46422 Federal Register / Vol. 85, No. 148 / Friday, July 31, 2020 / Rules and Regulations
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 making-
related 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
VerDate Sep<11>2014 20:59 Jul 30, 2020 Jkt 250001 PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 E:\FR\FM\31JYR4.SGM 31JYR4
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 making-
related 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
VerDate Sep<11>2014 20:59 Jul 30, 2020 Jkt 250001 PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 E:\FR\FM\31JYR4.SGM 31JYR4
46423Federal Register / Vol. 85, No. 148 / Friday, July 31, 2020 / Rules and Regulations
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).
6 Prohibitions 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).
7 Proposed 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).
8 Prohibitions 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.
11 Prohibitions 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 staff-
level 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
VerDate Sep<11>2014 20:59 Jul 30, 2020 Jkt 250001 PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 E:\FR\FM\31JYR4.SGM 31JYR4
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).
6 Prohibitions 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).
7 Proposed 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).
8 Prohibitions 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.
11 Prohibitions 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 staff-
level 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
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