Revisions to Prohibitions and Restrictions on Proprietary Trading and Certain Interests In, and Relationships With, Hedge Funds and Private Equity Funds
| Published date | 22 July 2019 |
| Citation | 84 FR 35008 |
| Record Number | 2019-15019 |
| Section | Rules and Regulations |
| Court | Federal Reserve System,The Comptroller Of The Currency Office |
Federal Register, Volume 84 Issue 140 (Monday, July 22, 2019)
[Federal Register Volume 84, Number 140 (Monday, July 22, 2019)]
[Rules and Regulations]
[Pages 35008-35022]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-15019]
[[Page 35008]]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 44
[Docket ID OCC-2018-0029]
RIN 1557-AE47
FEDERAL RESERVE SYSTEM
12 CFR Part 248
[Docket No. R-1643]
RIN 7100-AF33
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 351
RIN 3064-AE88
COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 75
RIN 3038-AE72
SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 255
[Release no. BHCA-6; File no. S7-30-18]
RIN 3235-AM43
Revisions to 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 (OCC), Treasury;
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 rules.
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SUMMARY: The OCC, Board, FDIC, SEC, and CFTC are adopting final rules
to amend the regulations implementing the Bank Holding Company Act's
prohibitions and restrictions on proprietary trading and certain
interests in, and relationships with, hedge funds and private equity
funds (commonly known as the Volcker Rule) in a manner consistent with
the statutory amendments made pursuant to certain sections of the
Economic Growth, Regulatory Relief, and Consumer Protection Act
(EGRRCPA). The EGRRCPA amendments and the final rules exclude from
these prohibitions and restrictions certain firms that have total
consolidated assets equal to $10 billion or less and total trading
assets and liabilities equal to five percent or less of total
consolidated assets. The EGRRCPA amendments and the final rules also
revise the restrictions applicable to the naming of a hedge fund or
private equity fund to permit an investment adviser that is a banking
entity to share a name with the fund under certain circumstances.
DATES: These final rules are effective on July 22, 2019.
FOR FURTHER INFORMATION CONTACT:
OCC: Roman Goldstein, Risk Specialist, Treasury and Market Risk
Policy, 202-649-6360; Tabitha Edgens, Senior Attorney; Mark O'Horo,
Senior Attorney, Chief Counsel's Office, (202) 649-5510; 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, Constance Horsley, Deputy Associate Director, (202) 452-5239,
Cecily Boggs, Senior Financial Institution Policy Analyst, (202) 530-
6209, David Lynch, Deputy Associate Director, (202) 452-2081, 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, [email protected], Michael E.
Spencer, Chief, Capital Markets Strategies, [email protected],
Andrew D. Carayiannis, Senior Policy Analyst, [email protected], or
Brian Cox, Capital Markets Policy Analyst, [email protected], Capital
Markets Branch, (202) 898-6888; Michael B. Phillips, Counsel,
[email protected], Benjamin J. Klein, Counsel, [email protected], or
Annmarie H. Boyd, Counsel, [email protected], Legal Division, Federal
Deposit Insurance Corporation, 550 17th Street NW, Washington, DC
20429.
SEC: Andrew R. Bernstein, Senior Special Counsel, Sam Litz,
Attorney-Adviser, Aaron Washington, Special Counsel, or Carol McGee,
Assistant Director, at (202) 551-5870, Office of Derivatives Policy and
Trading Practices, Division of Trading and Markets, and Matthew Cook,
Senior Counsel, Benjamin Tecmire, Senior Counsel, and Jennifer Songer,
Branch Chief, at (202) 551-6787 or [email protected], Division of
Investment Management, U.S. Securities and Exchange Commission, 100 F
Street NE, Washington, DC 20549.
CFTC: Cantrell Dumas, Special Counsel, (202) 418-5043,
[email protected]; Jeffrey Hasterok, Data and Risk Analyst, (646) 746-
9736, [email protected], Division of Swap Dealer and Intermediary
Oversight; Mark Fajfar, Assistant General Counsel, (202) 418-6636,
[email protected], Office of the General Counsel; Stephen Kane, Research
Economist, (202) 418-5911, [email protected], Office of the Chief
Economist; Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. Background
Section 13 of the Bank Holding Company Act of 1956 (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, subject to certain exemptions.\2\
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\1\ 12 U.S.C. 1851.
\2\ See id.
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Under the statute, authority for developing and adopting
regulations to implement the prohibitions and restrictions of section
13 of the BHC Act is shared among the OCC, Board, FDIC, SEC, and CFTC
(the agencies).\3\ The agencies adopted final rules implementing
section 13 of the BHC Act in December 2013 (the 2013 final rule).\4\
The agencies recently proposed amendments to these rules to provide
clarity about what activities are prohibited, and to improve
supervision
[[Page 35009]]
and implementation of section 13 of the BHC Act.\5\
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\3\ See 12 U.S.C. 1851(b)(2). Under section 13(b)(2)(B) of the
BHC Act, rules implementing section 13's prohibitions and
restrictions must be issued by: (i) The appropriate Federal banking
agencies (i.e., the Board, the OCC, and the FDIC), jointly, with
respect to insured depository institutions; (ii) the Board, with
respect to any company that controls an insured depository
institution, or that is treated as a bank holding company for
purposes of section 8 of the International Banking Act, any nonbank
financial company supervised by the Board, and any subsidiary of any
of the foregoing (other than a subsidiary for which an appropriate
Federal banking agency, the SEC, or the CFTC is the primary
financial regulatory agency); (iii) the CFTC with respect to any
entity for which it is the primary financial regulatory agency, as
defined in section 2 of the Dodd-Frank Act; and (iv) the SEC with
respect to any entity for which it is the primary financial
regulatory agency, as defined in section 2 of the Dodd-Frank Act.
See id.
\4\ See ``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).
\5\ See ``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).
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The Economic Growth, Regulatory Relief, and Consumer Protection Act
(EGRRCPA) amended section 13 of the BHC Act by modifying the definition
of ``banking entity'' to exclude certain community banks and their
affiliates from section 13's restrictions and by permitting an
investment adviser that is a banking entity to share a name with a
hedge fund or private equity fund that the banking entity organizes and
offers under certain circumstances.\6\
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\6\ See Economic Growth, Regulatory Relief, and Consumer
Protection Act, Public Law 115-174, sections 203, 204 (May 24,
2018). These provisions were effective upon EGRRCPA's enactment.
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Prior to the enactment of EGRRCPA, the definition of ``banking
entity,'' for purposes of section 13 of the BHC Act, included any
insured depository institution, as defined in the Federal Deposit
Insurance Act (FDI Act),\7\ any company that controls an insured
depository institution, or that is treated as a bank holding company
for purposes of section 8 of the International Banking Act of 1978
(IBA), and any affiliate or subsidiary of such entity (excluding from
the term insured depository institution certain insured depository
institutions that function solely in a trust or fiduciary capacity,
subject to a variety of conditions).\8\
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\7\ Section 3(c)(2) of the FDI Act defines an insured depository
institution to include any bank or savings association the deposits
of which are insured by the FDIC under the FDI Act. 12 U.S.C.
1813(c)(2).
\8\ 12 U.S.C. 1813(c)(2), 1851(h)(1).
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Section 203 of EGRRCPA, entitled ``Community bank relief,''
modified the scope of the term ``banking entity'' to exclude certain
community banks and their affiliates. Specifically, under section 203,
the term ``insured depository institution'' no longer includes any
institution that does not have, and is not controlled by a company that
has: (i) More than $10 billion in total consolidated assets; and (ii)
total trading assets and trading liabilities, as reported on the most
recent applicable regulatory filing filed by the institution, that are
more than 5 percent of total consolidated assets. Therefore, an insured
depository institution and its affiliates generally are not ``banking
entities'' if the insured depository institution and each affiliated
insured depository institution meets the statutory exclusion.\9\
However, EGRRCPA did not amend the definition of ``banking entity'' as
it relates to a company that is treated as a bank holding company for
purposes of section 8 of the IBA. Accordingly, the statutory exclusion
does not apply to a foreign banking organization with a U.S. branch or
agency, which continues to be subject to the prohibitions in section 13
of the BHC Act.
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\9\ Section 203 amended section 13(h)(1)(B) of the BHC Act by
excluding certain institutions from the term ``insured depository
institution'' exclusively for the purposes of section 13. Insured
banks and savings associations that qualify for this exclusion for
the purposes of section 13 of the BHC Act remain insured depository
institutions under section 3(c)(2) of the FDI Act. Additionally, an
institution that meets the criteria to be excluded from the
definition of insured depository institution under EGRRCPA may still
be a banking entity by virtue of its affiliation with another
insured depository institution or a company that is treated as a
bank holding company under section 8 of the IBA.
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Section 204 of EGRRCPA revised the restrictions applicable to the
naming of a hedge fund or private equity fund \10\ to permit an
investment adviser that is a banking entity to share a name with the
fund under certain circumstances. Prior to enactment of EGRRCPA,
section 13 provided that a banking entity (or an affiliate of the
banking entity), including an investment adviser, that organized and
offered a hedge fund or private equity fund could not share the same
name or a variation of the same name with the fund (the name-sharing
restriction).\11\ Section 204 of EGRRCPA amended the name-sharing
restriction to permit a hedge fund or private equity fund organized and
offered by a banking entity to share the same name or a variation of
the same name as a banking entity that is an investment adviser to the
hedge fund or private equity fund, if: (1) The investment adviser is
not an insured depository institution, a company that controls an
insured depository institution, or a company that is treated as a bank
holding company for purposes of section 8 of the IBA; \12\ (2) the
investment adviser does not share the same name or a variation of the
same name with any such entities; and (3) the name does not contain the
word ``bank.''
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\10\ The terms ``hedge fund'' and ``private equity fund'' are
defined at 12 U.S.C. 1851(h)(2). See also 12 CFR 44.10(b); 12 CFR
248.10(b); 12 CFR 351.10(b); 17 CFR 255.10(b); 17 CFR 75.10(b)
(defining ``covered fund'' for purposes of the 2013 final rule).
\11\ 12 U.S.C. 1851(d)(1)(G)(vi) (2017).
\12\ 12 U.S.C. 3106.
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On February 8, 2019, the agencies published a notice of proposed
rulemaking (the proposal) to revise the 2013 final rule consistent with
the EGRRCPA statutory amendments.\13\ For the reasons discussed below,
the agencies are now adopting the proposal as final without change.
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\13\ ``Proposed Revisions to Prohibitions and Restrictions on
Proprietary Trading and Certain Interests in, and Relationships
With, Hedge Funds and Private Equity Funds,'' 84 FR 2778 (Feb. 8,
2019).
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II. Description of the Final Rules
A. Definition of Banking Entity
Consistent with the proposal, the agencies are modifying the
definition of ``insured depository institution'' in Sec. __.2(r) of
the 2013 final rule to conform that definition with section 203 of
EGRRCPA. Under this revised definition, an insured depository
institution must satisfy two conditions for it and its affiliates to
qualify for the exclusion. First, the insured depository institution,
and every entity that controls it, must have total consolidated assets
equal to or less than $10 billion. Second, total consolidated trading
assets and liabilities of the insured depository institution, and every
entity that controls it, must be equal to or less than five percent of
its total consolidated assets.
