[House Report 115-426]
[From the U.S. Government Publishing Office]
115th Congress } { Report
HOUSE OF REPRESENTATIVES
1st Session } { 115-426
======================================================================
INVESTOR CLARITY AND BANK PARITY ACT
_______
November 28, 2017.--Committed to the Committee of the Whole House on
the State of the Union and ordered to be printed
_______
Mr. Hensarling, from the Committee on Financial Services, submitted the
following
R E P O R T
[To accompany H.R. 3093]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred
the bill (H.R. 3093) to amend the Volcker Rule to permit
certain investment advisers to share a similar name with a
private equity fund, subject to certain restrictions, and for
other purposes, having considered the same, report favorably
thereon without amendment and recommend that the bill do pass.
Purpose and Summary
On June 28, 2017, Representative Michael Capuano introduced
the ``Investor Clarity and Bank Parity Act'', which makes a
modest amendment to Section 619 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act--also known as the Volcker
Rule. This amendment to Section 619 corrects an unintended
consequence of the implementation of the Volcker Rule, as
adopted by the five federal regulators responsible for writing
and implementing the Rule (i.e., the Federal Reserve, the
Securities and Exchange Commission, the Commodity Futures
Trading Commission, the Office of the Comptroller of the
Currency, and the Federal Deposit Insurance Corporation).
When the five federal regulators issued the final rule to
implement the Volcker Rule in December 2013, the final rule
imposed severe limitations on the ability of bank holding
companies and their affiliates--including investment advisers--
to sponsor hedge funds and private equity funds (also known as
``covered funds''). As a result, a covered fund cannot use the
name of a sponsor if the sponsor is an affiliate of a bank
holding company. H.R. 3093 eliminates this prohibition and
simply allows an affiliate of a bank holding company, such as
an investment advisor, to share a similar name with a covered
fund.
Background and Need for Legislation
The Volcker Rule prohibits bank holding companies and their
affiliates from sharing the same name or variation of the name
for corporate, marketing, or promotional purposes with a hedge
fund or private equity fund. However, when the five federal
regulators adopted the final rule to implement the Volcker
Rule, they expanded upon the ``name-sharing prohibition''
beyond the intent of Section 619 of the Dodd-Frank Act.
Specifically, the final rule to implement Section 6109 of
the Dodd-Frank Act provides that the covered fund may neither
share the same name with the banking entity (or an affiliate or
subsidiary thereof), nor can the covered fund use the word
``bank'' in the name. For example, if XYZ Investment Adviser is
an affiliate of XYZ Bank Holding Company and sponsors a real
estate fund, that real estate fund could not be named XYZ Real
Estate Fund. As Jeffrey Plunkett, Executive Vice President and
General Counsel of Natixis Global Asset Management, testified
on February 14, 2016, the implementation of the Volcker Rule is
``at odds with both industry practice and with the goal of
providing clarity to investors about who is managing a covered
fund.''
The Department of Treasury's report from June 2017 on Banks
and Credit Unions, which was issued pursuant to President
Trump's February 3, 2017 Executive Order 13722, is consistent
with this legislation. Specifically, the Treasury report
recommended that Congress allow banking entities, other than
depository institutions, and their holding companies to share a
name with funds they sponsor, provided that the separate
identity of the funds is clearly disclosed to investors.
Hearings
The Committee on Financial Services Subcommittee on Capital
Markets, Securities, and Investment held a hearing examining
matters relating to H.R. 3093 on March 29, 2017.
Committee Consideration
The Committee on Financial Services met in open session on
November 14, 2017 and November 15, 2017, and ordered H.R. 3093
to be reported favorably to the House without amendment by
voice vote, a quorum being present.
Committee Votes
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the record votes
on the motion to report legislation and amendments thereto.
There were no recorded votes for H.R. 3093.
Committee Oversight Findings
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the findings and recommendations of
the Committee based on oversight activities under clause
2(b)(1) of rule X of the Rules of the House of Representatives,
are incorporated in the descriptive portions of this report.
Performance Goals and Objectives
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the Committee states that H.R. 3093
will clarify the Volcker Rule to permit a covered fund to have
the same name as an investment adviser affiliated with a bank
holding company under certain conditions.
New Budget Authority, Entitlement Authority, and Tax Expenditures
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee adopts as its
own the estimate of new budget authority, entitlement
authority, or tax expenditures or revenues contained in the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to section 402 of the Congressional
Budget Act of 1974.
