licenses to operate and do not make new investments (other than investments in cash equivalents) after such voluntary surrender.691 Clarifying that SBICs that have voluntarily surrendered their licenses and are winding-down remain excluded from the covered fund definition reduces regulatory uncertainty for banking entities. Under the implementing regulations, because it is unclear whether an SBIC that has voluntarily surrendered its license is still excluded from the definition of ‘‘covered fund,’’ banking entities must make a determination whether or not the SBIC that is winding-down is a covered fund. If the banking entity determines that when the SBIC that is winding-down and has voluntarily surrendered its license no longer qualifies for the exclusion from the covered fund definition, then the implementing regulations apply and the banking entity’s existing investment in, and relationship with, the SBIC is prohibited. This potential result may discourage banking entities from making investments in SBICs. The 2020 proposal discussed comments the SEC had received indicating that the 2013 rule had limited banking entity activities in SBICs that may spur economic growth, and that banking entities faced significant regulatory burdens that are not commensurate with the risk of the underlying activities.692 Another commenter indicated that, in the ordinary course of business, SBIC fund managers often relinquish or voluntarily surrender a license during the winddown of the fund while liquidating assets in the dissolution process (since the license is no longer necessary or an efficient use of partnership funds).693 The agencies proposed revising the exclusion for SBICs to clarify how the exclusion would apply to SBICs that voluntarily surrender their licenses during wind-down phases.694 Specifically, the agencies proposed revising the exclusion for SBICs to apply explicitly to an issuer that has voluntarily surrendered its license to operate as an SBIC and does not make new investments (other than investments in cash equivalents) after such voluntary surrender.695 Most commenters that directly addressed the 2020 proposal’s revisions concerning SBICs supported the proposed revisions, stating that the
proposed revisions would provide greater certainty to banking entities wishing to invest in SBICs and would increase investment in small businesses.696 The final rule adopts the 2020 proposal’s revisions concerning SBICs without modification. SBICs are an important mechanism for capital allocation by banking entities and one important channel of capital raising for issuers. The final rule clarifies that banking entities are able to continue to participate in SBIC-related activities during the dissolution of such funds, as long as certain conditions are met. To the degree that banking entities have been reluctant to invest in SBICs to avoid the risk of an SBIC being treated as a covered fund during SBIC dissolution, the final rule may increase the willingness of some banking entities to participate in SBICs. The final rule requires that SBICs that have voluntarily surrendered their license may not make new investments during the wind-down process. This aspect of the final rule seeks to address the possibility of banking entities becoming exposed to greater risk as part of their participation in SBICs during their wind-down process, even though such exposure may not be common in an SBIC’s ordinary course of business. In any case, both the risks and the returns arising out of a banking entity’s investment in a SBIC at all stages of its lifecycle are

697 Implementing regulations §ll.10(c)(11)(ii)(A). 698See 85 FR 12169. 699See id. 700See id. 701See id. 702See Final rule §ll.10(c)(11)(ii)(A). 703See SIFMA; FSF; and SBIA. 704See supra note 575. 705See supra note 576. 706See U.S. Dep’t of Agriculture, Rural Business Investment Program Overview, available at http:// www.rd.usda.gov/programs-services/rural-businessinvestment-program. 707SBICs are intended to increase access to capital for growth stage businesses. See U.S. Small Bus. Admin., SBIC Program Overview, available at https://www.sba.gov/partners/sbics. 708See supra note 578. The private fund adviser exemption excludes the assets of RBICs and SBICs from counting towards the $150 million threshold. 15 U.S.C. 80b–3(m). 709 In addition, RBICs may be excluded from the definition of ‘‘covered fund’’ under the qualifying venture capital fund exclusion in the final rule. See supra note 578. 710See SIFMA; FSF; and ABA. 711Final rule §ll.10(c)(11)(iv). 712See Opportunity Zone Statement, supra note 581. likely to flow through to the banking entity’s shareholders. Moreover, banking entities participating in SBICs remain subject to applicable safety and soundness regulations and requirements. Public Welfare Funds The implementing regulations exclude from the definition of ‘‘covered fund’’ issuers that make investments that are designed primarily to promote the public welfare, of the type permitted under paragraph 11 of section 5136 of the Revised Statutes of the United States (12 U.S.C. 24), including the welfare of low- and moderate-income communities or families (such as providing housing, services, or jobs) (public welfare investment exclusion).697 As discussed in the 2020 proposal, the SEC has received comment that the implementing regulations’ exclusion for public welfare funds may not capture community development investments made through investment vehicles and comment supporting an exclusion of investments that qualify for Community Reinvestment Act (CRA) credit, including direct and indirect investments in a community development fund, SBIC, or similar fund.698 The 2020 proposal posed a number of questions related to the scope of the public welfare investment exclusion. For example, the 2020 proposal asked whether investments that would receive consideration as qualified investments under the regulations implementing the CRA should be excluded from the definition of covered fund, either by incorporating these investments into the public welfare investment exclusion or by establishing a new exclusion for CRA-qualifying investments.699 In addition, the 2020 proposal requested comment on whether RBICs are typically excluded from the definition of ‘‘covered fund’’ because of the public welfare investment exclusion or another exclusion and on whether the agencies should expressly exclude RBICs from the definition of covered fund.700 Finally, the 2020 proposal requested comment on whether many or all QOFs would meet the terms of the public
welfare investment exclusion and on whether the agencies should expressly exclude QOFs from the definition of covered fund.701 The final rule revises the public welfare investment exclusion of the implementing regulations to incorporate issuers explicitly, the business of which is to make investments that qualify for consideration under the regulations implementing the CRA.702 To the degree that some banking entities have faced uncertainty about their ability to make CRA-qualified investments and qualify for the exclusion, the explicit exclusion for such funds may increase the willingness of banking entities to intermediate such community development investments. At the same time, to the degree that banking entities have financed community development projects eligible for the CRA through other fund structures and have relied on corresponding exemptions, the economic effects of the explicit exclusion for CRA-qualified investments may be limited to the difference in compliance burdens between the new explicit exclusion and any existing covered fund exclusions. Commenters on the 2020 proposal generally favored explicitly excluding RBICs from the definition of ‘‘covered fund,’’ either by adopting a new exclusion, or by further clarifying the scope of the public welfare investment exclusion.703 The final rule provides a separate specific exclusion for RBICs, similar to the separate, specific exclusion for SBICs.704 As discussed elsewhere,705 RBICs are intended to promote economic development and the creation of wealth and job opportunities in rural areas and among individuals living in such areas,706 and their purpose is similar to the purpose of SBICs and public welfare companies.707 Because SBICs and RBICs share the common purpose of promoting capital formation in their respective sectors, advisers to SBICs and RBICs are treated similarly under the Advisers Act (in that they have the opportunity to take advantage of exemptions from investment adviser registration).708 The final rule’s specific exclusion for RBICs should expand the economic effects of the SBIC exclusion discussed above and may facilitate capital formation by banking entities in growth stage businesses. The SEC understands that RBICs may already have been excluded from the definition of covered fund under the implementing regulations.709 For example, RBICs may qualify for the public welfare exclusion under the implementing regulations or may not be a covered fund by virtue of relying on an exclusion from the definition of ‘‘investment company’’ under the Investment Company Act other than
section 3(c)(1) or 3(c)(7). An express
exclusion for RBICs nevertheless should reduce compliance costs for banking entities, which may otherwise have been required to conduct a case-by-case analysis of each RBIC to determine whether it qualifies for an exclusion or exemption under the implementing regulations. In response to a request for comment in the 2020 proposal, commenters generally favored explicitly excluding QOFs from the definition of ‘‘covered fund.’’ 710 The final rule provides a specific exclusion for QOFs similar to that provided to RBICs.711 As discussed above, the QOF program allows taxpayers to defer and reduce taxes on capital gains by reinvesting gains in QOFs that are required to have at least 90 percent of their assets in designated low-income zones. In this regard, QOFs are similar to SBICs and public welfare companies. The QOF exclusion should expand the economic effects of the SBIC exclusion and public welfare exclusion discussed above, and may facilitate capital formation by banking entities. QOFs already may have been excluded from the definition of covered fund under the implementing regulations. For example, QOFs may qualify for the public welfare exclusion under the implementing regulations or may not be covered funds by virtue of relying on an exclusion from the definition of ‘‘investment company’’ under the Investment Company Act other than section 3(c)(1) or 3(c)(7), such as section 3(c)(5)(C).712 In addition, depending on the facts and circumstances, an issuer that holds securities issued by a QOF may not meet the definition of ‘‘investment company’’ under section 3(a)(1) of the Investment Company Act, may be excluded under Rule 3a–1 thereunder, or may qualify for the exclusion under