Trade associations representing large commercial banks, community
banks, and credit unions all generally supported the agencies' proposal
to implement the community bank relief provision under section 203 of
EGRRCPA.\14\ Some commenters cited, among other considerations, the
statute's plain meaning, legislative history, and policy considerations
for their support of the proposal.\15\ Certain other commenters
suggested that section 203 extended relief to firms with either $10
billion or less in total consolidated assets or trading assets and
liabilities equal to 5 percent or less of total consolidated
assets.\16\ Under these commenters' view of section 203, many banks
with total consolidated assets well over $10 billion, including certain
global systemically important banks (G-SIBs) with over $250 billion in
total consolidated assets, would be exempt from section 13 of the BHC
Act.
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\14\ See American Bankers Association; Independent Community
Bankers of America; National Association of Federally-Insured Credit
Unions; California Bankers Association.
\15\ Los Huertos and Mount; National Association of Federally-
Insured Credit Unions.
\16\ See Competitive Enterprise Institute; Competitive
Enterprise Institute et al.; Luetkemeyer; Matthew Thomas.
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After considering these comments, the agencies are not persuaded by
the argument that the exclusion under section 203 of EGRRCPA extends to
institutions with total consolidated assets in excess of $10 billion.
The agencies believe that the statute requires an institution to
satisfy both criteria to qualify for the exclusion. This approach
[[Page 35010]]
is most consistent with the statutory language of EGRRCPA, the
congressional intent behind the statute, and the structure of the
statute as a whole.
The agencies note that Section 203 of EGRRCPA, is entitled
``Community bank relief,'' and that numerous floor statements made by
senators contemporaneously with passage of the legislation in the
Senate on a bipartisan basis indicated that section 203 was only
intended to exclude community banks and their affiliates.\17\ Moreover,
the Senate Banking Committee's summary of section 203 describes it as
exempting banking entities that have total consolidated assets of $10
billion or less and total trading assets and trading liabilities that
are five percent or less of total consolidated assets.\18\ For these
reasons, the agencies are adopting without change the proposed
revisions to the banking entity definition.
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\17\ See, e.g., 164 Cong. Rec. S1696 at S1701, S1720, S1724-25
(Mar. 14, 2018).
\18\ See S. 2155, Section-By-Section, as Passed by Senate,
United State Senate Committee on Banking and Urban Affairs (March
14, 2018).
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Some commenters requested that, for purposes of determining whether
trading assets and liabilities are within the five percent threshold,
the agencies limit their review to an institution's most recent
applicable regulatory filing.\19\ These commenters requested that the
agencies not review all ``available information,'' as suggested in the
preamble to the proposal,\20\ because such information could be at
variance with the trading assets and/or liabilities figure(s) reported
in the most recent applicable regulatory filing. These commenters also
requested that the agencies confirm that section 203 of EGRRCPA is
self-effectuating and that no additional action is required by the
agencies for the community bank exclusion to take effect.
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\19\ See American Bankers Association; California Bankers
Association. Another commenter requested that the agencies provide
additional clarity for the purposes of determining which
institutions qualify for the relevant exclusion. See Grimm. That
commenter also requested further clarity with respect to the changes
made to the name-sharing restriction pursuant to section 204 of
EGRRCPA.
\20\ The preamble to the proposal stated that ``the Agencies
would expect to use available information, including information
reported on regulatory reporting forms available to each Agency,
with respect to whether financial institutions qualify for the
exclusion.'' 84 FR 2781.
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The agencies confirm that a bank or savings association seeking to
determine its eligibility for the exclusion may use its most recent
quarterly Consolidated Report of Condition and Income (call report) as
the source of data for its consolidated assets and its total trading
assets and liabilities at the bank or savings association level.
Similarly, a banking organization may use the most recent filing of the
Board's FR Y-9C by its holding company as the source of data about the
consolidated assets and total trading assets and liabilities of the
companies controlling the bank or savings association. Generally, the
agencies believe that most current FR Y9-SP filers will be able to
determine eligibility for the exclusion based on the call report data
filed by their affiliated insured depository institution(s). All
entities that seek to rely on the community bank exclusion should
assure themselves that all affiliated banks or savings associations and
holding companies satisfy the total consolidated assets and trading
asset and liability thresholds. As the agencies noted in the proposal,
institutions that meet the eligibility requirements under section 203
of EGRRCPA are no longer subject to the requirements of section 13 of
the BHC Act, and no additional action by the agencies is required for
the exclusion to take effect.
Two commenters requested that the agencies provide clarification
that certain securities held by banks or savings associations and their
holding companies are not within the category of ``trading assets'' for
purposes of determining eligibility for the exclusion.\21\ As described
above, the call report or FR Y-9C, as applicable, may be used as the
source of data for purposes of determining compliance with the total
assets and trading asset and liability thresholds. Institutions should
classify assets and liabilities consistent with the instructions to the
relevant report in consultation with appropriate supervisors, as
necessary.
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\21\ American Bankers Association (securities reported as
available-for-sale); Bessemer Group, Inc. (mutual fund shares held
to hedge nonqualified compensation plan liabilities).
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One commenter requested that the agencies generally clarify that
securities held as available-for-sale do not count towards the trading
assets and liabilities threshold.\22\ The call report and FR Y-9C
require reporting an institution's available-for-sale securities
separately from the institution's trading assets. Accordingly,
securities appropriately classified as available-for-sale and excluded
from trading assets on an institution's call report or FR Y-9C will not
count toward an institution's trading assets and liabilities threshold.
Another commenter requested that the agencies address the
classification of securities held in connection with employee deferred
compensation programs for purposes of the call report and FR Y-9C.\23\
The question of how to classify specific types of assets, such as
assets held in connection with employee deferred compensation programs,
on the call report and FR Y-9C is fact-specific and beyond the scope of
this rulemaking.\24\ As stated above, institutions should classify
assets and liabilities consistent with the instructions to the relevant
report in consultation with appropriate supervisors, as necessary.
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\22\ American Bankers Association.
\23\ Bessemer Group, Inc.
\24\ The regulatory reporting forms to which the commenter is
requesting revision or clarification are also used for other
purposes, such as for determining capital requirements. See 12 CFR
part 3, app. B; 12 CFR 217.202; 12 CFR 324.202 (using trading assets
and liabilities for the purpose of determining ``covered positions''
under the market risk capital rule). Accordingly, changes to the
reporting forms or the instructions thereto would likely have
unintended consequences for other areas of supervision and
regulation.
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Two commenters generally opposed providing an exclusion to
community banks.\25\ One of these commenters suggested that, for a
community bank to remain eligible for the exclusion, it should be
required to pass periodic tests by its regulator.\26\ As noted above,
EGRRCPA excludes community banks from section 13 if they meet the
specified total consolidated assets and trading asset and liability
conditions, and these provisions became effective upon enactment.
Accordingly, the agencies are finalizing the exclusion as proposed in
order to conform the regulation to the statutory exclusion. The banking
agencies note that they will continue to examine community banks that
are exempt under section 203 for compliance with applicable laws and
regulations, including the requirement under applicable banking laws
and regulations that they operate in a safe and sound manner.
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\25\ Tinee Carraker, Rodger Cunningham.
\26\ See Carraker.
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Another commenter requested relief from the control definition or a
specific exclusion for investors in companies that control industrial
loan companies (ILCs).\27\ Any changes to the definition of ``control''
under the BHC Act \28\ are outside of the scope of this rulemaking.\29\
Furthermore, the agencies do not find any support for a specific
exemption from section 13 of the BHC Act for investors in ILC parents
under EGRRCPA. Accordingly, the agencies are not adopting an exemption
from
[[Page 35011]]
section 13 of the BHC Act for parent ILCs or investors in the parent
ILCs that do not otherwise meet the eligibility requirements for the
community bank exclusion under section 203.
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\27\ See EnerBank.
\28\ 12 U.S.C. 1841(a)(2); 12 CFR 225.2(e)(1).
\29\ The Board recently invited comment on a notice of proposed
rulemaking to simplify and increase the transparency of the rules
for determining control of a banking organization. Press Release:
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20190423a.htm.
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B. Modification of Name-Sharing Restriction
Consistent with the proposal, the agencies are modifying the name-
sharing restriction in Sec. _.11(a)(6)(i) of the 2013 final rule to
conform that restriction to section 204 of EGRRCPA. Pursuant to this
change, a hedge fund or private equity fund sponsored by a banking
entity is permitted to share the same name or a variation of the same
name with a banking entity that is an investment adviser to the fund,
subject to the conditions specified in the statute.\30\ These
conditions require that the investment adviser is not, and does not
share the same name (or a variation of the same name) as, an insured
depository institution, a company that controls an insured depository
institution, or a company that is treated as a bank holding company for
purposes of section 8 of the IBA,\31\ and that the investment adviser's
name does not contain the word ``bank.'' \32\
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\30\ EGRRCPA, section 204. While the statute applies these
restrictions and conditions to ``hedge funds'' and ``private equity
funds,'' the 2013 final rule applies to ``covered funds,'' as
defined in Sec. _.10 of the regulations. See supra footnote 10.
\31\ 12 U.S.C. 1851(d)(1)(G)(vi)(I); 12 U.S.C.
1851(d)(1)(G)(vi)(II).
\32\ 12 U.S.C. 1851(d)(1)(G)(vi)(III). The requirement that the
name not contain the word ``bank'' was included in the name-sharing
restriction by section 204 of EGRRCPA but already is a condition
under the 2013 final rule. Accordingly, the agencies did not make
any additional modifications to the rule to reflect this condition.
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The agencies received four comments on these proposed changes to
the name-sharing restriction. One commenter generally supported the
proposed changes to the name-sharing restriction.\33\ Two commenters
asked the agencies to provide relief from the name-sharing restriction
for covered funds that are required or expected by regulators in a
foreign jurisdiction to share the same name or a variation of the same
name with a fund manager, and the fund manager shares a name or a
variation of the same name as its banking entity affiliate.\34\ One of
these commenters asserted that concerns regarding investor confusion
about the role of the banking entity or perceived bailout risk would be
mitigated because the funds would be required to comply with the
written disclosure requirements under the 2013 final rule for
organizing and offering a covered fund.\35\ Another commenter suggested
that the agencies could use their exemptive authority under section
13(d)(1)(J) of the BHC Act to implement this exemption.\36\
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\33\ Independent Community Bankers of America.
\34\ American Bankers Association; Investment Adviser
Association. Another commenter stated that the agencies should be
mindful of any foreign requirements on name-sharing between covered
funds and banking entities. See Matthew Thomas.
\35\ See Investment Adviser Association; 12 CFR 44.11(a)(8); 12
CFR 248.11(a)(8); 12 CFR 351.11(a)(8); 17 CFR 255.11(a)(8); 17 CFR
75.11(a)(8).
\36\ See American Bankers Association.
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The purpose of these revisions to the 2013 final rule is to conform
the amendments to section 204 of EGRRCPA. Section 204 of EGRRCPA did
not provide an exclusion allowing banking entities to share a name with
a covered fund if required or expected to by foreign regulators.
Accordingly, the agencies have determined not to make the requested
change to the name-sharing restriction, which goes beyond the scope of
this rulemaking, and are adopting the changes implementing section 204
as proposed.