Congressional Budget Office Estimates
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, the following is the cost estimate
provided by the Congressional Budget Office pursuant to section
402 of the Congressional Budget Act of 1974:
U.S. Congress,
Congressional Budget Office,
Washington, DC, November 21, 2017.
Hon. Jeb Hensarling,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 3093, the Investor
Clarity and Bank Parity Act.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Sarah Puro.
Sincerely,
Keith Hall,
Director.
Enclosure.
H.R. 3093--Investor Clarity and Bank Parity Act
H.R. 3093 would amend current law, known as the ``Volker
Rule,'' to allow certain types of financial firms--hedge funds
and private equity funds (known as ``covered funds'' under the
rule)--to have the same name as an insured depository
institution or its affiliate. As a result, the federal banking
regulators--the Federal Deposit Insurance Corporation (FDIC),
the Office of the Comptroller of the Currency (OCC), and the
Federal Reserve--along with the Securities and Exchange
Commission (SEC) and the Commodity Futures Trading Commission
(CFTC)--would be required to revise current regulations
concerning allowable naming conventions.
Direct spending and revenues
Costs incurred by the FDIC and the OCC are recorded in the
budget as an increase in direct spending. CBO expects that each
agency would need one or two full-time employees to complete
the rule-making. Those two agencies are authorized to collect
premiums and fees from insured depository institutions to cover
administrative expenses. CBO expects that they would do so to
recover any costs associated with amending current regulations
under the bill. Costs to the Federal Reserve System are
reflected on the federal budget as a reduction in remittances
to the Treasury (which are recorded in the budget as revenues).
CBO estimates that any additional administrative costs to the
Federal Reserve under the bill would be insignificant.
Because enacting H.R. 3093 would affect direct spending and
revenues, pay-as-you-go procedures apply. However, CBO
estimates that the net effects would be insignificant for each
year.
CBO estimates that enacting H.R. 3093 would not
significantly increase net direct spending or on-budget
deficits in any of the four consecutive 10-year periods
beginning in 2028.
Discretionary costs
Costs incurred by the SEC and the CFTC are recorded in the
budget as discretionary and are subject to future
appropriations action. Based on the cost of similar activities,
CBO estimates that each agency would need one or two full-time
employees to complete the rule-making. CBO estimates that the
costs to those agencies would not be significant and would be
subject to the availability of appropriated funds.
Mandates
H.R. 3093 contains no intergovernmental mandates as defined
in the Unfunded Mandates Reform Act (UMRA).
If any of the financial regulators increase premiums or
fees to offset the costs of implementing the bill, H.R. 3093
would increase the cost of an existing mandate on private
entities required to pay those assessments. Using information
from the agencies, CBO estimates that the incremental cost of
the mandate would be small and be below the annual threshold
for private-sector mandates established in UMRA ($156 million
in 2017, adjusted annually for inflation).
The CBO staff contacts for this estimate are Sarah Puro
(for the FDIC and the OCC), Stephen Rabent (for the CFTC and
the SEC) and Rachel Austin (for Mandates). The estimate was
approved by H. Samuel Papenfuss, Deputy Assistant Director for
Budget Analysis.
Federal Mandates Statement
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995.
The Committee has determined that the bill does not contain
Federal mandates on the private sector. The Committee has
determined that the bill does not impose a Federal
intergovernmental mandate on State, local, or tribal
governments.
Advisory Committee Statement
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
Applicability to Legislative Branch
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of the section
102(b)(3) of the Congressional Accountability Act.
Earmark Identification
With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee has carefully reviewed
the provisions of the bill and states that the provisions of
the bill do not contain any congressional earmarks, limited tax
benefits, or limited tariff benefits within the meaning of the
rule.
Duplication of Federal Programs
In compliance with clause 3(c)(5) of rule XIII of the Rules
of the House of Representatives, the Committee states that no
provision of the bill establishes or reauthorizes: (1) a
program of the Federal Government known to be duplicative of
another Federal program; (2) a program included in any report
from the Government Accountability Office to Congress pursuant
to section 21 of Public Law 111-139; or (3) a program related
to a program identified in the most recent Catalog of Federal
Domestic Assistance, published pursuant to the Federal Program
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No.
98-169).
Disclosure of Directed Rulemaking
Pursuant to section 3(i) of H. Res. 5, (115th Congress),
the following statement is made concerning directed
rulemakings: The Committee estimates that the bill requires no
directed rulemakings within the meaning of such section.