713See id.
714See 85 FR 12170.
715See id.
716See id.
717See 85 FR 12170.
718See, e.g., Goldman Sachs; FSF; CCMR; IAA; ABA; BPI; PNC; and SIFMA. 719See Data Boiler. 720See supra Section IV.C.3. (Family Wealth Management Vehicles). 721See final rule §ll.10(c)(17)(i). 722See final rule §ll.10(c)(17)(i)(C). 723See final rule §ll.10(c)(17)(ii)(A). 724See final rule §ll.10(c)(17)(ii)(B). 725The disclosure 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 entity. See final rule §ll.10(c)(17)(ii)(C). 726See final rule §ll.10(c)(17)(ii)(E). 727See final rule §ll.10(c)(17)(ii)(F). 728See final rule §ll.10(c)(17)(iii)(B).
section 3(c)(6) of the Investment
Company Act.713 The express exclusion for QOFs, similar to the express exclusion for RBICs, should reduce compliance costs for banking entities, which may otherwise be required to conduct a case-by-case analysis of each QOF to determine whether it qualifies for an exclusion or exemption under the implementing regulations. Family Wealth Management Vehicles As discussed in the 2020 proposal, family wealth management vehicles commonly engage in asset management activities, as well as estate planning and other related activities.714 The SEC understands that some banking entities may have been constrained in providing traditional banking and asset management services, including, for example, investment advice, brokerage execution, financing, clearing, and settlement services, to family wealth management vehicles due to the implementing regulations.715 In addition, the SEC understands that certain family wealth management vehicles that are structured as trusts may prefer to appoint banking entities as trustees acting in a fiduciary capacity.716 In the 2020 proposal, the agencies requested comment on whether to exclude family wealth management vehicles from the definition of ‘‘covered fund.’’ 717 Several commenters supported this exclusion, stating generally that it would reduce uncertainty for banking entities about the permissibility of providing traditional banking, investment management, and trust and estate planning services to family wealth management vehicle clients.718 As discussed above, the agencies are adopting an exclusion from the definition of ‘‘covered fund’’ for any entity that acts as a ‘‘family wealth management vehicle.’’ By specifically excluding family wealth management vehicles, the final rule may benefit such banking entities and their family customers by permitting the banking entities to offer services to and engage in transactions with family wealth management vehicle customers. Importantly, the final rule may benefit family wealth management vehicles and their investment advisers by increasing the number of banking entity counterparties willing to provide traditional client-oriented financial and asset management services. Thus, the final rule may enhance competition among banking and non-banking entities providing financial services to family wealth management vehicles and may lead to more efficient capital allocation of family wealth management vehicles’ funds. To the degree banking entities pass compliance costs on to customers, family wealth vehicles may experience costs savings from the final rule as well. Some commenters on the 2020 proposal opposed the exclusion for family wealth management vehicles. One commenter stated that rather than providing an exclusion for family wealth management vehicles through an agency rulemaking, the agencies should instead provide no-action relief to such vehicles on a case-by-case basis.719 The SEC believes that such an approach would be unnecessarily burdensome and difficult to
administer. The compliance costs of such an approach could impact the willingness of banking entities to provide traditional clientoriented financial and asset management services to their family customers. This approach would also unnecessarily deviate from the agencies’ treatment of other excluded entities under the implementing regulations and hinder transparency and consistency. The SEC recognizes that some banking entities may respond to the exclusion by seeking to structure other entities as family wealth management vehicles. However, as discussed in detail above, the exclusion is only available under a number of conditions.720 Specifically, if the entity is a trust, the grantor(s) of the entity must all be family customers; if the entity is not a trust, a majority of the voting interests in the entity must be owned (directly or indirectly) by family customers, a majority of the interests in the entity must be owned by family customers, and the entity must be owned only by family customers and up to five closely related persons of the family customers.721 Moreover, up to an aggregate 0.5 percent of the family wealth management vehicle’s outstanding ownership interests may be acquired or retained by one or more entities that are not family customers or closely related persons for the purpose of and to the extent necessary for establishing corporate separateness or addressing bankruptcy, insolvency, or similar concerns.722 In addition, banking entities may rely on this exclusion only if they: (1) Provide bona fide trust, fiduciary, investment advisory, or commodity trading advisory services to the entity; 723 (2) do not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or performance of such entity; 724 (3) comply with the disclosure obligations under § ll.11(a)(8), as if such entity 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 entity; 725 (4) comply with the requirements of §§ ll.14(b) and ll.15, as if such entity were a covered fund; 726 and (5) except for riskless principal transactions as defined in §ll.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.727 The definition of ‘‘family customer’’ includes any ‘‘family client’’ as defined in Rule 202(a)(11)(G)–1(d)(4) of the Investment Advisers Act of 1940, and any natural person who is a father-inlaw, mother-in-law, brother-in-law, sister-in-law, son-in-law or daughter-inlaw of a family client, or a spouse or a spousal equivalent of any of the foregoing.728 The SEC believes that the conditions for the exclusion and the definition of ‘‘family customer’’ will result in family wealth management vehicles being used as vehicles for providing customer-oriented financial services on arms-length,
market terms, which the SEC believes will reduce the risk that banking entities’ involvement in these vehicles will give rise to the types of risks that the covered funds provisions are meant to mitigate. In the 2020 proposal, the agencies proposed to permit up to three closely related persons to hold ownership interests in a family wealth management vehicle. Several commenters supported allowing a finite number of closely related persons to hold ownership interests, but suggested that the proposed limit of three did not reflect the typical manner in which family

729See, e.g., BPI; SIFMA; ABA; and PNC. 730See, e.g., BPI; ABA; and PNC. 731See 85 FR 12139. 732See, e.g., SIFMA and BPI. 733See final rule §ll.10(c)(17)(ii)(F). 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). 734See, e.g., BPI and SIFMA. 735See, e.g., SIFMA. 736See, e.g., SIFMA and BPI. 737See, e.g., SIFMA. wealth management vehicles are constituted and would unnecessarily constrain the availability of the exclusion.729 The final rule allows for five closely related persons to hold ownership interests in a family wealth management vehicle. The agencies understand that many family wealth management vehicles currently include more than three closely related persons.730 The agencies believe that the final rule will more closely align the exclusion with the current composition of family wealth management vehicles, thereby increasing the utility of the exclusion without allowing such a large number of non-family customer owners to suggest the entity is in reality a hedge fund or private equity fund. In the 2020 proposal, a banking entity could rely on the family wealth management vehicle exclusion only if the banking entity and its affiliates did not acquire or retain, as principal, an ownership interest in the entity, other than up to 0.5 percent of the entity’s outstanding ownership interests. In addition, such de minimis interest could be held only for the purpose of and to the extent necessary for establishing corporate separateness or addressing bankruptcy, insolvency, or similar concerns.731 Some commenters requested that unaffiliated third parties—such as third-party trustees or similar service providers—be permitted to hold the de minimis interest.732 As adopted, the final rule allows up to an aggregate 0.5 percent of the vehicle’s outstanding ownership interests to be acquired or retained by third parties (that is, entities other than family customers or closely related persons). The SEC believes that permitting de minimis ownership by these third parties reflects a common structure of family wealth management vehicles. The SEC recognizes that without this modification, family wealth management vehicles may be forced to engage in less effective and/or efficient means of structuring and organization because the exclusion could limit the vehicle’s access to some customary service providers that have traditionally taken small ownership interests for structuring purposes. To the extent that a family customer prefers a particular person or entity to act as a service provider, allowing third-party service providers to acquire the de minimis ownership interest may enable the family customer to choose to establish a family wealth management vehicle. Whether the de minimis amount is held by a banking entity or some
other third party is not likely to raise any concerns that are not sufficiently addressed by the aggregate ownership limit and the narrow circumstances in which such de minimis ownership interest may be held. At the same time, when circumstances require that a de minimis ownership interest be held (e.g., for establishing corporate separateness), if the de minimis ownership interest is held by a third party and not a banking entity, then no banking entity will be exposed to any risk associated with holding the interest, however minimal that risk may be. In the 2020 proposal, banking entities could rely on the family wealth management vehicle exclusion only if the banking entity complied with the disclosure obligations under § ll.11(a)(8), as if such vehicle were a covered fund. Commenters on the 2020 proposal requested that the agencies clarify that the disclosures could be modified (1) to reflect the specific circumstances of the banking entity’s relationship with, and the particular structure of, its family wealth management vehicle clients; and (2) to allow the banking entity to satisfy the written disclosure requirement by means other than including such disclosures in the governing document(s) of the family wealth management vehicle(s). The final rule provides such clarity and change the disclosure requirement to permit banking entities and their affiliates (1) to modify the content of such disclosures to prevent them from being misleading and (2) to modify the manner of disclosure to accommodate the specific circumstances of the vehicle. The SEC believes that these disclosures will provide important information to the customers for whom these vehicles will be established. Because the final rule permits modification of the disclosures for certain reasons, the SEC expects that the disclosures provided to any particular family customer will be more accurate and better tailored to the particular circumstances of the family wealth management vehicle than the disclosures might have been under the 2020 proposal. These disclosures may result in the family customers being better able to understand the information included in these disclosures and being better able to weigh that information in determining whether to establish a family wealth management vehicle. To the extent that these tailored disclosures assist family customers in determining whether or how to structure a family wealth management vehicle, they may assist family customers in deciding how best to receive services from or otherwise interact with banking entities. The SEC expects that these benefits will justify any costs incurred by banking entities in tailoring the disclosures of § ll.11(a)(8) or in providing them to customers (either by including them in existing documents or preparing a new disclosure document). The agencies are adopting, with modifications, the condition requiring a banking entity relying on the exclusion for family wealth management vehicles to comply with the
requirements of 12 CFR 223.15(a), as if such banking entity were a member bank and the vehicle were an affiliate thereof.733 This condition prohibits banking entity purchases of low-quality assets from these vehicles and is intended to prevent banking entities from ‘‘bailing out’’ family wealth management vehicles. Several commenters on the 2020 proposal stated that the agencies should clarify 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 Regulation W—from family wealth management vehicles.734 According to these commenters, allowing a banking entity to engage in such riskless principal transactions would facilitate the family customer’s sale of assets,735 while posing minimal market or credit risk to the banking entity because the banking entity would purchase and sell the same asset contemporaneously.736 Furthermore, commenters stated that absent clarity on the permissiveness of riskless principal transactions, a family wealth management vehicle would be forced to obtain the services of a third party service provider to sell low quality assets, which in turn would increase the vehicle’s costs and operational complexity without providing a meaningful benefit to furthering the aims of section 13 of the BHC or the implementing regulations.737 The SEC believes that permitting a banking entity to engage in riskless principal transactions that involve the purchase of low-quality assets from a

