\30\ Proposed Rule 225.180(h).

The standards contained in the second, third, and fourth standards above are based on existing standards in the Federal banking and securities laws that are designed to identify securities that are liquid and may be sold promptly at a price that is reasonably related to its fair value. Specifically, the second standard above is based in part on the SEC's definition of securities for which a ``ready market'' exists for purposes of the net capital rules applicable to broker dealers under the Securities Exchange Act of 1934 (``Exchange Act'').\31\ Similarly, the third standard above is based, in part, on the actions regularly taken by a ``qualified OTC market maker'' as defined in the SEC's Rule 3b8, with respect to securities under the Exchange Act.\32\ The fourth standard above is based, in part, on the criteria used to identify whether a security or other asset is a ``marketable security'' or a ``liquid asset'' for purposes of the Board's Regulation W governing transactions between member banks and their affiliates.\33\ In each instance, the proposal represents a modification of the standards to reflect the broader range of financial instruments (including derivatives) or other assets that may be held by a hedge fund or private equity fund and that should be considered ``liquid'' if traded or quoted in the manner described. The Board has proposed using these standards (which are generally understood within the banking and financial services industries) to help promote ready and measurable compliance with the requirements of the Volcker Rule. These standards are designed to capture the wide range of instruments and assets (or their equivalents) that one actively or routinely trades on markets or trading facilities, as for which bid, offer or price quotations are widely available, and that, therefore, should be considered as liquid assets for purposes of the Volcker Rule's provision regarding illiquid funds. For example, these standards would treat as a liquid asset: (i) Equity and debt securities, derivatives, and commodity futures traded on a registered securities exchange, board of trade, alternative trading system, electronic trading platform or similar market that provides independent, bona fide offers to buy and sell; (ii) assets traded on an electronic interdealer quotation system, such as OTC Bulletin Board or the system maintained by PINK OTC Markets, Inc., as well as overthecounter derivatives, debt securities (such as corporate bonds), and syndicated commercial loans for which active interdealer markets exist; and (iii) financial instruments for which indicative price data is supplied by an electronic service, such as Markit Group Limited.
\31\ See 15 CFR 240.15c31(c)(11)(i).
\32\ See 15 CFR 240.3b8(a).

\33\ See 12 CFR 223.42(e) and (f)(5).

The fifth standard is designed to capture instruments with a relatively shortterm duration and that can be monetized or converted at maturity into a liquid asset. The Board recognizes that there may be situations where other, nonenumerated assets may be liquid even though they are not included in the standards contained in sections 225.181(h)(1)(5) of the proposed rule. In order to address these situations, the Board has expressly retained the ability to determine that any other asset is a liquid asset, based on all the facts and circumstances.

On the other hand, consistent with the purpose of the Volcker Rule, this proposed approach to defining illiquid assets should include as illiquid assets investments in portfolio companies, investments in real estate (other than those made through publicly traded REITs), venture capital investments, and investments in other hedge funds or private equity funds that both are not publicly traded and invest in illiquid assets. The proposed rule also provides that an assetincluding a liquid asset such as a securitymay be considered an ``illiquid asset'' if, because of statutory or regulatory restrictions applicable to the hedge fund, private equity fund or asset, the asset cannot be offered, sold, or otherwise transferred by the hedge fund or private equity fund to a person that is unaffiliated with the banking entity. This approach recognizes situations where, for example, a security held by a fund is subject to one or more statutory or regulatory restrictions under the Federal securities laws (such as under Rule 144A of the Securities Act of 1933
[[Page 72745]]
regarding private resales of securities to institutions) that temporarily prohibit the transferability or resale of the security.\34\ However, the proposed rule expressly provides that an asset may be considered an illiquid asset under this provision only for so long as and to the extent that the relevant statutory or regulatory restriction is effective.\35\ Once the relevant statutory or regulatory restriction is no longer applicable to the asset, hedge fund, or private equity fund, the asset would cease to be treated as an illiquid asset and would be a ``liquid asset'' if it met any of the standards contained in sections 225.181(g)(1)(6) of the proposed rule.
\34\ See 15 CFR 230.144a.