Section-by-Section Analysis of the Legislation
Section 1. Short title
This section cites H.R. 3093 as the ``Investor Clarity and
Bank Parity Act''.
Section 2. Naming restrictions
This section amends Sections 13 of the Bank Holding Company
Act of 1956 to permit a covered fund to have the same name as a
bank-affiliated investment advisor if the investment advisor
(1) is not, and does not control, an insured depository
institution and is not treated as a bank holding company as
defined by the International Banking Act of 1978; (2) does not
share the same name as (i) an insured depository institution;
(ii) a company that controls an insured depository institution;
or (iii) a company that is treated as a bank holding company;
and (3) does not have a name that contains the word ``bank''.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, and existing law in which no
change is proposed is shown in roman):
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (new matter is
printed in italic, and existing law in which no change is
proposed is shown in roman):
BANK HOLDING COMPANY ACT OF 1956
* * * * * * *
SEC. 13. PROHIBITIONS ON PROPRIETARY TRADING AND CERTAIN RELATIONSHIPS
WITH HEDGE FUNDS AND PRIVATE EQUITY FUNDS.
(a) In General.--
(1) Prohibition.--Unless otherwise provided in this
section, a banking entity shall not--
(A) engage in proprietary trading; or
(B) acquire or retain any equity,
partnership, or other ownership interest in or
sponsor a hedge fund or a private equity fund.
(2) Nonbank financial companies supervised by the
board.--Any nonbank financial company supervised by the
Board that engages in proprietary trading or takes or
retains any equity, partnership, or other ownership
interest in or sponsors a hedge fund or a private
equity fund shall be subject, by rule, as provided in
subsection (b)(2), to additional capital requirements
for and additional quantitative limits with regards to
such proprietary trading and taking or retaining any
equity, partnership, or other ownership interest in or
sponsorship of a hedge fund or a private equity fund,
except that permitted activities as described in
subsection (d) shall not be subject to the additional
capital and additional quantitative limits except as
provided in subsection (d)(3), as if the nonbank
financial company supervised by the Board were a
banking entity.
(b) Study and Rulemaking.--
(1) Study.--Not later than 6 months after the date of
enactment of this section, the Financial Stability
Oversight Council shall study and make recommendations
on implementing the provisions of this section so as
to--
(A) promote and enhance the safety and
soundness of banking entities;
(B) protect taxpayers and consumers and
enhance financial stability by minimizing the
risk that insured depository institutions and
the affiliates of insured depository
institutions will engage in unsafe and unsound
activities;
(C) limit the inappropriate transfer of
Federal subsidies from institutions that
benefit from deposit insurance and liquidity
facilities of the Federal Government to
unregulated entities;
(D) reduce conflicts of interest between the
self-interest of banking entities and nonbank
financial companies supervised by the Board,
and the interests of the customers of such
entities and companies;
(E) limit activities that have caused undue
risk or loss in banking entities and nonbank
financial companies supervised by the Board, or
that might reasonably be expected to create
undue risk or loss in such banking entities and
nonbank financial companies supervised by the
Board;
(F) appropriately accommodate the business of
insurance within an insurance company, subject
to regulation in accordance with the relevant
insurance company investment laws, while
protecting the safety and soundness of any
banking entity with which such insurance
company is affiliated and of the United States
financial system; and
(G) appropriately time the divestiture of
illiquid assets that are affected by the
implementation of the prohibitions under
subsection (a).
(2) Rulemaking.--
(A) In general.--Unless otherwise provided in
this section, not later than 9 months after the
completion of the study under paragraph (1),
the appropriate Federal banking agencies, the
Securities and Exchange Commission, and the
Commodity Futures Trading Commission, shall
consider the findings of the study under
paragraph (1) and adopt rules to carry out this
section, as provided in subparagraph (B).
(B) Coordinated rulemaking.--
(i) Regulatory authority.--The
regulations issued under this paragraph
shall be issued by--
(I) the appropriate Federal
banking agencies, 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
agency described in subclause
(I), (III), or (IV) is the
primary financial regulatory
agency);
(III) the Commodity Futures
Trading Commission, with
respect to any entity for which
the Commodity Futures Trading
Commission is the primary
financial regulatory agency, as
defined in section 2 of the
Dodd-Frank Wall Street Reform
and Consumer Protection Act;
and
(IV) the Securities and
Exchange Commission, with
respect to any entity for which
the Securities and Exchange
Commission is the primary
financial regulatory agency, as
defined in section 2 of the
Dodd-Frank Wall Street Reform
and Consumer Protection Act.