738See supra Section IV.C.3. (Customer Facilitation Vehicles). 739See 85 FR 12171. 740See id. 741See id. 742See final rule §ll.10(c)(18)(i). 743Notwithstanding 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. See §ll.10(c)(18)(ii)(B). family wealth management vehicle is unlikely to pose a substantive risk of evading section 13 of the BHC Act. Accordingly, in a change from the 2020 proposal and in response to the concerns raised by commenters, the condition will explicitly exclude from the requirements of 12 CFR 223.15(a) transactions that meet the definition of riskless principal transactions as defined in § ll.10(d)(11). The SEC expects that, together, the adopted criteria for the family wealth management vehicle exclusion will prevent a banking entity from being able to bail out such 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 were intended to address. Alternative forms of relief with respect to family wealth management vehicles—for example, alternatives that define ‘‘family customers’’ more broadly or narrowly, or that remove some of the conditions for the exclusion—would have increased or reduced the availability of the exclusion relative to the final rule. Alternatively, the agencies could have amended the limitations on relationships with a covered fund to permit banking entity transactions with family wealth management vehicles that would otherwise be considered covered transactions (e.g., ordinary extensions of credit) without subjecting them to 12 CFR 223.15(a) or section 23B of the Federal Reserve Act, as if such banking entity were a member bank and such family wealth management vehicle were an affiliate thereof. Broader (narrower) alternative forms of relief may have increased (decreased) the magnitude of the economic benefits for capital formation, allocative efficiency, and the ability of banking entities to provide traditional customer oriented services to family wealth management vehicles. At the same time, such broader relief may have increased the risk that some banking entities would have responded to such relief by attempting to evade the intent of the rule, increasing the volume of their activities with family wealth management vehicles. Such risks of the alternatives, as compared to the exclusion contained in the final rule, may have been mitigated by the fact that banking entities would have remained subject to the full scope of broker-dealer and prudential capital, margin, and other rules aimed at facilitating safety and soundness. Nonetheless, by providing relief that is narrower than the
broader alternative, the final rule should reduce those possible risks even further. Moreover, as discussed above, the SEC believes that traditional banking and asset management services involving family wealth management vehicles in general do not involve the types of risks that section 13 of the BHC Act was designed to address.738 Accordingly, any narrower relief than that provided by the final rule with respect to family wealth management vehicles may have constrained the economic benefits of the final rule (including with respect to capital formation and allocative efficiency) unnecessarily. Customer Facilitation Vehicles As discussed in the 2020 proposal, the SEC has received comments that, because of the implementing regulations’ covered fund restrictions, some banking entities have been unable to engage in traditional banking and asset management services with respect to vehicles provided for customers, even though banking entities are otherwise able to provide such exposures and services to customers directly (outside of the fund structure).739 The SEC has also received comment that some clients, particularly clients in markets such as Brazil, Germany, Hong Kong, and Japan, prefer to transact with or through such vehicles rather than banking entities directly because of a variety of legal, counterparty risk management, and accounting factors.740 Moreover, the SEC is aware that limitations of the implementing regulations on the activities of such vehicles may have disrupted client relationships, reducing the efficiency of customer-facing financial services, and raising compliance costs of banking entities.741 The final rule establishes an exclusion from the definition of ‘‘covered fund’’ 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.742 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; 743 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 § ll.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 §§ ll.14(b) and ll.15, as if such issuer were a covered fund; and (vi) except for riskless principal transactions as defined in § ll.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. The exclusion in the final rule should reduce or eliminate the costs imposed by the implementing regulations that limit the services that banking entities can provide to customer facilitation vehicles, which in turn may limit the activities of these vehicles. These costs include those associated with the disruption of client relationships and the reduction in the efficiency of customer-facing financial services. The final rule should reduce these baseline costs and inefficiencies by allowing banking entities to provide customeroriented financial services through vehicles, the purpose of which is to provide such customers with exposure to a transaction, investment strategy, or other service. As a result, banking entities may become better able to engage in the full range of customer facilitation activities through special