The agencies are also finalizing conforming changes to the
definition of ``sponsor.'' \37\ Pursuant to these changes, the
definition of the term ``sponsor'' includes a banking entity that
shares the same name or a variation of the same name with a fund, for
corporate, marketing, promotional, or other purposes, except as
permitted under Sec. __.11(a)(6)--i.e., the name-sharing restriction
as amended by EGRRCPA. The agencies did not receive any comments on the
proposed conforming changes to the definition of ``sponsor.'' The
agencies are adopting this change as final in order to conform the rule
to the EGRRCPA statutory revisions.
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\37\ EGRRCPA section 204.
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III. Administrative Law Matters
A. 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 and determined
that the final would not change the current reporting, recordkeeping or
third-party disclosure requirements associated with section 13 of the
BHC Act under the PRA. However, the final rule would reduce the number
of respondents for the Board (including OCC-, FDIC-, SEC-, and CFTC-
supervised institutions under a holding company), FDIC (with respect to
supervised institutions not under a holding company), and OCC
(supervised institutions not under a holding company), which will be
addressed as a nonmaterial change to OMB.
B. Plain Language
Section 722 of the Gramm-Leach-Bliley Act \38\ requires the OCC,
Board, and FDIC (Federal banking agencies) to use plain language in all
proposed and final rules published after January 1, 2000. The Federal
banking agencies have sought to present the proposed rule in a simple
and straightforward manner and did not receive any comments on plain
language.
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\38\ Public Law 106-102, section 722, 113 Stat. 1338, 1471
(1999).
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C. Regulatory Flexibility Act Analysis
OCC: The Regulatory Flexibility Act, 5 U.S.C. 601 et seq., (RFA),
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 SBA for purposes of the RFA to include
commercial banks and savings institutions with total assets of $550
million or less and trust companies with total assets of $38.5 million
of less) or to certify that the rule would not have a significant
economic impact on a substantial number of small entities.
The OCC currently supervises approximately 758 small entities.\39\
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\39\ We base our estimate of the number of small entities on the
SBA's size thresholds for commercial banks and savings institutions,
and trust companies, which are $550 million and $38.5 million,
respectively. Consistent with the General Principles of Affiliation
13 CFR 121.103(a), we count the assets of affiliated financial
institutions when determining if we should classify an OCC-
supervised institution as a small entity. We use December 31, 2018,
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
U.S. Small Business Administration's Table of Size Standards.
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Because the statutory provisions are already in effect, and this
rule only revises the OCC's existing regulations to conform to this
statutory change, this rule does not affect a substantial number of
small entities. Section 204 of EGRRCPA generally does not apply to OCC-
supervised institutions.
The OCC's threshold for a significant effect is whether cost
increases associated with a proposed rule are greater than or equal to
either 5 percent of a small bank's total annual salaries and benefits
or 2.5 percent of a small bank's total non-interest expense. Even if
the rule affected a substantial number
[[Page 35012]]
of small banks, the OCC does not believe that it would have a
significant economic impact on small banks, because OCC-supervised
institutions that qualify for the exclusion under section 203 of the
EGRRCPA should not have compliance costs associated with 12 CFR part
44. OCC-supervised institutions can determine their eligibility for the
exclusion at the bank level based on information they are separately
required to file in their Consolidated Reports of Condition and Income.
Therefore, the OCC certifies that the rule would not have a significant
economic impact on a substantial number of OCC-supervised small
entities.
Board: The RFA imposes certain requirements on the Board regarding
any potential significant economic impact that a rule may have on a
substantial number of small entities. The size standard to be
considered a small business for banking entities subject to the rule is
generally $550 million or less in consolidated assets.\40\ The Board
has considered the potential economic impact of the final rule on
Board-supervised small entities in accordance with the RFA. The Board
believes that the final rule will not have a significant economic
impact on a substantial number of small entities for the reasons
described below.\41\
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\40\ U.S. SBA, Table of Small Business Size Standards Matched to
North American Industry Classification System Codes, available at
https://www.sba.gov/sites/default/files/files/Size_Standards_Table.pdf. 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).
\41\ The Board published an initial RFA analysis in connection
with the proposal and received no public comments related to its
analysis.
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1. Reason for the Final Rule
As discussed in this SUPPLEMENTARY INFORMATION, the agencies are
revising the regulations implementing section 13 of the BHC Act in
conformance with EGRRCPA. The final rule therefore excludes from the
definition of ``insured depository institution'' if an insured
depository institution (and any company that controls such institution)
has total consolidated assets equal to $10 billion or less and total
trading assets and liabilities equal to five percent or less of total
consolidated assets. Such institutions are exempt from the prohibitions
and restrictions under section 13 of the BHC Act.
2. Statement of Objectives and Legal Basis
As discussed above, the agencies' objective in finalizing
amendments to the regulations implementing section 13 of the BHC Act is
to conform the regulations to changes recently enacted by sections 203
and 204 of EGRRCPA. The agencies are explicitly authorized under
section 13(b)(2) of the BHC Act to adopt rules implementing section
13.\42\
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\42\ 12 U.S.C. 1851(b)(2).
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3. Description of Small Entities to Which the Regulation Applies
Section 203 of EGRRCPA exempted approximately 3,193 Board-
supervised small entities from section 13 of the BHC Act.\43\ The
Board's final rule conforms its regulations implementing section 13 to
the statutory changes.
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\43\ Qualifying institutions eligible for this exclusion would
consist of state member banks, bank holding companies, and savings
and loan holding companies that meet the eligibility criteria for
the exclusion.
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4. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
Sections 203 and 204 of EGRRCPA were effective upon enactment, and,
thus, any economic impacts on small entities associated with these
changes were caused by the statutory changes. Section 203 of EGRRCPA
exempted all Board-supervised small entities from the reporting,
recordkeeping, and all other requirements associated with section 13 of
the BHC Act. While section 203 of EGRRCPA, therefore, affects a
substantial number of Board-supervised small entities, it is not
expected to have a significant economic impact on such entities. This
is because such small entities generally engage in limited activities
subject to section 13 of the BHC Act and are subject to limited
compliance requirements under the rule.
The Board estimates that Board-supervised small entities that are
no longer subject to section 13 of the BHC Act due to section 203 of
EGRRCPA will save, on average, approximately $5,000 per year.\44\ This
represents, on average, less than 1.25 percent of net income and less
than 0.07 percent of total equity for such entities. For the reasons
stated above, section 203 of EGRRCPA and the Board's final rule are not
expected to have a significant economic impact on Board-supervised
small entities.
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\44\ This estimate is based on the paperwork, recordkeeping, and
disclosure-related compliance requirements associated with section
13 of the BHC Act that the Board estimates for purposes of the PRA.
Because community banks do not significantly engage in the types of
activities subject to section 13's prohibitions and restrictions,
the majority of the ongoing costs associated with section 13 for
community banks prior to EGRRCPA were likely related to
recordkeeping and should thus be captured by this data. The average
estimated compliance cost savings would be $9,225, equal to 146
hours multiplied by an estimated total hourly compensation rate of
$63.36 per hour. According to the May 2017 National Industry-
Specific Occupational Employment and Wage Estimates for the
Depository Credit Intermediation sector the 75th percentile wages
for a compliance officer is $40.55 per hour. The wage information
reported by the BLS in the Specific Occupational Employment and Wage
Estimates does not include health benefits and other non-monetary
benefits. According to the December 2018 Employer Cost of Employee
Compensation data compensation rates for health and other benefits
are 33.7 percent of total compensation. The wage is also inflation
adjusted according to the BLS data on the Consumer Price Index for
Urban Consumers (CPI-U) so that it is contemporaneous with the non-
wage compensation statistic. The inflation rate was 3.59 percent
between May 2017 and December 2018. Therefore, the adjusted average
wage for a compliance officer is $63.36 per hour.
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Section 204 of EGRRCPA, which amends the restrictions related to
the naming of covered funds, will likely only have direct economic
impacts on investment advisory businesses subject to section 13 of the
BHC Act. Because the Board is not the primary financial regulatory
agency for investment advisers,\45\ section 204 of EGRRCPA not expected
to have a significant economic impact on Board-supervised small
entities.
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\45\ See 12 U.S.C. 1851(b)(2)(B)(i)(II).
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5. Identification of Duplicative, Overlapping, or Conflicting Federal
Regulations
The Board has not identified any federal statutes or regulations
that duplicate, overlap, or conflict with the proposed revisions.
6. Discussion of Significant Alternatives
The Board does not believe that this final rule will have a
significant economic impact on a substantial number small entities. As
a result, the Board has not adopted any alternatives to the final rule.
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
rulemaking on small entities.\46\ A regulatory flexibility analysis is
not required, however, if the agency certifies that the rule would 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 less than or equal to $550 million.\47\
[[Page 35013]]
Generally, the FDIC considers a significant effect to be a quantified
effect in excess of 5 percent of total annual salaries and benefits per
institution, or 2.5 percent of total non-interest expenses. The FDIC
believes that effects in excess of these thresholds typically represent
significant effects for FDIC-supervised institutions. The FDIC
supervises 3,489 depository institutions,\48\ of which 2,674 are
defined as small banking entities by the terms of the RFA.\49\ Of the
2,674 small, FDIC-supervised institutions, all report having total
consolidated assets less than or equal to $10 billion, and total
trading assets and liabilities less than or equal to five percent of
total consolidated assets, and are therefore, covered by the rule.\50\
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\46\ 5 U.S.C. 601 et seq.
\47\ The SBA defines a small banking organization as having $550
million or less in assets, where ``a financial institution's assets
are determined by averaging the assets reported on its four
quarterly financial statements for the preceding year.'' 13 CFR
121.201 n.8 (2018). ``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 . . .'' 13 CFR 121.103(a)(6) (2018).
Following these regulations, the FDIC uses a covered entity's
affiliated and acquired assets, averaged over the preceding four
quarters, to determine whether the covered entity is ``small'' for
the purposes of RFA.
\48\ FDIC-supervised institutions are set forth in 12 U.S.C.
1813(q)(2).
\49\ Call Report: December 31, 2018.
\50\ Call Report: December 31, 2018.
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Although the rule applies to 2,674 small, FDIC-supervised
institutions, the rule would not have a significant economic impact.
The statutory changes established by EGRRCPA no longer prohibit certain
institutions to engage in proprietary trading,\51\ thereby potentially
increasing the volume of such activity for affected banking entities.
The rule would amend the FDIC's regulations to conform to this
exemption established in EGRRCPA. Therefore, this component of the rule
would have no direct effect on small, FDIC-supervised institutions.
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\51\ 12 CFR 351.3(a).