(ii) Coordination, consistency, and
comparability.--In developing and
issuing regulations pursuant to this
section, the appropriate Federal
banking agencies, the Securities and
Exchange Commission, and the Commodity
Futures Trading Commission shall
consult and coordinate with each other,
as appropriate, for the purposes of
assuring, to the extent possible, that
such regulations are comparable and
provide for consistent application and
implementation of the applicable
provisions of this section to avoid
providing advantages or imposing
disadvantages to the companies affected
by this subsection and to protect the
safety and soundness of banking
entities and nonbank financial
companies supervised by the Board.
(iii) Council role.--The Chairperson
of the Financial Stability Oversight
Council shall be responsible for
coordination of the regulations issued
under this section.
(c) Effective Date.--
(1) In general.--Except as provided in paragraphs (2)
and (3), this section shall take effect on the earlier
of--
(A) 12 months after the date of the issuance
of final rules under subsection (b); or
(B) 2 years after the date of enactment of
this section.
(2) Conformance period for divestiture.--A banking
entity or nonbank financial company supervised by the
Board shall bring its activities and investments into
compliance with the requirements of this section not
later than 2 years after the date on which the
requirements become effective pursuant to this section
or 2 years after the date on which the entity or
company becomes a nonbank financial company supervised
by the Board. The Board may, by rule or order, extend
this two-year period for not more than one year at a
time, if, in the judgment of the Board, such an
extension is consistent with the purposes of this
section and would not be detrimental to the public
interest. The extensions made by the Board under the
preceding sentence may not exceed an aggregate of 3
years.
(3) Extended transition for illiquid funds.--
(A) Application.--The Board may, upon the
application of a banking entity, extend the
period during which the banking entity, to the
extent necessary to fulfill a contractual
obligation that was in effect on May 1, 2010,
may take or retain its equity, partnership, or
other ownership interest in, or otherwise
provide additional capital to, an illiquid
fund.
(B) Time limit on approval.--The Board may
grant 1 extension under subparagraph (A), which
may not exceed 5 years.
(4) Divestiture required.--Except as otherwise
provided in subsection (d)(1)(G), a banking entity may
not engage in any activity prohibited under subsection
(a)(1)(B) after the earlier of--
(A) the date on which the contractual
obligation to invest in the illiquid fund
terminates; and
(B) the date on which any extensions granted
by the Board under paragraph (3) expire.
(5) Additional capital during transition period.--
Notwithstanding paragraph (2), on the date on which the
rules are issued under subsection (b)(2), the
appropriate Federal banking agencies, the Securities
and Exchange Commission, and the Commodity Futures
Trading Commission shall issue rules, as provided in
subsection (b)(2), to impose additional capital
requirements, and any other restrictions, as
appropriate, on any equity, partnership, or ownership
interest in or sponsorship of a hedge fund or private
equity fund by a banking entity.
(6) Special rulemaking.--Not later than 6 months
after the date of enactment of this section, the Board
shall issues rules to implement paragraphs (2) and (3).
(d) Permitted Activities.--
(1) In general.--Notwithstanding the restrictions
under subsection (a), to the extent permitted by any
other provision of Federal or State law, and subject to
the limitations under paragraph (2) and any
restrictions or limitations that the appropriate
Federal banking agencies, the Securities and Exchange
Commission, and the Commodity Futures Trading
Commission, may determine, the following activities (in
this section referred to as ``permitted activities''')
are permitted:
(A) The purchase, sale, acquisition, or
disposition of obligations of the United States
or any agency thereof, obligations,
participations, or other instruments of or
issued by the Government National Mortgage
Association, the Federal National Mortgage
Association, the Federal Home Loan Mortgage
Corporation, a Federal Home Loan Bank, the
Federal Agricultural Mortgage Corporation, or a
Farm Credit System institution chartered under
and subject to the provisions of the Farm
Credit Act of 1971 (12 U.S.C. 2001 et seq.),
and obligations of any State or of any
political subdivision thereof.
(B) The purchase, sale, acquisition, or
disposition of securities and other instruments
described in subsection (h)(4) in connection
with underwriting or market-making-related
activities, to the extent that any such
activities permitted by this subparagraph are
designed not to exceed the reasonably expected
near term demands of clients, customers, or
counterparties.