744See, e.g., SIFMA; BPI; ABA; Credit Suisse; FSF; Goldman Sachs; and IAA. 745See, e.g., SIFMA; BPI; ABA; and Goldman Sachs. 746See, e.g., SIFMA; FSF; and SAF. 747See Better Markets and Data Boiler. 748See Better Markets. 749See final rule §ll.10(c)(18)(ii)(C)(3). 750See 85 FR 12139. 751See SIFMA; BPI; and FSF. 752See final rule §ll.10(c)(18)(ii)(B). 753Final rule §ll.10(c)(18)(ii)(B)(4). 754Final rule §ll.10(c)(18)(ii)(B)(2). 755Final rule §ll.10(c)(18)(ii)(B)(1). 756See supra note 585. 757See supra note 586. 758See supra note 587. 759See final rule §ll.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). purpose vehicles and fund structures, which could benefit banking entities, their customers, and securities markets more broadly. Most commenters on the 2020 proposal that addressed this exclusion were supportive,744 stating that it would provide banking entities with greater flexibility to meet client needs and objectives.745 Some commenters found the exclusion’s conditions to be reasonable and sufficient.746 However, two commenters recommended that the agencies impose additional limitations on the exclusion.747 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.748 In the 2020 proposal, banking entities could rely on the customer facilitation vehicle exclusion only if the banking entity complied with the disclosure obligations under § ll.11(a)(8), as if such vehicle were a covered fund. Commenters on the 2020 proposal requested that the agencies provide clarification in the context of family wealth management vehicles 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. As with family wealth management vehicles, the final rule includes a modification to the proposed exclusion clarifying that the content of the disclosure may be modified to accommodate the specific circumstances of the issuer.749 The SEC believes 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. As discussed above with respect to family wealth management vehicles, the SEC believes that the clarification in the final rule regarding permissible modifications of the disclosures required by §ll.11(a)(8) will provide benefits that will justify any
costs from tailoring and providing the disclosures. In the 2020 proposal, as with family wealth management vehicles, a banking entity could rely on the customer facilitation vehicle exclusion only if the banking entity and its affiliates did not acquire or retain, as principal, an ownership interest in the entity, other than up to 0.5 percent of the entity’s outstanding ownership interests. In addition, such de minimis interest could be held only for the purpose of and to the extent necessary for establishing corporate separateness or addressing bankruptcy, insolvency, or similar concerns.750 As with family wealth management vehicles, commenters suggested that the agencies specifically allow any party that is unaffiliated with the customer, rather than only the banking entity and its affiliates, to own this de minimis interest.751 As adopted, the final rule allows up to an aggregate 0.5 percent of the vehicle’s outstanding ownership interests to be acquired or retained by third parties (that is, entities other than the customer) 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.752 The SEC recognize that without this modification, customer facilitation vehicles may be forced to engage in less effective and/or efficient means of structuring and organization because the exclusion could limit the vehicle’s access to some customary service providers that have traditionally taken or may otherwise take small ownership interests for structuring purposes. To the extent that a customer prefers a particular person or entity to act as a service provider, allowing third-party service providers to acquire the de minimis ownership interest may make the customer more willing to establish a customer facilitation vehicle. Whether the de minimis amount is held by a banking entity or some other third party is not likely to raise any concerns that are not sufficiently addressed by the aggregate ownership limit and the narrow circumstances in which the de minimis ownership interest may be held. The SEC recognizes that the provision of financial services related to customer facilitation vehicles may involve market risk, and the exclusion in the final rule may enable banking entities to provide a greater array of financial services to, and otherwise transact with, such vehicles. The SEC believes that such risks may be mitigated by at least two of the conditions of the exclusion. First, similar to the family wealth management vehicle discussed above, other than the de minimis ownership interest, a banking entity and its affiliates may not acquire or retain, as principal, any ownership in interest in the issuer.753 Second, a banking entity and its affiliates may not directly or indirectly guarantee, assume, or otherwise insure the obligations or performance of the vehicle.754 These conditions, among the other
conditions of the exclusion, may mitigate risks that may be borne by individual banking entities and by banking entities as a whole as a result of the exclusion, and may facilitate banking entities’ ongoing compliance with section 13 of the BHC Act and the final rule. Moreover, the SEC continues to believe that the provision of customer-oriented financial services by banking entities may benefit customers, counterparties, and securities markets. The final rule creates new recordkeeping requirements for a banking entity that relies on the exclusion for customer facilitation vehicles.755 Specifically, the banking entity and its affiliates must maintain documentation outlining how the banking entity intends to facilitate the customer’s exposure to a transaction, investment strategy or service offered by the banking entity. As discussed in
Section V.B756 and above, these
recordkeeping burdens may impose a total initial burden of $1,078,650 757 and a total ongoing annual burden of 1,0798,650.758 The agencies are adopting, with modifications, the condition requiring a banking entity relying on the exclusion for customer facilitation vehicles to comply with the requirements of 12 CFR 223.15(a), as if such banking entity were a member bank and the vehicle were an affiliate thereof.759 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

760See 85 FR 12140.
761See 12 U.S.C. 1851(f)(1).
762See final rule §ll.14(a)(2)(iii). 763See final rule §ll.14(a)(2)(v). 764See final rule §ll.14(a)(2)(iv). 765See 85 FR 12144. 766As discussed above, the final rule includes a definition of riskless principal transaction that is similar to the definition adopted in Regulation W. To the extent these definitions are sufficiently similar, the SEC expects that compliance costs will be low for banking entities seeking to enter into riskless principal transactions with related covered funds. exclusions—to help ensure that the exclusions do not allow banking entities to ‘‘bail out’’ either vehicle.760 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) any transactions that meet the definition of riskless principal transactions as defined in § ll.10(d)(11). As with the discussion of family wealth management vehicles above, the SEC believes that the ability of a banking entity to engage in riskless principal transactions with a customer facilitation vehicle will lower costs for the vehicle by allowing it to avoid finding a third party to intermediate trades for low quality assets. At the same time, allowing these riskless principal transactions should not pose the type of risk to the banking entity that section 13 of the BHC Act was intended to prevent. The SEC expects that the conditions for the customer facilitation vehicle exclusion will prevent a banking entity from being able to bail out such 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 were intended to address. The agencies considered alternative forms of relief with respect to customer facilitation vehicles. For example, the agencies could have adopted a higher third party ownership limit (of, for example, 5% or 10%). Alternatively, the agencies could have adopted a 0.5% ownership interest limit, but without specifying a list of purposes for which such interest may be held, leading to banking entities accumulating greater ownership interests in such vehicles. As another example, the agencies could have adopted an exclusion for customer facilitation vehicles without subjecting the banking entity relying on the exclusion to 12 CFR 223.15(a) or section 23B of the Federal Reserve Act, as if such banking entity were a member bank and such customer facilitation vehicles were an affiliate thereof. Such alternatives would have removed or loosened the conditions of the exclusion, which may have increased the risk that customer facilitation vehicles could be used for evasion purposes or could have exposed banking entities to additional risk, but could also have further reduced compliance burdens and provided greater flexibility to banking entities and their customers.
ii. Limitations on Relationships
Between Banking Entities and Covered Funds As discussed above, under the implementing regulations, banking entities that either: (1) Serve, directly or indirectly, as a sponsor, investment adviser, commodity trading advisor, or investment manager to a covered fund; (2) organize and offer a covered fund under §ll.11; or (3) hold an ownership interest under § ll.11(b) have been unable to engage in any covered transactions with such funds.761 This prohibition may have limited the services that such banking entities and their affiliates have been able to provide to certain entities that are covered funds under the implementing regulations. For example, as noted above, banking entities have been significantly limited in their ability to both organize and offer a covered fund, as well as to provide custody or other services to the fund. 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.762 In addition, the final rule authorizes banking entities to engage in certain transactions, such as extensions of intraday credit for purchases of assets from covered funds in connection with payment, clearing, and settlement services.763 Finally, in a modification from the 2020 proposal, the final rule expressly permits banking entities to enter into certain riskless principal transactions with a related covered fund, including in circumstances where the covered fund is not a ‘‘securities affiliate.’’ 764 As discussed in the 2020 proposal, the SEC received comment suggesting that section 13(f)(1) of the BHC Act should be interpreted to include the exemptions provided under section 23A of the Federal Reserve Act, and that banking entities should be permitted to engage in a limited amount of covered transactions with related covered funds.765 The SEC recognizes that outsourcing such activities to third parties may have adversely affected customer relationships, increasing costs and decreasing operational efficiency for banking entities and covered funds. The final rule provides banking entities greater flexibility to provide these and other services directly to covered funds. If being able to provide custody, clearing, and other services to related covered funds reduces the costs of these services and risks of operational failure of fund custodians, then fund advisers and, indirectly, fund investors, may benefit from the final rule. Many direct benefits are likely to accrue to banking entity advisers to covered funds that have been relying on third-party service providers as a result of the requirements of the implementing regulations. The final rule includes a standalone provision that 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.’’ 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 SEC believes that providing a standalone exception will provide clarity and certainty to banking entities about the extent to which they are able to enter into riskless principal transactions with related covered funds. In addition, by permitting more riskless principal transactions than would have been the case under the 2020 proposal (i.e., those that do not or may not meet the criteria of Regulation W), the final rule may facilitate banking entities entering into more of these transactions than they would have, reducing the likelihood that the covered fund would incur additional costs in buying or selling securities.766 As described above, 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. Accordingly, the SEC does not believe that an increase in riskless principal transactions overall will increase the risks borne by any particular banking entity or banking entities in general. The final rule increases banking entities’ ability to engage in custody, clearing, and other transactions with related covered funds and will benefit banking entities that have been unable