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However, even if the economic effects of the proposed rule were
considered relative to a pre-statutory baseline the proposed changes
that enable certain institutions to engage in proprietary trading are
unlikely to have a significant effect on a substantial number of small,
FDIC-supervised institutions. In the years prior to the enactment of
the 2013 final rule (2006 to 2012) a maximum of 59 small, FDIC-
supervised institutions reported a nonzero value for trading assets,
trading liabilities, or structured financial products. Additionally, in
the years prior to the enactment of the 2013 final rule (2006 to 2012)
trading assets as a percent of total assets ranged between 0.00013 and
0.07 percent for small, FDIC-supervised institutions.\52\ According to
the most recent Call Report data trading assets as a percent of total
assets is 0.007 percent for small, FDIC-supervised institutions.\53\
Not all trading activity is necessarily proprietary trading, so only a
subset of trading assets would be affected by this rule. Also, changes
in the dollar volume of trading assets and their percentage of total
assets are affected by market conditions, economic conditions, and the
decisions of senior management at small, FDIC-supervised institutions,
among other things. However, the small volume of pre-Volcker Rule
trading assets and liabilities at small institutions suggests that the
proposed rule is unlikely to have significant effects on small, FDIC-
supervised institutions, assuming that past behavior is indicative of
the propensity of small, FDIC-supervised institutions to engage in
trading activity that otherwise would have been prohibited under the
Volcker Rule.
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\52\ Call Report: March 2006-December 2012.
\53\ Call Report: December 2018.
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As previously stated, EGRRCPA permits a covered fund organized and
offered by a banking entity to share the same name, or a variation of
the same name, as a banking entity that is an affiliated investment
adviser to the hedge fund or private equity fund, with some
restrictions. By permitting a covered fund to share the name of a
banking entity, or variation thereof, the fund can utilize the
franchise value of the banking entity to more effectively market the
fund to the bank's current account holders or the public. The size of
this potential benefit is difficult to accurately estimate with
available data because it depends on the business model of individual
banks and funds, the propensity of those funds to advertise to
particular groups, and the decisions of customers, among other things.
However, since the rule would conform FDIC regulations with the
statutory language enacted by EGRRCPA, this component of the rule would
have no direct effect on small, FDIC-supervised institutions.
Finally, the rule would introduce conforming changes that would
reduce recordkeeping, reporting, and disclosure costs for affected
FDIC-supervised institutions. EGRRCPA states that certain institutions
with total consolidated assets less than or equal to $10 billion, and
total trading assets and liabilities less than or equal to five percent
of total consolidated assets, are excluded from restrictions on
engaging in proprietary trading activity. The rule would amend the
FDIC's regulations to conform to this exclusion established in EGRRCPA.
In so doing, the rule would make conforming changes to reduce the
recordkeeping and reporting requirements for small, FDIC-supervised
institutions that were excluded from proprietary trading restriction by
EGRRCPA. Although the vast majority of small, FDIC-supervised
institutions are not currently required to comply with the
recordkeeping, reporting, or disclosure requirements associated with
proprietary trading, the rule would introduce conforming changes that
would exclude some small, FDIC-supervised institutions. Of these newly
excluded institutions, the rule would conform to Section 203 of
EGRRCPA, which reduced recordkeeping, reporting, or disclosure
requirements by up to an estimated 8 hours per institution, or
approximately $506.88 per year.54 55 The estimated reduction
in recordkeeping, reporting, or disclosure costs per institution
represents less than 0.01 percent of non-interest expenses, on average,
for small, FDIC-supervised institution.\56\ Thus, the FDIC believes the
rule would not have a significant economic impact on small, FDIC-
supervised institutions.
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\54\ 8 hours * $63.36 per hour = $506.88.
\55\ The estimated reduction in costs is calculated by
multiplying 8 hours by an estimated total hourly compensation rate
of $63.36 per hour. According to the May 2017 National Industry-
Specific Occupational Employment and Wage Estimates for the
Depository Credit Intermediation sector the 75th percentile wages
for a compliance officer is $40.55 per hour. The wage information
reported by the BLS in the Specific Occupational Employment and Wage
Estimates does not include health benefits and other non-monetary
benefits. According to the December 2018 Employer Cost of Employee
Compensation data compensation rates for health and other benefits
are 33.7 percent of total compensation. The wage is also inflation
adjusted according to the BLS data on the Consumer Price Index for
Urban Consumers (CPI-U) so that it is contemporaneous with the non-
wage compensation statistic. The inflation rate was 3.59 percent
between May 2017 and December 2018. Therefore, the adjusted average
wage for a compliance officer is $63.36 per hour.
\56\ Call Report, December 31, 2018.
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For the reasons described above and under section 605(b) of the
RFA, the FDIC certifies that the rule would 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 rule would 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 agencies are
revising the 2013 final rule in order to be consistent with statutory
amendments made by EGRRCPA to section 13 of the BHC Act. The statutory
amendments (a) modified the scope of the term ``banking entity'' to
exclude certain community banks and their affiliates and (b) permitted
any banking entity to share a name with a hedge fund or private equity
fund that it organizes and offers under certain circumstances.
[[Page 35014]]
The revisions 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.\57\ 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.\58\ 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.\59\
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\57\ The 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 rule. See 79 FR
5808, 5813 (Jan. 31, 2014) (CFTC version of 2013 final rule).
\58\ See 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).
\59\ See Policy Statement and Establishment of Definitions of
``Small Entities'' for Purposes of the Regulatory Flexibility Act,
47 FR 18618, 18620 (Apr. 30, 1982).
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In the context of the 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 potentially covered by the rule, and
generally those that are registered have larger businesses. Similarly,
the rule applies to only those commodity trading advisors that are
affiliated with banks, which the CFTC expects are larger businesses.
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 rule have been determined not
to be small entities, the CFTC believes that the 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.
SEC: In the proposal, the SEC certified that, pursuant to 5 U.S.C.
605(b), the 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 this SUPPLEMENTARY INFORMATION, the agencies are
adopting the proposal as final without change, in order to be
consistent with statutory amendments made by EGRRCPA to section 13 of
the BHC Act. The statutory amendments (a) modified the scope of the
term ``banking entity'' to exclude certain community banks and their
affiliates and (b) permitted any banking entity to share a name with a
hedge fund or private equity fund that it organizes and offers under
certain circumstances.
The revisions the agencies are adopting will generally apply to
banking entities, including certain SEC-registered entities.\60\ These
entities include bank-affiliated SEC-registered broker-dealers,
investment advisers, security-based swap dealers, and major security-
based swap participants. Based on information in filings submitted by
these entities, the SEC believes that there are no banking entity
registered investment advisers,\61\ broker-dealers,\62\ security-based
swap dealers, or major security-based swap participants that are small
entities for purposes of the RFA.\63\ For this reason, the SEC
certifies that the rule, as adopted, will not have a significant
economic impact on a substantial number of small entities.
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\60\ The SEC's Economic Analysis, below, discusses the economic
effects of the final amendments. See SEC Economic Analysis, section
III.F.
\61\ For the purposes of an SEC rulemaking in connection with
the RFA, an investment adviser generally is a small entity if it:
(1) Has assets under management having a total value of less than
$25 million; (2) did not have total assets of $5 million or more on
the last day of the most recent fiscal year; and (3) does not
control, is not controlled by, and is not under common control with
another investment adviser that has assets under management of $25
million or more, or any person (other than a natural person) that
had total assets of $5 million or more on the last day of its most
recent fiscal year. See 17 CFR 275.0-7.
\62\ For the purposes of an SEC rulemaking in connection with
the RFA, a broker-dealer will be deemed a small entity if it: (1)
Had total capital (net worth plus subordinated liabilities) of less
than $500,000 on the date in the prior fiscal year as of which its
audited financial statements were prepared pursuant to 17 CFR
240.17a-5(d), or, if not required to file such statements, had total
capital (net worth plus subordinated liabilities) of less than
$500,000 on the last day of the preceding fiscal year (or in the
time that it has been in business, if shorter); and (2) is not
affiliated with any person (other than a natural person) that is not
a small business or small organization. See 17 CFR 240.0-10(c).
Under the standards adopted by the SBA, small entities also include
entities engaged in financial investments and related activities
with $38.5 million or less in annual receipts. See 13 CFR 121.201
(Subsector 523).
\63\ Based on SEC analysis of Form ADV data, the SEC believes
that there are not a substantial number of registered investment
advisers affected by the proposal that qualify as small entities
under RFA. Based on SEC analysis of broker-dealer FOCUS filings and
NIC relationship data, the SEC believes that there are no SEC-
registered broker-dealers affected by the proposal that qualify as
small entities under RFA. With respect to security-based swap
dealers and major security-based swap participants, based on
feedback from market participants and information about the
security-based swap markets, the Commission believes that the types
of entities that would engage in more than a de minimis amount of
dealing activity involving security-based swaps--which generally
would be large financial institutions--would not be ``small
entities'' for purposes of the RFA. See Regulation SBSR--Reporting
and Dissemination of Security-Based Swap Information, 81 FR 53546,
53553 (Aug. 12, 2016).
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D. Riegle Community Development and Regulatory Improvement Act
Pursuant to section 302(a) of the Riegle Community Development and
Regulatory Improvement Act (RCDRIA),\64\ in determining the effective
date and administrative compliance requirements for new regulations
that impose additional reporting, disclosure, or other requirements on
insured depository institutions, each Federal banking agency must
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. In addition, section 302(b) of RCDRIA
requires new regulations and amendments to regulations that impose
additional reporting, disclosures, or other new requirements on insured
depository institutions generally to 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.\65\ The rule reduces burden
and does not impose any reporting, disclosure, or other new
requirements on insured depository institutions. Accordingly, the
agencies are not required by RCDRIA to consider the administrative
burdens and benefits of the rule or delay its effective date.\66\
Because delaying the effective date of the rule is not required and
would serve no purpose, the final rule will be effective on the date of
publication in the Federal Register.
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\64\ 12 U.S.C. 4802(a).
\65\ Id.
\66\ Additionally, the 30-day delayed effective date requirement
under the Administrative Procedure Act is not applicable to a rule,
such as the one herein, that grants or recognizes an exemption or
relieves a burden. 5 U.S.C. 553(d)(1).
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[[Page 35015]]
E. OCC Unfunded Mandates Reform Act Determination
The OCC has analyzed the rule under the factors set forth in the
Unfunded Mandates Reform Act of 1995 (UMRA) (2 U.S.C. 1532). Under this
analysis, the OCC considered whether the 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 for inflation). The rule does
not impose new mandates. Therefore, the OCC has determined that the
rule would not result in expenditures by State, local, and Tribal
governments, or the private sector, of $100 million or more in any one
year. Accordingly, the OCC has not prepared a written statement to
accompany this rule.
F. SEC Economic Analysis
The agencies are adopting amendments to the 2013 final rule to
implement the statutory mandates of sections 203 and 204 of EGRRCPA. In
accordance with section 203 of EGRRCPA,\67\ the final rules amend the
definition of ``insured depository institution'' in Sec. __.2(r) of
the 2013 final rule to exclude an institution so long as it, and every
company that controls it, has both (1) $10 billion or less in total
consolidated assets and (2) total consolidated trading assets and
liabilities that are 5 percent or less of total consolidated assets.
The final rule also amends the 2013 final rule to reflect the changes
made by section 204 of EGRRCPA. That provision modified section 13 of
the BHC Act to permit, in certain circumstances, bank-affiliated
investment advisers to share their name with the hedge funds or private
equity funds they organize and offer.
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\67\ Specifically, Section 203 of EGRRCPA provides that the term
``insured depository institution,'' for purposes of the definition
of ``banking entity'' in section 13(h)(1) of the BHC Act (12 U.S.C
1851(h)(1)), does not include an insured depository 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 percent of total consolidated assets.