(C) Risk-mitigating hedging activities in
connection with and related to individual or
aggregated positions, contracts, or other
holdings of a banking entity that are designed
to reduce the specific risks to the banking
entity in connection with and related to such
positions, contracts, or other holdings.
(D) The purchase, sale, acquisition, or
disposition of securities and other instruments
described in subsection (h)(4) on behalf of
customers.
(E) Investments in one or more small business
investment companies, as defined in section 102
of the Small Business Investment Act of 1958
(15 U.S.C. 662), investments designed primarily
to promote the public welfare, of the type
permitted under paragraph (11) of section 5136
of the Revised Statutes of the United States
(12 U.S.C. 24), or investments that are
qualified rehabilitation expenditures with
respect to a qualified rehabilitated building
or certified historic structure, as such terms
are defined in section 47 of the Internal
Revenue Code of 1986 or a similar State
historic tax credit program.
(F) The purchase, sale, acquisition, or
disposition of securities and other instruments
described in subsection (h)(4) by a regulated
insurance company directly engaged in the
business of insurance for the general account
of the company and by any affiliate of such
regulated insurance company, provided that such
activities by any affiliate are solely for the
general account of the regulated insurance
company, if--
(i) the purchase, sale, acquisition,
or disposition is conducted in
compliance with, and subject to, the
insurance company investment laws,
regulations, and written guidance of
the State or jurisdiction in which each
such insurance company is domiciled;
and
(ii) the appropriate Federal banking
agencies, after consultation with the
Financial Stability Oversight Council
and the relevant insurance
commissioners of the States and
territories of the United States, have
not jointly determined, after notice
and comment, that a particular law,
regulation, or written guidance
described in clause (i) is insufficient
to protect the safety and soundness of
the banking entity, or of the financial
stability of the United States.
(G) Organizing and offering a private equity
or hedge fund, including serving as a general
partner, managing member, or trustee of the
fund and in any manner selecting or controlling
(or having employees, officers, directors, or
agents who constitute) a majority of the
directors, trustees, or management of the fund,
including any necessary expenses for the
foregoing, only if--
(i) the banking entity provides bona
fide trust, fiduciary, or investment
advisory services;
(ii) the fund is organized and
offered only in connection with the
provision of bona fide trust,
fiduciary, or investment advisory
services and only to persons that are
customers of such services of the
banking entity;
(iii) the banking entity does not
acquire or retain an equity interest,
partnership interest, or other
ownership interest in the funds except
for a de minimis investment subject to
and in compliance with paragraph (4);
(iv) the banking entity complies with
the restrictions under paragraphs (1)
and (2) of subparagraph (f);
(v) the banking entity does not,
directly or indirectly, guarantee,
assume, or otherwise insure the
obligations or performance of the hedge
fund or private equity fund or of any
hedge fund or private equity fund in
which such hedge fund or private equity
fund invests;
(vi) the banking entity does not
share with the hedge fund or private
equity fund, for corporate, marketing,
promotional, or other purposes, the
same name or a variation of the same
name, except that the hedge fund or
private equity fund may 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 find, if--
(I) such 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;
(II) such investment adviser
does not share the same name or
a variation of the same name as
an insured depository
institution, any company that
controls an insured depository
institution, or any company
that is treated as a bank
holding company for purposes of
section 8 of the International
Banking Act of 1978; and
(III) such name does not
contain the word ``ban'';
(vii) no director or employee of the
banking entity takes or retains an
equity interest, partnership interest,
or other ownership interest in the
hedge fund or private equity fund,
except for any director or employee of
the banking entity who is directly
engaged in providing investment
advisory or other services to the hedge
fund or private equity fund; and
(viii) the banking entity discloses
to prospective and actual investors in
the fund, in writing, that any losses
in such hedge fund or private equity
fund are borne solely by investors in
the fund and not by the banking entity,
and otherwise complies with any
additional rules of the appropriate
Federal banking agencies, the
Securities and Exchange Commission, or
the Commodity Futures Trading
Commission, as provided in subsection
(b)(2), designed to ensure that losses
in such hedge fund or private equity
fund are borne solely by investors in
the fund and not by the banking entity.
(H) Proprietary trading conducted by a
banking entity pursuant to paragraph (9) or
(13) of section 4(c), provided that the trading
occurs solely outside of the United States and
that the banking entity is not directly or
indirectly controlled by a banking entity that
is organized under the laws of the United
States or of one or more States.