\35\ Proposed Rule 225.180(g)(2).

The Board is interested in receiving comments on the appropriateness of the definitions and standards mentioned above, as well as whether there are particular types of assets that should be defined, by rule, as liquid or illiquid. If so, what types of assets would these be?

b. ``Principally invested.''

The statute's fundrelated criteria also require that the hedge fund or private equity fund either (1) have been principally invested in illiquid assets as of May 1, 2010, or (2) have been invested to some degree in illiquid assets and contractually committed to principally invest in illiquid assets as of such date. In addition, in either case, the fund must make all of its investments pursuant to, and consistent with, an investment strategy to principally invest in illiquid assets.

Many types of hedge funds and private equity funds have investment strategies that focus almost exclusively on one type of illiquid assets, such as real estate or startup companies (including new or emerging companies in the technology, life sciences, alternative energy, or ``clean tech'' areas).\36\ These types of hedge funds and private equity funds typically request capital contributions from their investors only when particular investment opportunities have been identified and hold only a small portion of their assets in cash or other liquid assets (other than during brief periods pending the investment of capital or the distribution of proceeds from the sale of an investment). By limiting the availability of the extended transition period to hedge funds or private equity funds that ``principally invest'' in and have an investment strategy to principally invest in illiquid assets, such as real estate, nonpublic portfolio companies, and venture capital opportunities, Congress appears to have structured the extended transition period for those types of funds that are clearly focused on, and invest substantially all of their capital in, illiquid assets.
\36\ Accordingly, institutional investors, such as pension plans and endowments, that seek exposure to different types of assets typically invest in a range of different types of hedge funds or private equity funds to obtain diversification across asset classes.

Accordingly, the proposed rule provides that a hedge fund or private equity fund will be considered to be ``principally invested'' in illiquid assets only if at least 75 percent of the fund's consolidated total assets are, or are expected to be, comprised of illiquid assets or riskmitigating hedges entered into in connection with, and related to, individual or aggregated positions in, or holdings of, illiquid assets.\37\ The proposal would allow a fund to count riskmitigating hedging positions that are related to the fund's holdings of illiquid assets towards the 75 percent asset test because such positions are, by definition, associated with the fund's illiquid holdings. In addition, this approach is consistent with safe and sound riskmanagement practices and other provisions of the Volcker Rule.\38\ \37\ Proposed Rule 225.180(i).
\38\ See 12 U.S.C. 1851(d)(1)(C). The Board expects to interpret the language concerning riskmitigating hedges consistent with the manner in which such language is implemented through the rulemaking process conducted under section 13(b)(2) of the BHC Act.

The proposed rule also provides that a fund will be considered ``contractually committed to principally invest'' in illiquid assets as of May 1, 2010, if the fund's organizational documents (such as the limited partnership agreement in the case of a fund organized in this manner), or other documents that constitute a contractual obligation of the fund (such as a binding side letter agreement entered into with investors) that was in effect as of May 1, 2010, provide for the fund to be principally invested in illiquid assets during the period beginning on the date when capital contributions are first received by the fund for the purpose of making investments and ending on the fund's expected termination date.\39\ This definition is intended to recognize that an illiquid fund may have more than 25 percent of its assets in liquid assets (such as cash or money market instruments) during its initial preinvestment organizational period, while the fund seeks to meet its investment objective of investing principally in illiquid assets.

\39\ Proposed Rule 225.180(i)(2).

Additionally, the proposed rule provides that a fund would be considered to have an ``investment strategy to principally invest'' in illiquid assets if the fund either: (i) Markets or holds itself out to investors as intending to principally invest in illiquid assets; or (ii) has a documented investment policy of principally investing in illiquid assets.\40\ In considering whether a hedge fund or private equity fund's organizational documents, marketing materials, or investment policy provide for the fund to principally invest in illiquid assets, banking entities should consider whether the assets to be acquired by the fund (as specified in such materials) are of the type and nature that would make the assets ``illiquid assets'' or ``liquid assets'' for purposes of the rule. For example, under the proposal, if a fund's investment strategy provides for the fund to primarily invest in publicly traded stocks or OTC derivatives that are regularly bought and sold in the interdealer market, the fund would not be considered to have an investment strategy to principally invest in illiquid assets. This would be the case even if the fund's investment strategy did not indicate that the assets acquired by the fund must be traded on a recognized exchange, trading facility, or market of the type described in section 225.180(h)(2) or quoted on interdealer systems of the type described in section 225.180(h)(3). Likewise, under the proposal, a fund generally would be considered to be contractually committed to invest in illiquid assets if the fund's organizational documents provide for the fund to invest in the equity of earlystage nonpublic companies, even if the fund's documents do not specify that the equity of such companies must not be traded or quoted in the manner described in section 225.180(h)(2)(4).