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The amendments to the 2013 final rule reflect the statutory
provisions of EGRRCPA that are already in effect, and the SEC continues
to believe that market participants are already responding to the
statutory changes. Thus, the baseline against which the SEC is
assessing the effects of these amendments incorporates both: (i) The
enacted statutory provisions of sections 203 and 204 of EGRRCPA, and
(ii) the SEC's understanding that banking entities with both total
consolidated assets of $10 billion or less and total consolidated
trading assets and liabilities (henceforth, ``TAL'') that are 5 percent
or less of total consolidated assets are, consistent with EGRRCPA, no
longer complying with the 2013 final rule. The SEC continues to believe
that any costs, benefits, and economic effects of the final rules,
including those on efficiency, competition, and capital formation, stem
entirely from these statutory provisions and not from the conforming
amendments to the 2013 final rule.
The SEC is mindful of the costs and benefits imposed by its rules.
In the proposal, the SEC solicited comment on the economic effects of
the amendments on SEC registrants and on efficiency, competition, and
capital formation in securities markets. The SEC has considered these
comments, as discussed below.
This analysis is limited to areas within the scope of the SEC's
function as the primary regulator of U.S. securities markets. In
particular, the SEC's economic analysis is focused on the effects of
the final amendments on registrants the SEC oversees for purposes of
section 13 of the BHC Act, investors and issuers in securities markets,
and the functioning and efficiency of such markets.
As discussed in more detail below, the enactment of the statutory
exemption in section 203 of EGRRCPA: (i) Eliminated the costs of
compliance with section 13 of the BHC Act for certain banking entities,
with the cost savings potentially being passed along to customers and
counterparties; (ii) was not followed by significant changes in trading
activity by broker-dealers (``BDs'') that qualify for the statutory
exemption, and such trading activity remains extremely limited in
absolute terms by year-end 2018; (iii) may have created incentives for
entities that do not qualify for the statutory exemption but are close
to the relevant thresholds to decrease their asset size or trading
activity to become subject to the statutory exemption, though such an
effect had not materialized by year-end 2018; and (iv) may have
improved the competitive position of entities that qualify for the
statutory exemption relative to those that are not, and the competitive
position of U.S. entities that qualify for the statutory exemption
relative to certain foreign banking entities.
The statutory exemption in section 204 of EGRRCPA may also have:
(i) Improved the ability of certain bank-affiliated registered
investment advisers (``RIAs'') to compete for investor capital with
RIAs that are not affiliated with banks; (ii) provided bank-affiliated
RIAs that can share a name with a fund with a competitive advantage
over those bank-affiliated RIAs that cannot share a name with a fund
because they do not meet the statutory conditions for name sharing; and
(iii) reduced some investors' search costs in the capital allocation
process by making it easier for some investors to identify bank-
affiliated advisers of funds, to the extent that such advisers could
share a name with a fund as a result of the statutory exemption.
The SEC continues to believe that these economic effects stem from
the statutory provisions of EGRRCPA that are fully in effect, and that
the conforming amendments will not result in any additional costs,
benefits, or effects on efficiency, competition, and capital formation.
Certain SEC-regulated entities, such as BDs and RIAs, that fell
under the definition of ``banking entity'' for the purposes of section
13 of the BHC Act before the enactment of EGRRCPA qualify for the final
amendments implementing sections 203 and 204 of EGRRCPA.\68\ As
presented in Panel A of Table 1,\69\ the SEC estimates that there are
as many as 114 bank-affiliated BDs with aggregate assets of
approximately $101 billion and aggregate holdings of approximately $16
billion that are within the scope of these final amendments.\70\ The
SEC estimates that, at most, 296 bank-affiliated RIAs are within the
scope of the final
[[Page 35016]]
amendments and no longer subject to section 13 of the BHC Act.\71\
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\68\ The SEC believes that all bank-affiliated entities that may
register with the SEC as security-based swap dealers and major
security-based swap participants are unaffected by the amendments
due to the size of the balance sheet and the amount of trading
activity of their affiliated banking entities. The SEC's analysis is
based on DTCC Derivatives Repository Limited Trade Information
Warehouse data on single-name credit-default swaps. Throughout this
economic analysis, the term ``banking entity'' generally refers only
to banking entities that are subject to section 13 of the BHC Act
and 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); 12 U.S.C. 5301(12)(B).
\69\ In the proposal (84 FR at 2786) the SEC used data from the
release for the recently proposed amendments to these rules to
provide clarity about what activities are prohibited, and to improve
supervision and implementation of section 13 of the BHC Act (83 FR
at 33525) as of Q3 2017. In this release, we update the estimates
and use data as of Q4 2018 and Q4 2017. Data sources for Table 1
include Reporting Form FR Y-9C data for domestic bank holding
companies and Reports of Condition and Income data for banks that
are not bank holding companies. BD bank affiliations were obtained
from the Federal Financial Institutions Examination Council's
National Information Center. BD assets and holdings were obtained
from FOCUS Reports data.
\70\ As of Q4 2018, these 114 BDs were affiliated with 98 banks
or holding companies.
\71\ As estimated in the release for the recently proposed
amendments to these rules to provide clarity about what activities
are prohibited, and to improve supervision and implementation of
section 13 of the BHC Act (83 FR at 33525), there were 308 bank-
affiliated RIAs based on data as of March 31, 2018. Using data as of
March 31, 2019, the SEC is updating the estimate to approximately
296 bank-affiliated RIAs. The SEC does not have information or data
that would allow us to estimate how many of these bank-affiliated
RIAs would have preferred to share a name with funds they advise.
For the purposes of this analysis, the SEC estimates that these 296
bank-affiliated RIAs and 114 bank-affiliated BDs may be able to
engage in covered fund activities as a result of section 203 of
EGRRCPA. The SEC does not have information or data that would allow
us to estimate how many of these entities would have preferred to
engage in covered fund activities.
Table 1--BD Count, Assets, and Holdings by Affiliation
----------------------------------------------------------------------------------------------------------------
Total assets, Holdings, $mln Holdings (alt.),
BD affiliation Number $mln \72\ \73\ $mln \74\
----------------------------------------------------------------------------------------------------------------
Panel A. After the enactment of EGRRCPA: BD statistics as of Q4 2018
----------------------------------------------------------------------------------------------------------------
Bank BDs, affiliated bank total assets > 61 2,826,909 709,534 548,426
$10bln & TAL > 5% of total assets......
Bank BDs, affiliated bank total assets > 74 198,380 43,450 15,393
$10bln & TAL 5% of total assets...
Bank BDs subject to section 203 of 114 100,518 16,379 5,376
EGRRCPA \75\...........................
Non-bank BDs............................ 3,545 1,196,845 374,597 223,844
-----------------------------------------------------------------------
Total............................... 3,794 4,322,651 1,143,960 793,038
----------------------------------------------------------------------------------------------------------------
Total assets, Holdings (alt.),
BD affiliation Number $mln Holdings, $mln $mln
----------------------------------------------------------------------------------------------------------------
Panel B. Before the enactment of EGRRCPA: BD statistics as of Q4 2017
----------------------------------------------------------------------------------------------------------------
Bank BDs, affiliated bank total assets > 57 2,711,033 615,206 489,964
$10bln & TAL > 5% of total assets......
Bank BDs, affiliated bank total assets > 83 223,474 42,684 11,749
$10bln & TAL 5% of total assets...
Bank BDs subject to section 203 of 113 108,457 17,743 6,463
EGRRCPA \76\...........................
Non-bank BDs............................ 3,642 1,001,819 316,691 202,668
-----------------------------------------------------------------------
Total............................... 3,895 4,044,782 992,324 710,844
----------------------------------------------------------------------------------------------------------------
The costs of the 2013 final rule no longer apply to the entities
that qualify for the statutory exemption, which, as discussed above, is
already fully in effect.\77\ To the extent that the compliance costs
related to section 13 of the BHC Act and the relevant implementing
regulations would otherwise have been passed along to customers and
counterparties of the affected entities, the cost reductions associated
with section 203 of EGRRCPA may be flowing through to customers and
counterparties in the form of reduced transaction costs and increased
willingness to engage in trading activity, including intermediation
that facilitates risk-sharing, as well as covered fund activities.\78\
---------------------------------------------------------------------------
\72\ BD total assets are based on FOCUS report data for ``Total
Assets.''
\73\ BD holdings are based on FOCUS reports 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.
\74\ This measure excludes U.S. and Canadian government
obligations and spot commodities.
\75\ This category includes all bank-affiliated BDs affiliated
with holding companies that have both consolidated total assets less
than or equal to $10 billion and TAL less than or equal to 5% of
total assets, as well as bank-affiliated BDs for which parent firm
TAL data was not available. Based on a manual search of regulatory
filings for holding companies with missing assets and liabilities
data and current FR Y-9C and FR Y-9SP reporting requirements, the
SEC believes that entities with missing data have low levels of
trading activity and likely qualify for the exemption in section 203
of EGRRCPA. To the degree that this may not be the case for some
bank-affiliated BDs, these figures may overestimate the number of
affected entities.
\76\ Id.
\77\ In the proposal, the SEC estimated based on data as of Q3
2017 that annual compliance cost savings for SEC-regulated entities
due to section 203 of EGRRCPA may be as high as approximately
$16,626,385 (= 2,035 hours x 0.18 x (Attorney at $409 per hour) x
111). Based on data as of Q4 2018 we now estimate these annual
compliance cost savings may be as high as approximately $14,682,037
(= 2,035 hours x 0.18 x (Attorney at $409 per hour) x 98).
\78\ See 79 FR 5778 for the agencies' estimated ongoing
compliance and recordkeeping burdens related to the requirements of
the 2013 final rule.
---------------------------------------------------------------------------
The statutory exemption in section 203 of EGRRCPA provided entities
thereby excluded from section 13 of the BHC Act with greater
flexibility in pursuing certain types of potentially profitable trading
and covered fund activities. Additionally, to the extent that section
13 of the BHC Act may have previously reduced the ability or
willingness of such entities to engage in permitted hedging,
underwriting or market-making due to compliance costs, the statutory
exemption may have facilitated access to capital and trading activity.
In the proposal, the SEC stated that some entities with $10 billion
or less in total consolidated assets and TAL equal to or less than 5
percent of its total consolidated assets may have responded to the
statutory exemption by increasing or planning to increase their trading
activity and covered funds activities, while still remaining under the
applicable thresholds at the consolidated holding company level. Using
Q4 2018 data, the SEC estimates that 21 such holding companies with 22
[[Page 35017]]
BD affiliates and available information about TAL have, on aggregate,
total consolidated assets of approximately $74.5 billion and gross TAL
of approximately $688 million.\79\ The SEC further estimates that the
gross TAL of these 21 holding companies that qualify for the exemption
in section 203 of EGRRCPA and for which data is available increased by
approximately $98 million between Q4 2017 and Q4 2018 (from $590
million in Q4 2017 to approximately $688 million in Q4 2018). The SEC
does not have information about the remaining banks and holding
companies. However, the SEC is aware that, in total, 98 banks and
holding companies that qualify for the exemption in section 203 of
EGRRCPA and have affiliated BDs, can have, on aggregate, total gross
TAL of no more than $49 billion without exceeding either threshold and
becoming subject to section 13 of the BHC Act.\80\ Therefore, the SEC
estimates that the increase in the aggregate TAL of all 98 affected
banks and holding companies with SEC-regulated affiliates is likely no
more than $48.3 billion.\81\ The SEC continues to note that, if an
increase in risk-taking by such affected entities is observed by market
participants that provide capital to them, these capital providers may
demand additional compensation for bearing more financial risk, which
may decrease the profitability of the entity's trading and covered fund
activities.