(I) The acquisition or retention of any
equity, partnership, or other ownership
interest in, or the sponsorship of, a hedge
fund or a private equity fund by a banking
entity pursuant to paragraph (9) or (13) of
section 4(c) solely outside of the United
States, provided that no ownership interest in
such hedge fund or private equity fund is
offered for sale or sold to a resident of the
United States and that the banking entity is
not directly or indirectly controlled by a
banking entity that is organized under the laws
of the United States or of one or more States.
(J) Such other activity as the appropriate
Federal banking agencies, the Securities and
Exchange Commission, and the Commodity Futures
Trading Commission determine, by rule, as
provided in subsection (b)(2), would promote
and protect the safety and soundness of the
banking entity and the financial stability of
the United States.
(2) Limitation on permitted activities.--
(A) In general.--No transaction, class of
transactions, or activity may be deemed a
permitted activity under paragraph (1) if the
transaction, class of transactions, or
activity--
(i) would involve or result in a
material conflict of interest (as such
term shall be defined by rule as
provided in subsection (b)(2)) between
the banking entity and its clients,
customers, or counterparties;
(ii) would result, directly or
indirectly, in a material exposure by
the banking entity to high-risk assets
or high-risk trading strategies (as
such terms shall be defined by rule as
provided in subsection (b)(2));
(iii) would pose a threat to the
safety and soundness of such banking
entity; or
(iv) would pose a threat to the
financial stability of the United
States.
(B) Rulemaking.--The appropriate Federal
banking agencies, the Securities and Exchange
Commission, and the Commodity Futures Trading
Commission shall issue regulations to implement
subparagraph (A), as part of the regulations
issued under subsection (b)(2).
(3) Capital and quantitative limitations.--The
appropriate Federal banking agencies, the Securities
and Exchange Commission, and the Commodity Futures
Trading Commission shall, as provided in subsection
(b)(2), adopt rules imposing additional capital
requirements and quantitative limitations, including
diversification requirements, regarding the activities
permitted under this section if the appropriate Federal
banking agencies, the Securities and Exchange
Commission, and the Commodity Futures Trading
Commission determine that additional capital and
quantitative limitations are appropriate to protect the
safety and soundness of banking entities engaged in
such activities.
(4) De minimis investment.--
(A) In general.--A banking entity may make
and retain an investment in a hedge fund or
private equity fund that the banking entity
organizes and offers, subject to the
limitations and restrictions in subparagraph
(B) for the purposes of--
(i) establishing the fund and
providing the fund with sufficient
initial equity for investment to permit
the fund to attract unaffiliated
investors; or
(ii) making a de minimis investment.
(B) Limitations and restrictions on
investments.--
(i) Requirement to seek other
investors.--A banking entity shall
actively seek unaffiliated investors to
reduce or dilute the investment of the
banking entity to the amount permitted
under clause (ii).
(ii) Limitations on size of
investments.--Notwithstanding any other
provision of law, investments by a
banking entity in a hedge fund or
private equity fund shall--
(I) not later than 1 year
after the date of establishment
of the fund, be reduced through
redemption, sale, or dilution
to an amount that is not more
than 3 percent of the total
ownership interests of the
fund;
(II) be immaterial to the
banking entity, as defined, by
rule, pursuant to subsection
(b)(2), but in no case may the
aggregate of all of the
interests of the banking entity
in all such funds exceed 3
percent of the Tier 1 capital
of the banking entity.
(iii) Capital.--For purposes of
determining compliance with applicable
capital standards under paragraph (3),
the aggregate amount of the outstanding
investments by a banking entity under
this paragraph, including retained
earnings, shall be deducted from the
assets and tangible equity of the
banking entity, and the amount of the
deduction shall increase commensurate
with the leverage of the hedge fund or
private equity fund.
(C) Extension.--Upon an application by a
banking entity, the Board may extend the period
of time to meet the requirements under
subparagraph (B)(ii)(I) for 2 additional years,
if the Board finds that an extension would be
consistent with safety and soundness and in the
public interest.
(e) Anti-evasion.--
(1) Rulemaking.--The appropriate Federal banking
agencies, the Securities and Exchange Commission, and
the Commodity Futures Trading Commission shall issue
regulations, as part of the rulemaking provided for in
subsection (b)(2), regarding internal controls and
recordkeeping, in order to insure compliance with this
section.