\40\ Proposed Rule 225.180(i)(3).

The Board is interested in receiving comments on the appropriateness of these criteria and on whether there are other indicia of being ``contractually committed to principally invest,'' or having an ``investment strategy to principally invest,'' in illiquid assets that would better achieve the Volcker Rule's objectives. 2. Criteria Focused on the Banking Entity's Investment

Besides meeting the criteria described above, a banking entity's interest in a hedge fund or private equity fund qualifies for the extended transition period in section 13(c)(3) of the BHC Act only if the banking entity's retention of that ownership interest in the fund, or provision of additional capital to the fund, is necessary to fulfill a contractual
[[Page 72746]]
obligation of the banking entity that was in effect on May 1, 2010.\41\ This statutory restriction complements and reinforces the fundrelated criteria discussed above because a fund that is principally invested in liquid assets is unlikely to require its investors to commit to remaining invested in the fund for, or provide additional capital over, an extended period of time.

\41\ 12 U.S.C. 1851(c)(3)(A).

The proposed rule provides that a banking entity will be considered to have a ``contractual obligation'' to remain invested in a fund only if the banking entity, under the contractual terms of its equity, partnership, or other ownership interest in the fund or other contractual arrangements with the fund that were in effect as of May 1, 2010, is prohibited from both: (i) Redeeming all of its equity, partnership, or other ownership interests in the fund; and (ii) selling or otherwise transferring all such ownership interests to a person that is not an affiliate of the banking entity.\42\ Similarly, the proposed rule specifies that a banking entity has a contractual obligation to provide additional capital to an illiquid fund only if the banking entity is required, under the contractual terms of its equity, partnership, or other ownership interest in the fund or other contractual arrangements with the fund that were in effect as of May 1, 2010, to provide additional capital to the fund.

\42\ Proposed Rule 225.181(b)(3)(i).

In the Board's experience, to the extent that contractual obligations described above exist between a banking entity and a hedge fund or private equity fund, such obligations often may be waived with the consent of the general partner and/or the other investors in the fund. To address these situations, the proposed rule provides that either of the contractual obligations described above will not be considered to be in effect with respect to a banking entity if: (i) The obligation may be terminated by the banking entity or any of its subsidiaries or affiliates; or (ii) the obligation may be terminated with the consent of other persons unless the banking entity and its subsidiaries and affiliates have used their reasonable best efforts to obtain such consent and such consent has been denied.\43\ These provisions are intended to ensure that the banking entity's obligation to remain invested in, or provide additional capital to, a fund cannot be terminated by the banking entity itself or through its reasonable best efforts.

\43\ Proposed Rule 225.181(b)(3)(iii)(A) and (B).

The Board invites comments on the appropriateness of the criteria contained in the definition. For example, are there other ways to define a ``contractual obligation'' that would better achieve the objectives of the Volcker Rule's conformance period?

3. Application for Extended Transition Period

Under section 619 of the DoddFrank Act, a banking entity may take advantage of the extended transition period with respect to an investment in a qualifying illiquid fund only with the approval of the Board. Section 225.181(b) of the proposed rule implements this requirement. A banking entity that seeks an extended transition period with respect to an illiquid fund must submit a request to the Board in accordance with the requirements of section 225.181(c). Any request must address the factors specified in section 225.181(d) of the proposed rule, as described in Part II above. The Board expects to carefully review requests for an extended transition period to ensure that the banking entity's interest in the fund and the fund's assets and investment strategy satisfy the requirements contained in the rule in order to be eligible for an extended transition period. As noted above, in cases where the banking entity is primarily supervised by another Federal banking agency, the SEC, or the CFTC, the Board would consult with such agency both in connection with its review of the application and, if applicable, prior to imposing conditions in connection with the approval of any request by the banking entity seeking an extended transition period with respect to an illiquid fund under the proposed rule.