---------------------------------------------------------------------------
\79\ The current FR Y-9C and FR Y-9SP filing requirements limit
data availability. As of Q4 2018, the SEC has information about TAL
of 21 holding companies with 22 BD affiliates.
\80\ This figure is based on a maximum of $10 bln of total
consolidated assets and a maximum TAL of 5 percent of total
consolidated assets and is calculated as follows: 98 holding
companies x $10 bln total assets x 0.05 = $49 bln.
\81\ This figure is calculated as follows: $49 bln-$0.688 bln =
$48.312 bln. The SEC recognizes that these estimates may under- or
overestimate the increases in trading activity that may occur as a
result of section 203 of EGRRCPA for four primary reasons. First,
the profitability of trading activity is likely to strongly
influence incentives to engage in trading activity and may vary
depending on trading strategy, market sector, and time period
measured. Second, growth in a holding company's total consolidated
assets is influenced by business models, prevailing market
conditions, industry competition, bank merger and acquisition
activity, among other factors. Third, this estimate assumes that no
affected entity will enter or exit the industry as a result of the
statutory exclusion. Fourth, this estimate assumes for purposes of
this economic analysis that small holding companies that file form
FR Y-9SP, which does not contain data on TAL, do not currently have
any TAL.
---------------------------------------------------------------------------
Because EGRRCPA was enacted relatively recently (on May 24, 2018)
and a realignment of a BD's balance sheet may necessarily be gradual,
it is not yet clear if the economic effects of sections 203 and 204 are
fully realized in the relevant securities markets. However, Table 1
reports changes in the size and trading activity of different groups of
BDs within an approximate 12 month window around the enactment of
section 203 of EGRRCPA. Comparing BD statistics in Q4 2017 against Q4
2018, the number of bank-affiliated BDs that qualify for the exemption
in section 203 of EGRRCPA increased by one. BDs that qualify for the
exemption in section 203 of EGRRCPA decreased their assets by
approximately $8 billion, and their holdings by between approximately
$1.1 billion (using a measure of holdings that excludes U.S. and
Canadian government obligations and spot commodities) and approximately
$1.4 billion (using an inclusive measure of holdings).\82\ In
comparison, although the number of bank-affiliated BDs that do not
qualify for the exemption in section 203 of EGRRCPA decreased by 5,
such BDs experienced in the aggregate an approximately $90.8 billion
increase in total assets, and an increase in holdings between $62.1
billion (excluding U.S. and Canadian government obligations and spot
commodities) and approximately $95.1 billion (using an inclusive
measure of holdings).
---------------------------------------------------------------------------
\82\ This discussion describes changes in assets and holdings in
absolute terms since percentage measures magnify changes when
initial levels of a measure are extremely low.
---------------------------------------------------------------------------
It is difficult to draw meaningful causal inference from these
trends in assets and holdings due to a number of methodological
considerations. First, the effect of enactment of section 203 of
EGRRCPA is confounded by other changes, notably the market
participants' potential reaction to other statutory relief for small
banking entities in EGRRCPA (such as sections 201, 207, and 210 of
EGRRCPA) and to the agencies' proposed amendments to the 2013 final
rule that affected bank-affiliated BDs that do not qualify for the
exemption in section 203 of EGRRCPA. Second, there is a lack of
``control'' and ``treatment'' groups that are likely to satisfy the
``parallel trends'' assumption required for a difference-in-difference
analysis.\83\ Third, quarterly reporting of FOCUS data is
insufficiently frequent to perform an announcement effect analysis of
BD risk taking and asset size in the days immediately before and
immediately after the enactment of EGRRCPA. Fourth, as discussed in the
proposal, certain entities can influence whether they qualify for the
statutory exemption in section 203 of EGRRCPA by adjusting their
balance sheets and trading books, which is likely to confound
inference. Fifth, the relief in section 203 of EGRRCPA may have been at
least partly anticipated by market participants.\84\ In addition, in
the proposal, the SEC anticipated spillover effects between bank-
affiliated BDs that qualify for the exemption in section 203 of EGRRCPA
and bank-affiliated BDs that do not. Both anticipation and spillover
effects contaminate the estimation of regulatory effects.
---------------------------------------------------------------------------
\83\ Causal inference using difference-in-difference generally
requires that differences between treatment and control groups along
the dimension of interest (e.g., risk-taking) are constant in the
absence of regulatory intervention.
\84\ See U.S. Department of the Treasury, ``A Financial System
that Creates Economic Opportunities: Banks and Credit Unions'' (June
2017).
---------------------------------------------------------------------------
Thus, the SEC cannot conclusively determine whether the above
changes in BD characteristics arose as a result of the passage of
EGRRCPA. However, the above statistics indicate that bank-affiliated
BDs that qualify for the exemption in section 203 of EGRRCPA slightly
decreased their balance sheet and trading activity.\85\ This group of
BDs continues to represent a very small fraction of the BD industry,
representing approximately 2.3% of all BD assets and between 0.7% and
1.4% of all BD holdings.
---------------------------------------------------------------------------
\85\ As discussed above, BDs that qualify for the exemption in
section 203 of EGRRCPA exhibited a decrease in holdings by
approximately $1.4 billion when including the holdings of U.S. and
Canadian government obligations and spot commodities, and by
approximately $1.1 billion when excluding them. Thus, such
government obligations and spot commodities accounted for
approximately $277 million or 20% of the decrease in the inclusive
measure of holdings by BDs that qualify for the exemption in section
203 of EGRRCPA.
---------------------------------------------------------------------------
In the proposal, the SEC noted that certain banking entities with
more than $10 billion in total consolidated assets and/or TAL greater
than 5 percent of total consolidated assets may be incentivized to
shrink their balance sheets or trading activity under the thresholds.
The SEC recognized that this may reduce the willingness of such banking
entities to serve as intermediaries, and may also reduce the potential
for market impacts from the failure of a given entity.
As can be seen in Table 1, the number of bank-affiliated BDs not
subject to section 203 of EGRRCPA has declined by five between Q4 2017
and Q4 2018. These counts are impacted by the fact that holding
companies may have multiple BD subsidiaries, and by occurrences of
mergers and other changes in the organizational structure within
holding companies. Bank-affiliated BDs that do not qualify for the
exemption in section 203 of EGRRCPA have experienced an increase in
assets (by $91 billion) and holdings (by between $62.1 billion and
$95.1 billion
[[Page 35018]]
depending on the measure). BDs unaffiliated with banks or bank holding
companies have also increased their assets (by $195 billion) and
holdings (by between $21.2 billion and $57.9 billion depending on the
measure), despite the backdrop of the aggregate decline in the number
of BDs in the industry.
These observations suggest that aggregate industry and
macroeconomic factors may be driving a general increase in the size and
trading books of BDs. Such observations may also indicate that banking
entities not subject to section 203 of EGRRCPA may currently be unable
or unwilling to shrink their balance sheets and trading books in order
to fall under the relevant thresholds in section 203 of EGRRCPA. The
SEC continues to believe that banking entities not excluded from
section 13 of the BHC Act pursuant to section 203 of EGRRCPA may weigh
the size and complexity of each banking entity's trading activities and
organizational structure, and the profitability of their banking and
trading books, against the magnitude of expected compliance savings
from not being subject to section 13 of the BHC Act. The SEC continues
to note that, similar to the discussion above, due to methodological
limitations (including, among others, confounding events and the likely
violation of the parallel trends assumption), these observations of
trends do not allow us to draw a causal inference. It is also possible
that the effects of section 203 of EGRRCPA are still being realized,
and the observed trends may under- or overestimate potential long-term
shifts in risk-taking by entities that qualify for the exemption in
section 203 and those that do not.
In the proposal, the SEC stated that to the degree that statutory
changes in section 203 of EGRRCPA may have contributed to an increase
in the gross volume of TAL, there may be an increase in risk-taking
among entities no longer subject to section 13 of the BHC Act. However,
this need not necessarily be the case. For example, a hedging
transaction that offsets a risk exposure from an existing asset would
increase the reported gross TAL without necessarily producing a net
increase in the risk born by the entity. As described above, bank
affiliated BDs that qualify for the exemption in section 203 of EGRRCPA
have not increased their gross volume of TAL over the analyzed time
period. The SEC continues to recognize that bank-affiliated BDs that
qualify for the exemption in section 203 of EGRRCPA account only for
approximately 2.3% of aggregate BD assets and between 0.7% and 1.4% of
aggregate BD holdings. Thus, the statutory exemption affects only a
small fraction of the BD industry. Moreover, the SEC continues to
recognize that both the risks and the returns from newly permissible
trading and covered fund activities by individual bank-affiliated BDs
are likely to be passed along to their customers and counterparties.
In the proposal, the SEC recognized that potential shifts in risk-
taking due to section 203 of EGRRCPA, as discussed above, may lead to
two competing effects. On the one hand, if affected entities are now
able to bear risk at a lower cost than their customers (i.e., because
such entities are no longer subject to section 13 of the BHC Act),
increased risk-taking could promote secondary market trading activity
and capital formation in primary markets, and thus increase access to
capital for issuers. Similarly, the statutory exemption may increase
banking entities' covered fund activities, which may broaden investment
opportunities for investors in covered funds and facilitate access to
capital by companies in which those funds invest. On the other hand,
the statutory exemption may increase risk-taking by individual SEC-
regulated entities, the amount of covered fund activity in which they
engage, as well as total risk in the financial system, which may
ultimately negatively impact issuers and investors. However, as noted
above, the maximum potential increase in aggregate trading activity of
entities that qualify for the exemption in section 203 of EGRRCPA that
would not trigger section 13 of the BHC Act compliance is likely
limited to $48.3 billion.\86\ Moreover, as shown above, empirically
such changes in risk-taking by SEC registrants that qualify for the
exemption in section 203 of EGRRCPA so far remain very low in absolute
terms, and such BDs continue to represent a very small fraction of the
industry as measured by both assets and trading book size. The SEC
continues to recognize that an increase in risk-taking by entities that
qualify for the exemption in section 203 of EGRRCPA, to the degree that
it is observed by providers of capital, may increase their cost of
capital and reduce the profitability of such risk-taking.
---------------------------------------------------------------------------
\86\ See supra footnote 81.
---------------------------------------------------------------------------
In the proposal, the SEC outlined two primary effects of section
203 of EGRRCPA on competition. First, entities exempt from section 13
of the BHC Act under EGRRCPA are no longer required to incur related
compliance costs and, thus, may have a competitive advantage relative
to similarly situated entities above the thresholds. The availability
of the statutory exemption may incentivize entities near the thresholds
to decrease the size of their balance sheet, trading activity, or both
in order to become exempt from section 13 of the BHC Act, resulting in
greater competition between entities with consolidated assets and TAL
near the thresholds. As demonstrated in Table 1 and the discussion
above, the number of BDs above the thresholds in section 203 of EGRRCPA
has declined only by five, while their assets and trading activity have
actually increased. Thus, to date the above competition effects may
have been muted.