(2) Termination of activities or investment.--
Notwithstanding any other provision of law, whenever an
appropriate Federal banking agency, the Securities and
Exchange Commission, or the Commodity Futures Trading
Commission, as appropriate, has reasonable cause to
believe that a banking entity or nonbank financial
company supervised by the Board under the respective
agency's jurisdiction has made an investment or engaged
in an activity in a manner that functions as an evasion
of the requirements of this section (including through
an abuse of any permitted activity) or otherwise
violates the restrictions under this section, the
appropriate Federal banking agency, the Securities and
Exchange Commission, or the Commodity Futures Trading
Commission, as appropriate, shall order, after due
notice and opportunity for hearing, the banking entity
or nonbank financial company supervised by the Board to
terminate the activity and, as relevant, dispose of the
investment. Nothing in this paragraph shall be
construed to limit the inherent authority of any
Federal agency or State regulatory authority to further
restrict any investments or activities under otherwise
applicable provisions of law.
(f) Limitations on Relationships With Hedge Funds and Private
Equity Funds.--
(1) In general.--No banking entity that serves,
directly or indirectly, as the investment manager,
investment adviser, or sponsor to a hedge fund or
private equity fund, or that organizes and offers a
hedge fund or private equity fund pursuant to paragraph
(d)(1)(G), and no affiliate of such entity, may enter
into a transaction with the fund, or with any other
hedge fund or private equity fund that is controlled by
such fund, that would be a covered transaction, as
defined in section 23A of the Federal Reserve Act (12
U.S.C. 371c), with the hedge fund or private equity
fund, as if such banking entity and the affiliate
thereof were a member bank and the hedge fund or
private equity fund were an affiliate thereof.
(2) Treatment as member bank.--A banking entity that
serves, directly or indirectly, as the investment
manager, investment adviser, or sponsor to a hedge fund
or private equity fund, or that organizes and offers a
hedge fund or private equity fund pursuant to paragraph
(d)(1)(G), shall be subject to section 23B of the
Federal Reserve Act (12 U.S.C. 371c 1), as if such
banking entity were a member bank and such hedge fund
or private equity fund were an affiliate thereof.
(3) Permitted services.--
(A) In general.--Notwithstanding paragraph
(1), the Board may permit a banking entity to
enter into any prime brokerage transaction with
any hedge fund or private equity fund in which
a hedge fund or private equity fund managed,
sponsored, or advised by such banking entity
has taken an equity, partnership, or other
ownership interest, if--
(i) the banking entity is in
compliance with each of the limitations
set forth in subsection (d)(1)(G) with
regard to a hedge fund or private
equity fund organized and offered by
such banking entity;
(ii) the chief executive officer (or
equivalent officer) of the banking
entity certifies in writing annually
(with a duty to update the
certification if the information in the
certification materially changes) that
the conditions specified in subsection
(d)(1)(g)(v) are satisfied; and
(iii) the Board has determined that
such transaction is consistent with the
safe and sound operation and condition
of the banking entity.
(B) Treatment of prime brokerage
transactions.--For purposes of subparagraph
(A), a prime brokerage transaction described in
subparagraph (A) shall be subject to section
23B of the Federal Reserve Act (12 U.S.C. 371c-
1) as if the counterparty were an affiliate of
the banking entity.
(4) Application to nonbank financial companies
supervised by the board.--The appropriate Federal
banking agencies, the Securities and Exchange
Commission, and the Commodity Futures Trading
Commission shall adopt rules, as provided in subsection
(b)(2), imposing additional capital charges or other
restrictions for nonbank financial companies supervised
by the Board to address the risks to and conflicts of
interest of banking entities described in paragraphs
(1), (2), and (3) of this subsection.
(g) Rules of Construction.--
(1) Limitation on contrary authority.--Except as
provided in this section, notwithstanding any other
provision of law, the prohibitions and restrictions
under this section shall apply to activities of a
banking entity or nonbank financial company supervised
by the Board, even if such activities are authorized
for a banking entity or nonbank financial company
supervised by the Board.
(2) Sale or securitization of loans.--Nothing in this
section shall be construed to limit or restrict the
ability of a banking entity or nonbank financial
company supervised by the Board to sell or securitize
loans in a manner otherwise permitted by law.
(3) Authority of federal agencies and state
regulatory authorities.--Nothing in this section shall
be construed to limit the inherent authority of any
Federal agency or State regulatory authority under
otherwise applicable provisions of law.