767See supra Section IV.D. (Limitations on Relationships with a Covered Fund). 768See 85 FR 12172. 769See final rule §ll.14(a)(2)(iv)(B). 770See supra note 435. 771See implementing regulations §ll.10(d)(6)(i)(A). See also supra Section IV.E.1. (Ownership Interest). 772See 85 FR 12173. 773See id. 774See id. 775See id. 776See final rule §ll.10(d)(6)(i)(A)(1). 777See final rule §ll.10(d)(6)(i)(A)(2). 778See SIFMA. to engage in otherwise profitable or efficient activities with related covered funds. Moreover, this may enhance operational efficiency and reduce operational risks and costs incurred by covered funds, which have been unable to rely on banking entities with which they have certain relationships for custody, clearing, and other transactions. As discussed above, reducing operational risk as well as the interconnectedness between financial firms that would result from such services being provided by the banking entities and their affiliates, would promote the financial stability of the U.S. financial system.767 In the 2020 proposal, the SEC discussed a prior comment that opposed incorporating the Federal Reserve Act
section 23A exemptions or quantitative
limits.768 To the extent that the final rule may increase transactions between banking entities and related covered funds, banking entities could incur risks associated with these transactions. However, as discussed above, the final rule imposes a number of conditions aimed at reducing overall risks to banking entities, the ability of banking entities to lever up related covered funds, and the incentive of banking entities to bail out related covered funds, while enhancing their ability to provide ordinary-course banking, custody, and asset management services, and to facilitate capital formation in covered funds. The agencies could have adopted broader or narrower forms of relief. For example, in addition to the relief under the final rule, the agencies could have permitted banking entities to engage in additional covered transactions in connection with payment, clearing, and settlement services beyond extensions of credit and purchases of assets. Further, under the final rule, each extension of credit must be repaid, sold, or terminated by the end of five business days.769 As another alternative, the agencies could have allowed extensions of credit in connection with payment transactions, clearing, or settlement services for periods that are longer than five business days. However, the five business day criteria is consistent with the federal banking agencies’ capital rule and generally requires banking entities to rely on transactions with normal settlement periods, which have lower risk of delayed settlement or failure, when providing short-term extensions of credit.770 In addition, the agencies could have imposed quantitative limits on the newly permitted covered transactions tied to bank capital or fund size. Relative to the final rule, alternatives providing greater relief with respect to covered transactions with covered funds could have magnified the cost savings and operational risk benefits described above, but may also have increased risk to banking entities or the incentives for banking entities to bail out related covered funds. Similarly, narrower alternative forms of relief may have dampened the economic effects of the final rule discussed above.
iii. Definition of Ownership Interest
As discussed above, the implementing regulations define ‘‘ownership interest’’ in a covered fund to mean any equity, partnership, or ‘‘other similar interest.’’ This definition focuses on the attributes of the interest and whether it provides a banking entity with voting rights or economic exposure to the profits and losses of the covered fund, rather than its form. ‘‘Other similar interest’’ is defined, in part, 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).’’ 771 As discussed in the 2020 proposal, the SEC has received comment that the implementing regulations’ definition of ownership interest has captured instruments that do not have equity-like features and constrained banking entity investments in debt securitizations and client facilitation services.772 For example, one commenter indicated that analyzing the ownership interest definition in the context of securitizations had resulted in added time and costs of executing transactions, as well as impeded securitization transactions.773 Moreover, the commenter indicated that the ‘‘other similar interest’’ prong of the definition precluded some banking entities from investing in collateralized loan obligation (CLO) senior debt instruments, which affects lending to CLOs, and that banking entities with pre-existing CLO exposures have had to waive credit-enhancing remedies to avoid triggering the ownership interest restrictions.774 In addition, the SEC received comment that the ownership interest definition in the implementing regulations may have required an extensive legal analysis and documentation review and that, as a result, some banking entities may have defaulted to treating interests without controlling positions or equity-like features as ownership interests.775 The final rule modifies the definition of ownership interest in several ways. First, the final rule moves the existing exclusion from the definition of ‘‘other similar interest’’ in §ll.10(d)(6)(A) (‘‘for the rights of a creditor to exercise remedies upon the occurrence of an event of default or an acceleration event’’) from the parenthetical to its own provision.776 The final rule also creates a new exclusion, for ‘‘the right to participate in the removal of an investment manager for ’’cause’’ or participate in the selection of a replacement manager upon an investment manager’s resignation or removal.’’ 777 Commenters on the 2020 proposal 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 exclusion 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.778 The final rule reflects those comments and provide clarity about the types of creditor rights that may attach to an interest without that interest being deemed an ownership interest. In particular, under § ll.10(d)(6)(A)(2), the definition of ownership interest does not
include rights of an interest that allows a creditor to participate in the removal of an investment manager for ‘‘cause.’’ The final rule defines ‘‘cause’’ for removal to mean one or more of the following events:
(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;

779See final rule §ll.10(d)(6)(ii)(B). 780See id. See also, supra Section IV.E.1. (Ownership Interest). 781See Occupy. 782See supra Section IV.F. (Parallel Investments) and references therein. 783See id. 784See 85 FR 12174. 785See final rule §ll.12(b)(5)(i). (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 final rule also modifies the definition of ownership interest to add to the list of interests that are excluded from the definition of ownership interest. Specifically, the final rule provides a safe harbor excluding any senior loan or senior debt interest that has specific characteristics.779 Those characteristics are: (1) Under the terms of the interest, the holders do not have the right to receive a share of the income, gains, or profits of the covered fund, but are entitled to receive only certain interest and fees, and repayment of a fixed principal amount on or before a maturity date in a contractuallydetermined manner (which may include prepayment premiums intended solely to reflect, and compensate holders of the interest for, forgone income resulting from an early prepayment); (2) the entitlement to payments is absolute and cannot be reduced because of the losses arising from the covered fund’s underlying assets; 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 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).780 The final rule should simplify the analysis banking entities must perform to determine whether they have an ownership interest under section 13 of the BHC Act and the final rule. Moreover, to the degree that banking entities may have responded to the ownership interest definition in the implementing regulations by reducing their investments in certain debt instruments, the final rule may result in greater banking entity investments in covered funds and a greater ability of covered funds to allocate capital to the
underlying assets. The SEC recognizes that such debt instrument investments carry risk,781 and that the risks and returns of such investments flow through to banking entities’ shareholders. While the final rule’s ownership interest definition may permit banking entities to increase exposures to certain debt instruments, three key considerations may mitigate the risks associated with such activities. First, the final rule does not change any of the applicable prudential capital, margin, or liquidity requirements intended to ensure safety and soundness of banking entities. Second, to the degree that the ownership interest definition has actually discouraged banking entities from obtaining credit enhancements to avoid triggering the ownership interest restrictions, the final rule may result in banking entities receiving credit enhancements that reduce the risk of the debt instrument or loan and are therefore stronger than what banking entities may have received in the absence of the final rule. Finally, the final rule includes a number of conditions and restrictions aimed at reducing the risk to banking entities while facilitating traditional lending activity. The agencies could have adopted broader relief by limiting the particular forms of a banking entity’s interest (e.g., equity or partnership shares) that would qualify as an ownership interest or by limiting the definition of ownership interest to ‘‘voting securities’’ as defined by the Board’s Regulation Y. By providing broader relief relative to the final rule, such an alternative may have produced greater reductions in uncertainty and compliance burdens, and a greater willingness of banking entities to become involved in certain debt transactions. However, such greater involvement in certain debt transactions may also have given rise to greater risks being borne by banking entities. The final rule is intended to provide sufficient safeguards and limitations to prevent banking entities from acquiring interests in covered funds that run counter to the intentions of the implementing regulations and limit a banking entity’s exposure to the economic risks of covered funds and their underlying assets, while reducing compliance uncertainty and increasing the willingness of banking entities to participate in covered funds.
iv. Parallel Investments
As discussed above, the preamble to the 2013 rule stated that if a banking entity makes investments side by side in substantially the same positions as a covered fund, then the value of such investments would be included for the purposes of determining the value of the banking entity’s investment in the covered fund.782 The agencies also stated that a banking entity that sponsors a covered fund should not make any additional side-by-side coinvestment with the covered fund in a privately negotiated investment unless the value of such co-investment is less than three percent of the value of the total amount co-invested by other investors in such investment.783 As discussed in the 2020 proposal, the SEC has received comment that argued the implementing regulations should not impose a limit on parallel investments and noted that such a restriction is not reflected in the text of the 2013 rule.784 The final rule includes a rule of construction that (1) a banking entity will not be required to include in the calculation of the investment limits under §ll.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, and (2) a banking entity shall not be restricted 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.785 The SEC recognizes that this rule of construction may increase the incentive for banking entities to make parallel investments alongside a covered fund that is organized and offered by the banking entity for the purposes of artificially maintaining or increasing the value of the fund’s positions. Supporting a fund with a direct investment in such a manner would increase these banking entities’ exposures to the covered fund’s assets and, as discussed above, could be inconsistent with the final rule’s restriction on a banking entity guaranteeing, assuming, or otherwise