Second, section 203 of EGRRCPA may have placed domestic entities
subject to the statutory exemption on a more even competitive footing
with foreign firms that are not subject to the substantive prohibitions
and compliance costs related to section 13 of the BHC Act and its
implementing regulations. In addition, section 203 of EGRRCPA may have
improved the competitive position of affected domestic entities
relative to foreign banking entities that are subject to section 13 of
the BHC Act as a result of such foreign banking entities utilizing the
exemptions related to activity outside of the United States.\87\ The
SEC has no data on the activity or risk-taking of foreign BDs that are
not registered with the SEC and are affiliated with banks or bank
holding companies. No such data is publicly available and commenters
did not provide data enabling such quantification. As a result, the SEC
is unable to empirically evaluate this effect.
---------------------------------------------------------------------------
\87\ See 12 U.S.C. 1851(d)(1)(H) and (I) (2017); See Sec. Sec.
_.6(e) and _.13(b) of the 2013 final rule.
---------------------------------------------------------------------------
Prior to the enactment of EGRRCPA, a bank-affiliated RIA could not
share the same name or a variation of the same name as a hedge fund or
private equity fund that it organized and offered under an exemption in
section 13 of the BHC Act.\88\ Section 204 of EGRRCPA changed this
condition for bank-affiliated RIAs that meet certain requirements and
provided them with flexibility in name sharing for corporate,
marketing, promotional, or other purposes. To the extent that name
sharing effectively and easily conveys the identity of a fund's RIA and
preserves the brand value, section 204 of EGRRCPA improved bank-
affiliated RIAs' ability to compete for investor capital with RIAs that
are not affiliated with banks.
---------------------------------------------------------------------------
\88\ See Sec. _.11 of the 2013 final rule; 12 U.S.C.
1851(d)(1)(G) (2017).
---------------------------------------------------------------------------
Section 204 also provided bank-affiliated RIAs that can share a
name with a fund with a competitive
[[Page 35019]]
advantage over those bank-affiliated RIAs that cannot share a name with
a fund because they do not meet the statutory conditions for name
sharing. This competitive effect can be attenuated since bank-
affiliated RIAs in the latter group may change their names to avoid
sharing the same name or a variation of the same name as a depository
institution, any company that controls it, or any bank holding company.
However, such a name change by bank-affiliated RIAs may have associated
costs that would not apply to bank-affiliated RIAs that do not have the
name of a depository institution, any company that controls it, or any
bank holding company in their names.
In addition, the statutory name-sharing provision may have reduced
some investors' search costs in the capital allocation process by
making it easier for some investors to identify the bank-affiliated RIA
of funds, to the extent that such advisers and funds could share names
as a result of the statutory exemption.
The SEC reiterates that the economic effects discussed above stem
from the statutory provisions of EGRRCPA that are fully in effect, and,
therefore, the SEC believes that these effects may be already partly
realized. The SEC believes that the conforming amendments to the
implementing regulations will have no additional costs, benefits, or
effects on efficiency, competition, and capital formation.
The agencies have received a number of comments on the proposal,
some supporting \89\ and others questioning \90\ the agencies'
codification of section 203 of EGRRCPA, and comments opposing the
statutory exemption for community banks.\91\ As discussed above, the
agencies believe that the final amendments conform the regulations
implementing section 13 of the BHC Act with the statutory amendments
made pursuant to sections 203 and 204 of EGRRCPA with no exercise of
agency discretion. As such, the SEC believes there are no reasonable
alternatives to the final rule.
---------------------------------------------------------------------------
\89\ See ICBA Letter; IAA Letter; LosHuertos and Mount Letter;
NAFCU Letter. See also section II.
\90\ See Competitive Enterprise Institute Letter; Competitive
Enterprise Institute et. al. Letter; Luetkemeyer Letter. See also
section II.
\91\ See Tinee Carraker Letter, Rodger Cunningham Letter.
---------------------------------------------------------------------------
G. Congressional Review Act
Pursuant to the Congressional Review Act,\92\ the Office of
Information and Regulatory Affairs has designated these rules as not a
``major rule,'' as defined by 5 U.S.C. 804(2).
---------------------------------------------------------------------------
\92\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------
H. Effective Date
Pursuant to Section 553(d) of the Administrative Procedure Act,\93\
the required publication or service of a substantive rule shall be made
not less than 30 days before its effective date, except, among other
things, as provided by the agency for good cause found and published
with the rule or if the rule is a substantive rule which grants or
recognizes an exemption or relieves a restriction. The agencies find
that there is good cause for setting an effective date that is less
than 30 days after publication of this substantive rule because this
final rule merely conforms the 2013 final rule to the EGRRCPA statutory
amendments. Furthermore, the final rule recognizes a statutory
exemption from the definition of ``banking entity,'' and relieves
restrictions applicable to the naming of a hedge fund or private equity
fund. Accordingly, the final rules are effective as of July 22, 2019.
---------------------------------------------------------------------------
\93\ 5 U.S.C. 553(d).
---------------------------------------------------------------------------
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
0
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 A--Authority and Definitions
0
2. In Sec. 44.1, revise paragraph (c) to read as follows:
Sec. 44.1 Authority, purpose, scope, and relationship to other
authorities.
* * * * *
(c) Scope. This part implements section 13 of the Bank Holding
Company Act with respect to banking entities for which the OCC is
authorized to issue regulations under section 13(b)(2) of the Bank
Holding Company Act (12 U.S.C. 1851(b)(2)) and take actions under
section 13(e) of that Act (12 U.S.C. 1851(e)). These include national
banks, Federal branches and Federal agencies of foreign banks, Federal
savings associations, Federal savings banks, and any of their
respective subsidiaries (except a subsidiary for which there is a
different primary financial regulatory agency, as that term is defined
in this part), but do not include such entities to the extent they are
not within the definition of banking entity in Sec. 44.2(c).
* * * * *
0
3. In Sec. 44.2, revise paragraph (r) to read as follows:
Sec. 44.2 Definitions.
* * * * *
[[Page 35020]]
(r) Insured depository institution, unless otherwise indicated, has
the same meaning as in section 3(c) of the Federal Deposit Insurance
Act (12 U.S.C. 1813(c)), but does not include:
(1) An insured depository institution that is described in section
2(c)(2)(D) of the BHC Act (12 U.S.C. 1841(c)(2)(D)); or
(2) An insured depository institution if it has, and if every
company that controls it has, total consolidated assets of $10 billion
or less and total trading assets and trading liabilities, on a
consolidated basis, that are 5 percent or less of total consolidated
assets.
* * * * *
Subpart C--Covered Funds Activities and Investments
0
4. In Sec. 44.10, revise paragraph (d)(9)(iii) to read as follows:
Sec. 44.10 Prohibition on acquiring or retaining an ownership
interest in and having certain relationships with a covered fund.
* * * * *
(d) * * *
(9) * * *
(iii) To share with a covered fund, for corporate, marketing,
promotional, or other purposes, the same name or a variation of the
same name, except as permitted under Sec. 44.11(a)(6).
* * * * *
0
5. In Sec. 44.11, revise paragraph (a)(6) to read as follows:
Sec. 44.11 Permitted organizing and offering, underwriting, and
market making with respect to a covered fund.
(a) * * *
(6) The covered fund, for corporate, marketing, promotional, or
other purposes:
(i) Does not share the same name or a variation of the same name
with the banking entity (or an affiliate thereof) except that a covered
fund may share the same name or a variation of the same name with a
banking entity that is an investment adviser to the covered fund if:
(A) The investment adviser is not an insured depository
institution, a company that controls an insured depository institution,
or a company that is treated as a bank holding company for purposes of
section 8 of the International Banking Act of 1978 (12 U.S.C. 3106);
and
(B) The investment adviser does not share the same name or a
variation of the same name as an insured depository institution, a
company that controls an insured depository institution, or a company
that is treated as a bank holding company for purposes of section 8 of
the International Banking Act of 1978 (12 U.S.C. 3106); and
(ii) Does not use the word ``bank'' in its name;
* * * * *
Board of Governors of the Federal Reserve
12 CFR Chapter II
Authority and Issuance
For the reasons set forth in the Common Preamble the Board amends
chapter II of title 12 of the Code of Federal Regulations as follows:
PART 248--PROPRIETARY TRADING AND CERTAIN INTERESTS IN AND
RELATIONSHIPS WITH COVERED FUNDS (REGULATION VV)
0
6. The authority citation for part 248 continues to read as follows:
Authority: 12 U.S.C. 1851, 12 U.S.C. 221 et seq., 12 U.S.C.
1818, 12 U.S.C. 1841 et seq., and 12 U.S.C. 3103 et seq.
0
7. The heading for part 248 is revised as set forth above.
Subpart A--Authority and Definitions
0
8. In Sec. 248.1, revise paragraph (c) to read as follows:
Sec. 248.1 Authority, purpose, scope, and relationship to other
authorities.
* * * * *
(c) Scope. This part implements section 13 of the Bank Holding
Company Act with respect to banking entities for which the Board is
authorized to issue regulations under section 13(b)(2) of the Bank
Holding Company Act (12 U.S.C. 1851(b)(2)) and take actions under
section 13(e) of that Act (12 U.S.C. 1851(e)). These include any state
bank that is a member of the Federal Reserve System, any company that
controls an insured depository institution (including a bank holding
company and savings and loan holding company), any company that is
treated as a bank holding company for purposes of section 8 of the
International Banking Act (12 U.S.C. 3106), and any subsidiary of the
foregoing other than a subsidiary for which the OCC, FDIC, CFTC, or SEC
is the primary financial regulatory agency (as defined in section 2(12)
of the Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010 (12 U.S.C. 5301(12)), but do not include such entities to the
extent they are not within the definition of banking entity in Sec.
248.2(c).
* * * * *
0
9. In Sec. 248.2, revise paragraph (r) to read as follows:
Sec. 248.2 Definitions.
* * * * *
(r) Insured depository institution, unless otherwise indicated, has
the same meaning as in section 3(c) of the Federal Deposit Insurance
Act (12 U.S.C. 1813(c)), but does not include:
(1) An insured depository institution that is described in section
2(c)(2)(D) of the BHC Act (12 U.S.C. 1841(c)(2)(D)); or
(2) An insured depository institution if it has, and if every
company that controls it has, total consolidated assets of $10 billion
or less and total trading assets and trading liabilities, on a
consolidated basis, that are 5 percent or less of total consolidated
assets.
* * * * *
Subpart C--Covered Funds Activities and Investments
0
10. In Sec. 248.10, revise paragraph (d)(9)(iii) to read as follows:
Sec. 248.10 Prohibition on acquiring or retaining an ownership
interest in and having certain relationships with a covered fund.
* * * * *
(d) * * *
(9) * * *
(iii) To share with a covered fund, for corporate, marketing,
promotional, or other purposes, the same name or a variation of the
same name, except as permitted under Sec. 248.11(a)(6).