(h) Definitions.--In this section, the following definitions
shall apply:
(1) Banking entity.--The term ``banking entity''
means any insured depository institution (as defined in
section 3 of the Federal Deposit Insurance Act (12
U.S.C. 1813)), 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, and any affiliate or
subsidiary of any such entity. For purposes of this
paragraph, the term ``insured depository institution''
does not include an institution that functions solely
in a trust or fiduciary capacity, if--
(A) all or substantially all of the deposits
of such institution are in trust funds and are
received in a bona fide fiduciary capacity;
(B) no deposits of such institution which are
insured by the Federal Deposit Insurance
Corporation are offered or marketed by or
through an affiliate of such institution;
(C) such institution does not accept demand
deposits or deposits that the depositor may
withdraw by check or similar means for payment
to third parties or others or make commercial
loans; and
(D) such institution does not--
(i) obtain payment or payment related
services from any Federal Reserve bank,
including any service referred to in
section 11A of the Federal Reserve Act
(12 U.S.C. 248a); or
(ii) exercise discount or borrowing
privileges pursuant to section 19(b)(7)
of the Federal Reserve Act (12 U.S.C.
461(b)(7)).
(2) Hedge fund; private equity fund.--The terms
``hedge fund'' and ``private equity fund'' mean an
issuer that would be an investment company, as defined
in the Investment Company Act of 1940 (15 U.S.C. 80a-1
et seq.), but for section 3(c)(1) or 3(c)(7) of that
Act, or such similar funds as the appropriate Federal
banking agencies, the Securities and Exchange
Commission, and the Commodity Futures Trading
Commission may, by rule, as provided in subsection
(b)(2), determine.
(3) Nonbank financial company supervised by the
board.--The term ``nonbank financial company supervised
by the Board'' means a nonbank financial company
supervised by the Board of Governors, as defined in
section 102 of the Financial Stability Act of 2010.
(4) Proprietary trading.--The term ``proprietary
trading'', when used with respect to a banking entity
or nonbank financial company supervised by the Board,
means engaging as a principal for the trading account
of the banking entity or nonbank financial company
supervised by the Board in any transaction to purchase
or sell, or otherwise acquire or dispose of, any
security, any derivative, any contract of sale of a
commodity for future delivery, any option on any such
security, derivative, or contract, or any other
security or financial instrument that the appropriate
Federal banking agencies, the Securities and Exchange
Commission, and the Commodity Futures Trading
Commission may, by rule as provided in subsection
(b)(2), determine.
(5) Sponsor.--The term to ``sponsor'' a fund means--
(A) to serve as a general partner, managing
member, or trustee of a fund;
(B) in any manner to select or to control (or
to have employees, officers, or directors, or
agents who constitute) a majority of the
directors, trustees, or management of a fund;
or
(C) to share with a fund, for corporate,
marketing, promotional, or other purposes, the
same name or a variation of the same name,
except as permitted under subsection
(d)(1)(G)(vi).
(6) Trading account.--The term ``trading account''
means any account used for acquiring or taking
positions in the securities and instruments described
in paragraph (4) principally for the purpose of selling
in the near term (or otherwise with the intent to
resell in order to profit from short-term price
movements), and any such other accounts as the
appropriate Federal banking agencies, the Securities
and Exchange Commission, and the Commodity Futures
Trading Commission may, by rule as provided in
subsection (b)(2), determine.
(7) Illiquid fund.--
(A) In general.--The term ``illiquid fund''
means a hedge fund or private equity fund
that--
(i) as of May 1, 2010, was
principally invested in, or was
invested and contractually committed to
principally invest in, illiquid assets,
such as portfolio companies, real
estate investments, and venture capital
investments; and
(ii) makes all investments pursuant
to, and consistent with, an investment
strategy to principally invest in
illiquid assets. In issuing rules
regarding this subparagraph, the Board
shall take into consideration the terms
of investment for the hedge fund or
private equity fund, including
contractual obligations, the ability of
the fund to divest of assets held by
the fund, and any other factors that
the Board determines are appropriate.
(B) Hedge fund.--For the purposes of this
paragraph, the term ``hedge fund'' means any
fund identified under subsection (h)(2), and
does not include a private equity fund, as such
term is used in section 203(m) of the
Investment Advisers Act of 1940 (15 U.S.C. 80b-
3(m)).
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