786 Id.
787See supra note 784.
788See id.
789For example, the final rule could result in additional venture capital being available in geographic areas where it has been relatively less available. See supra Section V.F.3.i. (Venture Capital Funds). insuring the obligations or performance of such covered fund.786 Further, as stated above, the agencies would expect that any investments made alongside a covered fund by a director or employee of a banking entity or its affiliate, if made 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 an 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. The SEC recognizes that the rule of construction may remove a restriction on investments made alongside a covered fund that may have interfered with banking entities’ ability to make otherwise permissible investments directly on their balance sheets.787 In particular, the rule of construction may allow banking entities to make parallel investments alongside their covered funds without including the value of those parallel investments within the ownership limits imposed on a banking entity. Similarly, the rule of construction may provide clarity to banking entities such that they will not be prevented from making investments alongside their covered funds, as long as those investments are otherwise permissible under applicable laws and regulations.788 In addition to removing impediments for banking entities’ otherwise permissible investments, the rule of construction in the final rule may enable banking entities to make investments alongside a covered fund that will credibly signal the banking entity’s view of the quality of the investment(s) to investors in the fund, and may also help align the incentives of banking entities, and their directors and employees, with those of the covered funds and their investors.
4. Efficiency, Competition, and Capital
Formation
As discussed above, the final rule excludes certain groups of private funds and other entities from the scope of the covered fund definition and modifies other covered fund restrictions applicable to banking entities subject to the final rule. Moreover, the final rule reduces compliance obligations of banking entities subject to the final rule. The SEC believes that the final rule may impact competition, capital formation, and allocative efficiency. The final rule may have three groups of competitive effects. First, the final rule may make it easier for bank affiliated broker-dealers, SBSDs, and RIAs to compete with bank unaffiliated broker-dealers, SBSDs, and RIAs in their activities with certain groups of private funds and other entities. Second, the final rule may reduce competitive disparities between banking entities subject to the final rule and affected by the final rule, and banking entities that are not. Third, certain aspects of the final rule (such as those related to foreign excluded funds and foreign public funds) may reduce competitive disparities between U.S. banking entities and foreign banking entities in their covered fund activities. Because competition may reduce costs or increase quality, and because some affected banking entities may face economies of scale or scope in the provision of services to certain private funds, these competitive effects may flow through to customers, clients, and investors in the form of reduced transaction costs and greater quality of private fund and other offerings and related financial services. The final rule may also impact capital formation. For example, by reducing the scope of application of covered fund restrictions in the final rule, the final rule relaxes restrictions related to banking entity underwriting and market-making of certain private funds. Moreover, the final rule modifies certain restrictions related to banking entity relationships with certain covered funds. Further, as discussed above, the final rule enables banking entities to engage indirectly (through a fund structure) in certain of the same activities that they are currently able to engage in directly (extending credit or direct ownership stakes). To the degree that the implementing regulations impede or otherwise constrain banking entity activities in such funds, the final rule may result in a greater number of such private funds being launched by banking entities, increasing capital formation via private funds. The effects of the final rule on capital formation are likely to flow through to investors (in the form of greater availability or variety or private funds available for investors) as well as an increase in the supply of capital available to firms seeking to raise capital or obtain financing from private funds.789 The possible effects of the final rule on allocative efficiency are related to the final rule’s likely impact on capital formation. Specifically, as discussed above, the SEC believes that the final
rule may result in a greater number and variety of private funds launched by banking entities. To the degree that banking entities may be able to provide superior private funds due to their expertise or economies of scale or scope, and to the degree that fund structures may be more efficient than direct investments (due to, e.g., superior risk sharing and pooling of expertise across fund investors), the final rule may enhance the ability of market participants, investors, and issuers to allocate their capital efficiently. The SEC recognizes that the final rule may increase the ability of banking entities to engage in certain types of activities involving risk, and that increases in risk exposures of large groups of banking entities may negatively impact capital formation, securities markets, and the real economy, particularly during times of adverse economic conditions. Moreover, losses on investment portfolios may discourage capital market participation by various groups of investors. Three important considerations may mitigate these potential risks. First, as discussed throughout this economic analysis, banking entities already engage in a variety of permissible activities involving risk, including extensions of credit, underwriting, and marketmaking, and the activities of many types of private funds that are excluded under the final rule largely replicate permissible and traditional activities of banking entities. Second, banking entities subject to the final rule may also be subject to multiple prudential capital, margin, and liquidity requirements that facilitate the safety and soundness of banking entities and promote financial stability. Third, the additional exclusions from the definition of covered fund each include a number of conditions aimed at preventing evasion of section 13 of the BHC Act and the final rule, promoting safety and soundness, and/or allowing for customer oriented financial services provided on arms-length, market terms. Under the final rule, a banking entity is not prohibited from acquiring or retaining an ownership interest in, or acting as sponsor to, a covered fund if the banking entity organizes or offers the covered fund and satisfies other requirements. One such requirement is that the banking entity provide specified disclosures to prospective and actual

790 Implementing regulations §ll.11(a)(8). investors in the covered fund.790 Under the final rule, banking entities must provide the disclosures specified by § ll.11(a)(8) to satisfy the exclusions for family wealth management vehicles and customer facilitation vehicles and to satisfy the exclusions for credit funds and venture capital funds if the banking entity is a sponsor, investment adviser, or commodity trading advisor of the fund. To the extent that the final rule leads banking entities to establish or provide services to more of these vehicles, the volume of information available to market participants could increase. Specifically, if banking entities respond to the final rule by establishing or providing services to more of these vehicles because they are excluded from the definition of ‘‘covered fund,’’ then the amount of such disclosures would increase accordingly. Importantly, the magnitude of all of the above effects on competition, capital formation, and allocative efficiency will be influenced by a large number of factors, such as prevailing macroeconomic conditions, the financial condition of firms seeking to raise capital, and of funds seeking to transact with banking entities, market saturation, and search for higher yields by investors during low interest rate environments. Moreover, the relative efficiency between fund structures and the direct provision of capital is likely to vary widely among banking entities and funds. The SEC recognizes that such economic effects may be dampened or magnified in different phases of the macroeconomic cycle and across various types of banking entities. G. Congressional Review Act For the OCC, Board, FDIC, SEC, and CFTC, the Office of Information and Regulatory Affairs, pursuant to the Congressional Review Act, has designated this rule as a ‘‘major rule’’ as defined by 5 U.S.C. 804(2). List of Subjects 12 CFR Part 44 Banks, Banking, Compensation, Credit, Derivatives, Government securities, Insurance, Investments, National banks, Penalties, Reporting and recordkeeping requirements, Risk, Risk retention, Securities, Trusts and trustees. 12 CFR Part 248 Administrative practice and procedure, Banks, banking, Conflict of interests, Credit, Foreign banking, Government securities, Holding companies, Insurance, Insurance companies, Investments, Penalties, Reporting and recordkeeping requirements, Securities, State nonmember banks, State savings associations, Trusts and trustees. 12 CFR Part 351 Banks, Banking, Capital, Compensation, Conflicts of interest, Credit, Derivatives, Government securities, Insurance, Insurance companies, Investments, Penalties, Reporting and recordkeeping requirements, Risk, Risk retention, Securities, Trusts and trustees. 17 CFR Part 75 Banks, Banking, Compensation, Credit, Derivatives, Federal branches and agencies, Federal savings associations, Government securities, Hedge funds, Insurance, Investments, National banks, Penalties, Proprietary trading, Reporting and
recordkeeping requirements, Risk, Risk retention, Securities, Swap dealers, Trusts and trustees, Volcker rule. 17 CFR Part 255 Banks, Brokers, Dealers, Investment advisers, Recordkeeping, Reporting, Securities. DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency 12 CFR Chapter I Authority and Issuance For the reasons stated in the Common Preamble, the Office of the Comptroller of the Currency amends chapter I of title 12, Code of Federal Regulations as follows:
PART 44—PROPRIETARY TRADING
AND CERTAIN INTERESTS IN AND RELATIONSHIPS WITH COVERED FUNDS

1. The authority citation for part 44
  continues to read as follows:
  Authority: 7 U.S.C. 27 et seq., 12 U.S.C. 1, 24, 92a, 93a, 161, 1461, 1462a, 1463, 1464, 1467a, 1813(q), 1818, 1851, 3101, 3102, 3108, 5412. Subpart B—Proprietary Trading
1. Amend § 44.6 by adding paragraph
  (f) to read as follows:
  § 44.6 Other permitted proprietary trading activities.

(f) Permitted trading activities of qualifying foreign excluded funds. The prohibition contained in § 44.3(a) does not apply to the purchase or sale of a financial instrument by a qualifying foreign excluded fund. For purposes of this paragraph (f), a qualifying foreign excluded fund means a banking entity that:
(1) Is organized or established outside the United States, and the ownership interests of which are offered and sold solely outside the United States; (2)(i) Would be a covered fund if the entity were organized or established in the United States, or (ii) Is, or holds itself out as being, an entity or arrangement that raises money from investors primarily for the purpose of investing in financial instruments for resale or other disposition or otherwise trading in financial instruments; (3) Would not otherwise be a banking entity except by virtue of the acquisition or retention of an ownership interest in, sponsorship of, or relationship with the entity, by another banking entity that meets the following:
(i) The banking entity is not organized, or directly or indirectly controlled by a banking entity that is organized, under the laws of the United States or of any State; and (ii) The banking entity’s acquisition or retention of an ownership interest in or sponsorship of the fund meets the requirements for permitted covered fund activities and investments solely outside the United States, as provided in § 44.13(b); (4) Is established and operated as part of a bona fide asset management business; and (5) Is not operated in a manner that enables the banking entity that sponsors or controls the qualifying foreign excluded fund, or any of its affiliates, to evade the requirements of section 13 of the BHC Act or this part. Subpart C—Covered Funds Activities and Investments

3. Amend § 44.10 by:
a. Revising paragraph (c)(1);
b. Revising paragraph (c)(3)(i);
c. Revising paragraph (c)(8);
d. Revising the heading of paragraph
(c)(10) and revising paragraph (c)(10)(i);
e. Revising paragraph (c)(11);
f. Adding paragraphs (c)(15), (16),
(17), and (18);
g. Revising paragraph (d)(6); and
h. Adding paragraph (d)(11).
The revisions and additions read as follows:
§ 44.10 Prohibition on acquiring or retaining an ownership interest in and having certain relationships with a covered fund.