* * * * *
0
11. In Sec. 248.11, revise paragraph (a) to read as follows:
Sec. 248.11 Permitted organizing and offering, underwriting, and
market making with respect to a covered fund.
(a) * * *
(6) The covered fund, for corporate, marketing, promotional, or
other purposes:
(i) Does not share the same name or a variation of the same name
with the banking entity (or an affiliate thereof) except that a covered
fund may share the same name or a variation of the same name with a
banking entity that is an investment adviser to the covered fund if:
(A) The investment adviser is not an insured depository
institution, a company that controls an insured depository institution,
or a company that is treated as a bank holding company for purposes of
section 8 of the International Banking Act of 1978 (12 U.S.C. 3106);
and
(B) The investment adviser does not share the same name or a
variation of the same name as an insured depository institution, a
company that controls an
[[Page 35021]]
insured depository institution, or a company that is treated as a bank
holding company for purposes of section 8 of the International Banking
Act of 1978 (12 U.S.C. 3106); and
(ii) Does not use the word ``bank'' in its name;
* * * * *
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Chapter III
Authority and Issuance
For the reasons set forth in the Common Preamble, the Federal
Deposit Insurance Corporation amends chapter III of title 12, Code of
Federal Regulations as follows:
PART 351--PROPRIETARY TRADING AND CERTAIN INTERESTS IN AND
RELATIONSHIPS WITH COVERED FUNDS
0
12. The authority citation for part 351 continues to read as follows:
Authority: 12 U.S.C. 1851; 1811 et seq.; 3101 et seq.; and 5412.
Subpart A--Authority and Definitions
0
13. In Sec. 351.1, revise paragraph (c) to read as follows:
Sec. 351.1 Authority, purpose, scope and relationship to other
authorities.
* * * * *
(c) Scope. This part implements section 13 of the Bank Holding
Company Act with respect to insured depository institutions for which
the FDIC is the appropriate Federal banking agency, as defined in
section 3(q) of the Federal Deposit Insurance Act, and certain
subsidiaries of the foregoing, but does not include such entities to
the extent they are not within the definition of banking entity in
Sec. 351.2(c).
* * * * *
0
14. In Sec. 351.2, revise paragraph (r) to read as follows:
Sec. 351.2 Definitions.
* * * * *
(r) Insured depository institution, unless otherwise indicated, has
the same meaning as in section 3(c) of the Federal Deposit Insurance
Act (12 U.S.C. 1813(c)), but does not include:
(1) An insured depository institution that is described in section
2(c)(2)(D) of the Bank Holding Company Act of 1956 (12 U.S.C.
1841(c)(2)(D)); or
(2) An insured depository institution if it has, and if every
company that controls it has, total consolidated assets of $10 billion
or less and total trading assets and trading liabilities, on a
consolidated basis, that are 5 percent or less of total consolidated
assets.
* * * * *
Subpart C--Covered Funds Activities and Investments
0
15. In Sec. 351.10, revise paragraph (d)(9)(iii) to read as follows:
Sec. 351.10 Prohibitions on acquiring or retaining an ownership
interest in and having certain relationships with a covered fund.
* * * * *
(d) * * *
(9) * * *
(iii) To share with a covered fund, for corporate, marketing,
promotional, or other purposes, the same name or a variation of the
same name, except as permitted under Sec. 351.11(a)(6).
* * * * *
0
16. In Sec. 351.11, revise paragraph (a) to read as follows:
Sec. 351.11 Permitted organizing and offering, underwriting, and
market making with respect to a covered fund.
(a) * * *
(6) The covered fund, for corporate, marketing, promotional, or
other purposes:
(i) Does not share the same name or a variation of the same name
with the banking entity (or an affiliate thereof), except that a
covered fund may share the same name or a variation of the same name
with a banking entity that is an investment adviser to the covered fund
if:
(A) The investment adviser is not an insured depository
institution, a company that controls an insured depository institution,
or a company that is treated as a bank holding company for purposes of
section 8 of the International Banking Act of 1978 (12 U.S.C. 3106);
and
(B) The investment adviser does not share the same name or a
variation of the same name as an insured depository institution, a
company that controls an insured depository institution, or a company
that is treated as a bank holding company for purposes of section 8 of
the International Banking Act of 1978 (12 U.S.C. 3106); and
(ii) Does not use the word ``bank'' in its name;
* * * * *
COMMODITY FUTURES TRADING COMMISSION
17 CFR Chapter I
Authority and Issuance
For the reasons set forth in the Common Preamble, the Commodity
Futures Trading Commission amends part 75 to chapter I of title 17 of
the Code of Federal Regulations as follows:
PART 75 -- PROPRIETARY TRADING AND CERTAIN INTERESTS IN AND
RELATIONSHIPS WITH COVERED FUNDS
0
17. The authority citation for part 75 continues to read as follows:
Authority: 12 U.S.C. 1851.
Subpart A--Authority and Definitions
0
18. In Sec. 75.1, revise paragraph (c) to read as follows:
Sec. 75.1 Authority, purpose, scope and relationship to other
authorities.
* * * * *
(c) Scope. This part implements section 13 of the Bank Holding
Company Act with respect to banking entities for which the CFTC is the
primary financial regulatory agency, as defined in section 2(12) of the
Dodd-Frank Act, but does not include such entities to the extent they
are not within the definition of banking entity in Sec. 75.2(c).
* * * * *
0
19. In Sec. 75.2, revise paragraph (r) to read as follows:
Sec. 75.2 Definitions.
* * * * *
(r) Insured depository institution, unless otherwise indicated, has
the same meaning as in section 3(c) of the Federal Deposit Insurance
Act (12 U.S.C. 1813(c)), but does not include:
(1) An insured depository institution that is described in section
2(c)(2)(D) of the Bank Holding Company Act of 1956 (12 U.S.C.
1841(c)(2)(D)); or
(2) An insured depository institution if it has, and if every
company that controls it has, total consolidated assets of $10 billion
or less and total trading assets and trading liabilities, on a
consolidated basis, that are 5 percent or less of total consolidated
assets.
* * * * *
Subpart C--Covered Funds Activities and Investments
0
20. In Sec. 75.10, revise paragraph (d)(9)(iii) to read as follows:
Sec. 75.10 Prohibitions on acquiring or retaining an ownership
interest in and having certain relationships with a covered fund.
* * * * *
(d) * * *
(9) * * *
(iii) To share with a covered fund, for corporate, marketing,
promotional, or
[[Page 35022]]
other purposes, the same name or a variation of the same name, except
as permitted under Sec. 75.11(a)(6).
* * * * *
0
21. In Sec. 75.11, revise paragraph (a) to read as follows:
Sec. 75.11 Permitted organizing and offering, underwriting, and
market making with respect to a covered fund.
(a) * * *
(6) The covered fund, for corporate, marketing, promotional, or
other purposes:
(i) Does not share the same name or a variation of the same name
with the banking entity (or an affiliate thereof), except that a
covered fund may share the same name or a variation of the same name
with a banking entity that is an investment adviser to the covered fund
if:
(A) The investment adviser is not an insured depository
institution, a company that controls an insured depository institution,
or a company that is treated as a bank holding company for purposes of
section 8 of the International Banking Act of 1978 (12 U.S.C. 3106);
and
(B) The investment adviser does not share the same name or a
variation of the same name as an insured depository institution, a
company that controls an insured depository institution, or a company
that is treated as a bank holding company for purposes of section 8 of
the International Banking Act of 1978 (12 U.S.C. 3106); and
(ii) Does not use the word ``bank'' in its name;
* * * * *
SECURITIES AND EXCHANGE COMMISSION
17 CFR Chapter II
Authority and Issuance
For the reasons set forth in the Common Preamble, the Securities
and Exchange Commission amends part 255 to chapter II of title 17 of
the Code of Federal Regulations as follows:
PART 255--PROPRIETARY TRADING AND CERTAIN INTERESTS IN AND
RELATIONSHIPS WITH COVERED FUNDS
0
22. The authority for part 255 continues to read as follows:
Authority: 12 U.S.C. 1851.
Subpart A--Authority and Definitions
0
23. In Sec. 255.1, revise paragraph (c) to read as follows:
Sec. 255.1 Authority, purpose, scope and relationship to other
authorities.
* * * * *
(c) Scope. This part implements section 13 of the Bank Holding
Company Act with respect to banking entities for which the SEC is the
primary financial regulatory agency, as defined in this part, but does
not include such entities to the extent they are not within the
definition of banking entity in Sec. 255.2(c).
* * * * *
0
24. In Sec. 255.2, revise paragraph (r) to read as follows:
Sec. 255.2 Definitions
* * * * *
(r) Insured depository institution, unless otherwise indicated, has
the same meaning as in section 3(c) of the Federal Deposit Insurance
Act (12 U.S.C. 1813(c)), but does not include:
(1) An insured depository institution that is described in section
2(c)(2)(D) of the BHC Act (12 U.S.C. 1841(c)(2)(D)); or
(2) An insured depository institution if it has, and if every
company that controls it has, total consolidated assets of $10 billion
or less and total trading assets and trading liabilities, on a
consolidated basis, that are 5 percent or less of total consolidated
assets.
* * * * *
Subpart C--Covered Funds Activities and Investments
0
25. In Sec. 255.10, revise paragraph (d)(9)(iii) to read as follows:
Sec. 255.10 Prohibition on acquiring or retaining an ownership
interest in and having certain relationships with a covered fund.
* * * * *
(d) * * *
(9) * * *
(iii) To share with a covered fund, for corporate, marketing,
promotional, or other purposes, the same name or a variation of the
same name, except as permitted under Sec. 255.11(a)(6).
* * * * *
0
26. In Sec. 255.11, revise paragraph (a) to read as follows:
Sec. 255.11 Permitted organizing and offering, underwriting, and
market making with respect to a covered fund.
(a) * * *
(6) The covered fund, for corporate, marketing, promotional, or
other purposes:
(i) Does not share the same name or a variation of the same name
with the banking entity (or an affiliate thereof) except that a covered
fund may share the same name or a variation of the same name with a
banking entity that is an investment adviser to the covered fund if:
(A) The investment adviser is not an insured depository
institution, a company that controls an insured depository institution,
or a company that is treated as a bank holding company for purposes of
section 8 of the International Banking Act of 1978 (12 U.S.C. 3106);
and
(B) The investment adviser does not share the same name or a
variation of the same name as an insured depository institution, a
company that controls an insured depository institution, or a company
that is treated as a bank holding company for purposes of section 8 of
the International Banking Act of 1978 (12 U.S.C. 3106); and
(ii) Does not use the word ``bank'' in its name;
* * * * *
Dated: June 26, 2019.
Morris Morgan,
Senior Deputy Comptroller and Chief Operating Officer.
By order of the Board of Governors of the Federal Reserve
System, July 8, 2019.
Margaret McCloskey Shanks,
Deputy Secretary of the Board.
Federal Deposit Insurance Corporation.
By Order of the Board of Directors.
Dated at Washington, DC, on June 18, 2019.
Valerie J. Best,
Assistant Executive Secretary.
Issued in Washington, DC, on July 9, 2019, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Securities and Exchange Commission
Dated: July 5, 2019.
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 2019-15019 Filed 7-19-19; 8:45 am]
BILLING CODE P