(A) Is organized or established outside of the United States; and (B) Is authorized to offer and sell ownership interests, and such interests are offered and sold, through one or more public offerings. (ii) With respect to a banking entity that is, or is controlled directly or indirectly by a banking entity that is, located in or organized under the laws of the United States or of any State and any issuer for which such banking entity acts as sponsor, the sponsoring banking entity may not rely on the exemption in paragraph (c)(1)(i) of this
section for such issuer unless more than
75 percent of the ownership interests in the issuer are sold to persons other than:
(A) Such sponsoring banking entity; (B) Such issuer; (C) Affiliates of such sponsoring banking entity or such issuer; and (D) Directors and senior executive officers as defined in § 225.71(c) of the Board’s Regulation Y (12 CFR 225.71(c)) of such entities. (iii) For purposes of paragraph (c)(1)(i)(B) of this section, the term ‘‘public offering’’ means a distribution (as defined in § 44.4(a)(3)) of securities in any jurisdiction outside the United States to investors, including retail investors, provided that:
(A) The distribution is subject to substantive disclosure and retail investor protection laws or regulations; (B) With respect to an issuer for which the banking entity serves as the investment manager, investment adviser, commodity trading advisor, commodity pool operator, or sponsor, the distribution complies with all applicable requirements in the jurisdiction in which such distribution is being made; (C) The distribution does not restrict availability to investors having a minimum level of net worth or net investment assets; and (D) The issuer has filed or submitted, with the appropriate regulatory authority in such jurisdiction, offering disclosure documents that are publicly available.

(3) * * *
(i) Is composed of no more than 10 unaffiliated co-venturers;

(8) Loan securitizations. (i) Scope. An issuing entity for asset-backed securities that satisfies all the conditions of this paragraph (c)(8) and the assets or holdings of which are composed solely of:
(A) Loans as defined in § 44.2(t); (B) Rights or other assets designed to assure the servicing or timely distribution of proceeds to holders of such securities and rights or other assets that are related or incidental to purchasing or otherwise acquiring and holding the loans, provided that each asset that is a security (other than special units of beneficial interest and collateral certificates meeting the requirements of paragraph (c)(8)(v) of this section) meets the requirements of paragraph (c)(8)(iii) of this section; (C) Interest rate or foreign exchange derivatives that meet the requirements of paragraph (c)(8)(iv) of this section; (D) Special units of beneficial interest and collateral certificates that meet the requirements of paragraph (c)(8)(v) of this section; and (E) Debt securities, other than assetbacked securities and convertible securities, provided that:
(1) The aggregate value of such debt securities does not exceed five percent of the aggregate value of loans held under paragraph (c)(8)(i)(A) of this
section, cash and cash equivalents held
under paragraph (c)(8)(iii)(A) of this
section, and debt securities held under
this paragraph (c)(8)(i)(E); and (2) The aggregate value of the loans, cash and cash equivalents, and debt securities for purposes of this paragraph is calculated at par value at the most recent time any such debt security is acquired, except that the issuing entity may instead determine the value of any such loan, cash equivalent, or debt security based on its fair market value if:
(i) The issuing entity is required to use the fair market value of such assets for purposes of calculating compliance with concentration limitations or other similar calculations under its transaction agreements, and (ii) The issuing entity’s valuation methodology values similarly situated assets consistently. (ii) Impermissible assets. For purposes of this paragraph (c)(8), except as permitted under paragraph (c)(8)(i)(E) of this section, the assets or holdings of the issuing entity shall not include any of the following:
(A) A security, including an assetbacked security, or an interest in an equity or debt security other than as permitted in paragraphs (c)(8)(iii), (iv), or (v) of this section; (B) A derivative, other than a derivative that meets the requirements of paragraph (c)(8)(iv) of this section; or (C) A commodity forward contract. (iii) Permitted securities. Notwithstanding paragraph (c)(8)(ii)(A) of this section, the issuing entity may hold securities, other than debt securities permitted under paragraph (c)(8)(i)(E) of this section, if those securities are:
(A) Cash equivalents—which, for the purposes of this paragraph, means high quality, highly liquid investments whose maturity corresponds to the securitization’s expected or potential need for funds and whose currency corresponds to either the underlying loans or the asset-backed securities—for purposes of the rights and assets in paragraph (c)(8)(i)(B) of this section; or (B) Securities received in lieu of debts previously contracted with respect to the loans supporting the asset-backed securities. (iv) Derivatives. The holdings of derivatives by the issuing entity shall be limited to interest rate or foreign exchange derivatives that satisfy all of the following conditions:
(A) The written terms of the derivatives directly relate to the loans, the asset-backed securities, the contractual rights or other assets described in paragraph (c)(8)(i)(B) of this section, or the debt securities described in paragraph (c)(8)(i)(E) of this
section; and
(B) The derivatives reduce the interest rate and/or foreign exchange risks related to the loans, the asset-backed securities, the contractual rights or other assets described in paragraph (c)(8)(i)(B) of this section, or the debt securities described in paragraph (c)(8)(i)(E) of this
section.
(v) Special units of beneficial interest and collateral certificates. The assets or holdings of the issuing entity may include collateral certificates and special units of beneficial interest issued by a special purpose vehicle, provided that:
(A) The special purpose vehicle that issues the special unit of beneficial interest or collateral certificate meets the requirements in this paragraph (c)(8); (B) The special unit of beneficial interest or collateral certificate is used for the sole purpose of transferring to the issuing entity for the loan securitization the economic risks and benefits of the assets that are permissible for loan securitizations under this paragraph (c)(8) and does not directly or indirectly transfer any interest in any other economic or financial exposure; (C) The special unit of beneficial interest or collateral certificate is created solely to satisfy legal requirements or otherwise facilitate the structuring of the loan securitization; and (D) The special purpose vehicle that issues the special unit of beneficial interest or collateral certificate and the

issuing entity are established under the direction of the same entity that initiated the loan securitization.

(10) Qualifying covered bonds. (i) Scope. An entity owning or holding a dynamic or fixed pool of loans or other assets as provided in paragraph (c)(8) of this section for the benefit of the holders of covered bonds, provided that the assets in the pool are composed solely of assets that meet the conditions in paragraph (c)(8)(i) of this section.

(11) SBICs and public welfare investment funds. An issuer:
(i) That is a small business investment company, as defined in section 103(3) of the Small Business Investment Act of 1958 (15 U.S.C. 662), or that has received from the Small Business Administration notice to proceed to qualify for a license as a small business investment company, which notice or license has not been revoked, or that has voluntarily surrendered its license to operate as a small business investment company in accordance with 13 CFR
107.1900 and does not make any new
investments (other than investments in cash equivalents, which, for the purposes of this paragraph, means high quality, highly liquid investments whose maturity corresponds to the issuer’s expected or potential need for funds and whose currency corresponds to the issuer’s assets) after such voluntary surrender; (ii) The business of which is to make investments that are:
(A) Designed primarily to promote the public welfare, of the type permitted under paragraph (11) of section 5136 of the Revised Statutes of the United States (12 U.S.C. 24), including the welfare of low- and moderate-income communities or families (such as providing housing, services, or jobs) and including investments that qualify for consideration under the regulations implementing the Community Reinvestment Act (12 U.S.C. 2901 et seq.); or (B) Qualified rehabilitation expenditures with respect to a qualified rehabilitated building or certified historic structure, as such terms are defined in section 47 of the Internal Revenue Code of 1986 or a similar State historic tax credit program; (iii) That has elected to be regulated or is regulated as a rural business investment company, as described in 15 U.S.C. 80b–3(b)(8)(A) or (B), or that has terminated its participation as a rural business investment company in accordance with 7 CFR 4290.1900 and does not make any new investments (other than investments in cash equivalents, which, for the purposes of this paragraph, means high quality, highly liquid investments whose maturity corresponds to the issuer’s expected or potential need for funds and whose currency corresponds to the issuer’s assets) after such termination; or (iv) That is a qualified opportunity fund, as defined in 26 U.S.C. 1400Z– 2(d).

(15) Credit funds. Subject to paragraphs (c)(15)(iii), (iv), and (v) of this section, an issuer that satisfies the asset and activity requirements of paragraphs (c)(15)(i) and (ii) of this
section.
(i) Asset requirements. The issuer’s assets must be composed solely of:
(A) Loans as defined in § 44.2(t); (B) Debt instruments, subject to paragraph (c)(15)(iv) of this section; (C) Rights and other assets that are related or incidental to acquiring, holding, servicing, or selling such loans or debt instruments, provided that:
(1) Each right or asset held under this paragraph (c)(15)(i)(C) that is a security is either:
(i) A cash equivalent (which, for the purposes of this paragraph, means high quality, highly liquid investments whose maturity corresponds to the issuer’s expected or potential need for funds and whose currency corresponds to either the underlying loans or the debt instruments); (ii) A security received in lieu of debts previously contracted with respect to such loans or debt instruments; or (iii) An equity security (or right to acquire an equity security) received on customary terms in connection with such loans or debt instruments; and (2) Rights or other assets held under this paragraph (c)(15)(i)(C) of this
section may not include commodity
forward contracts or any derivative; and (D) Interest rate or foreign exchange derivatives, if:
(1) The written terms of the derivative directly relate to the loans, debt instruments, or other rights or assets described in paragraph (c)(15)(i)(C) of this section; and (2) The derivative reduces the interest rate and/or foreign exchange risks related to the loans, debt instruments, or other rights or assets described in paragraph (c)(15)(i)(C) of this section. (ii) Activity requirements. To be eligible for the exclusion of paragraph (c)(15) of this section, an issuer must:
(A) Not engage in any activity that would constitute proprietary trading under § 44.3(b)(l)(i), as if the issuer were a banking entity; and (B) Not issue asset-backed securities. (iii) Requirements for a sponsor, investment adviser, or commodity trading advisor. A banking entity that acts as a sponsor, investment adviser, or commodity trading advisor to an issuer that meets the conditions in paragraphs (c)(15)(i) and (ii) of this section may not rely on this exclusion unless the banking entity:
(A) Provides in writing to any prospective and actual investor in the issuer the disclosures required under § 44.11(a)(8) of this subpart, as if the issuer were a covered fund; (B) Ensures that the activities of the issuer are consistent with safety and soundness standards that are substantially similar to those that would apply if the banking entity engaged in the activities directly; and (C) Complies with the limitations imposed in § 44.14, as if the issuer were a covered fund, except the banking entity may acquire and retain any ownership interest in the issuer. (iv) Additional Banking Entity Requirements. A banking entity may not rely on this exclusion with respect to an issuer that meets the conditions in paragraphs (c)(15)(i) and (ii) of this
section unless:
(A) The banking entity does not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or performance of the issuer or of any entity to which such issuer extends credit or in which such issuer invests; and (B) Any assets the issuer holds pursuant to paragraphs (c)(15)(i)(B) or (i)(C)(1)(iii) of this section would be permissible for the banking entity to acquire and hold directly under applicable federal banking laws and regulations. (v) Investment and Relationship Limits. A banking entity’s investment in, and relationship with, the issuer must:
(A) Comply with the limitations imposed in § 44.15, as if the issuer were a covered fund; and (B) Be conducted in compliance with, and subject to, applicable banking laws and regulations, including applicable safety and soundness standards. (16) Qualifying venture capital funds. (i) Subject to paragraphs (c)(16)(ii) through (iv) of this section, an issuer that:
(A) Is a venture capital fund as defined in 17 CFR 275.203(l)–1; and (B) Does not engage in any activity that would constitute proprietary trading under § 44.3(b)(1)(i), as if the issuer were a banking entity. (ii) A banking entity that acts as a sponsor, investment adviser, or commodity trading advisor to an issuer

that meets the conditions in paragraph (c)(16)(i) of this section may not rely on this exclusion unless the banking entity:
(A) Provides in writing to any prospective and actual investor in the issuer the disclosures required under § 44.11(a)(8), as if the issuer were a covered fund; (B) Ensures that the activities of the issuer are consistent with safety and soundness standards that are substantially similar to those that would apply if the banking entity engaged in the activities directly; and (C) Complies with the restrictions in § 44.14 as if the issuer were a covered fund (except the banking entity may acquire and retain any ownership interest in the issuer). (iii) The banking entity must not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or performance of the issuer. (iv) A banking entity’s ownership interest in or relationship with the issuer must:
(A) Comply with the limitations imposed in § 44.15, as if the issuer were a covered fund; and (B) Be conducted in compliance with, and subject to, applicable banking laws and regulations, including applicable safety and soundness standards. (17) Family wealth management vehicles. (i) Subject to paragraph (c)(17)(ii) of this section, any entity that is not, and does not hold itself out as being, an entity or arrangement that raises money from investors primarily for the purpose of investing in securities for resale or other disposition or otherwise trading in securities, and:
(A) If the entity is a trust, the grantor(s) of the entity are all family customers; and (B) If the entity is not a trust:
(1) A majority of the voting interests in the entity are owned (directly or indirectly) by family customers; (2) A majority of the interests in the entity are owned (directly or indirectly) by family customers; (3) The entity is owned only by family customers and up to 5 closely related persons of the family customers; and (C) Notwithstanding paragraph (c)(17)(i)(A) and (B) of this section, up to an aggregate 0.5 percent of the entity’s outstanding ownership interests may be acquired or retained by one or more entities that are not family customers or closely related persons 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. (ii) A banking entity may rely on the exclusion in paragraph (c)(17)(i) of this
section with respect to an entity
provided that the banking entity (or an affiliate):
(A) Provides bona fide trust, fiduciary, investment advisory, or commodity trading advisory services to the entity; (B) Does not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or performance of such entity; (C) Complies with the disclosure obligations under § 44.11(a)(8), as if such entity 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 entity; (D) Does not acquire or retain, as principal, an ownership interest in the entity, other than as described in paragraph (c)(17)(i)(C) of this section; (E) Complies with the requirements of §§ 44.14(b) and 44.15, as if such entity were a covered fund; and (F) Except for riskless principal transactions as defined in paragraph (d)(11) of this section, complies 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. (iii) For purposes of paragraph (c)(17) of this section, the following definitions apply:
(A) Closely related person means a natural person (including the estate and estate planning vehicles of such person) who has longstanding business or personal relationships with any family customer. (B) Family customer means:
(1) A family client, as defined in Rule 202(a)(11)(G)–1(d)(4) of the Investment Advisers Act of 1940 (17 CFR 275.202(a)(11)(G)–1(d)(4)); or (2) Any natural person who is a father-in-law, mother-in-law, brother-inlaw, sister-in-law, son-in-law or daughter-in-law of a family client, or a spouse or a spousal equivalent of any of the foregoing. (18) Customer facilitation vehicles. (i) Subject to paragraph (c)(18)(ii) of this
section, an 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. (ii) A banking entity may rely on the exclusion in paragraph (c)(18)(i) of this
section with respect to an issuer
provided that:
(A) 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; (B) Notwithstanding paragraph (c)(18)(ii)(A) of this section, 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; and (C) The banking entity and its affiliates:
(1) Maintain documentation outlining how the banking entity intends to facilitate the customer’s exposure to such transaction, investment strategy, or service; (2) Do not, directly or indirectly, guarantee, assume, or otherwise insure the obligations or performance of such issuer; (3) Comply with the disclosure obligations under § 44.11(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; (4) Do not acquire or retain, as principal, an ownership interest in the issuer, other than as described in paragraph (c)(18)(ii)(B) of this section; (5) Comply with the requirements of §§ 44.14(b) and 44.15, as if such issuer were a covered fund; and (6) Except for riskless principal transactions as defined in paragraph (d)(11) of this section, comply with the requirements of 12 CFR 223.15(a), as if such banking entity and its affiliates were a member bank and the issuer were an affiliate thereof.

(d) * * *
(6) Ownership interest. (i) Ownership interest means any equity, partnership, or other similar interest. An ‘‘other similar interest’’ means an interest that:
(A) Has the right to participate in the selection or removal of a general partner, managing member, member of the board of directors or trustees, investment manager, investment adviser, or commodity trading advisor of the covered fund, excluding:
(1) The rights of a creditor to exercise remedies upon the occurrence of an

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