As provided in the Volcker Rule, the Board may grant a banking entity only one extended transition period with respect to any illiquid fund, which may not exceed 5 years.\44\ The Volcker Rule expressly states that any extended transition period will automatically terminate (unless it already expired by its terms) on the date on which the contractual obligation to invest in, or provide additional capital to, the illiquid fund terminates.\45\ Section 225.181(b)(2)(ii) implements this termination requirement.
\44\ The statute provides that a banking entity may apply for a single extension with respect to an illiquid fund, and that such extension may not exceed 5 years. In light of the statutory language, the Board retains the right to grant an extended transition period of less than 5 years if, based on all the facts and circumstances, it determines such extension is appropriate. \45\ Id. at Sec. 1851(c)(4).
4. Exception for Private Equity Funds as Defined Under the Investment Advisors Act of 1940

Section 13(h)(7)(B) of the BHC Act provides that, for purposes of the definition of an ``illiquid fund,'' the term ``hedge fund'' shall not include a ``private equity fund,'' as such term is used in section 203(m) of the Investment Advisors Act of 1940 (15 U.S.C. 80b3(m)).'' \46\ However, section 203(m) of the Investment Advisors Act, as added by section 408 of the DoddFrank Act, does not contain a definition of, nor does it use the term, ``private equity fund.'' Moreover, Congress' intent in adopting this exclusion is unclear. For example, a fund that invests primarily in nonpublic portfolio companies, which are commonly referred to in the investment community as ``private equity funds,'' appears to be the type of fund that the Volcker Rule intended to potentially qualify as an ``illiquid fund.'' As noted earlier, the Volcker Rule specifically includes investments in ``portfolio companies'' as an example of an ``illiquid asset,'' one of the key terms used to define an ``illiquid fund.''

\46\ See 12 U.S.C. 1851(h)(7)(B).

In any event, the Board does not believe that it is necessary to resolve the ambiguity surrounding this provision because the exclusion would not have any effect on the ability of a fund to qualify as an illiquid fund. This is because the Volcker Rule defines a ``hedge fund'' and a ``private equity fund'' synonymously.\47\ Thus, any illiquid fund that would have been excluded from the definition of ``hedge fund'' because it met the missing definition of a ``private equity fund'' in the Investment Advisors Act could still qualify for the extended conformance period afforded to illiquid funds as a ``private equity fund'' under the Volcker Rule itself.
\47\ 12 U.S.C. 1851(h)(2).

D. Nonbank Financial Companies Supervised by the Board

As noted above, the Volcker Rule does not prohibit nonbank financial companies supervised by the Board from engaging in proprietary trading, or from having the types of investments in or relationships with hedge funds or private equity funds that banking entities are prohibited or restricted from having under the Volcker Rule. However, the Volcker Rule provides that the Board or other appropriate agency impose additional capital charges, quantitative limits, or other restrictions on nonbank financial companies supervised by the Board or their
[[Page 72747]]
subsidiaries that are engaged in such activities or maintain such relationships.\48\ Like banking entities, the Volcker Rule provides a nonbank financial company supervised by the Board two years after the date the company becomes a nonbank financial company supervised by the Board to conform its activities to any applicable requirements of the Volcker Rule, including any capital requirements or quantitative limitations adopted thereunder and applicable to the company. The Volcker Rule also provides the Board the ability to extend this two year conformance period by up to three additional oneyear periods.\49\ Section 225.182 of the proposed rule implements the conformance period for nonbank financial companies supervised by the Board. A nonbank financial company supervised by the Board seeking an extension must submit a request to the Board under the same time frame as required of banking entities.
\48\ See 12 U.S.C. 1851(a)(2), (d)(4).
\49\ 12 U.S.C. 1851(c)(2).

III. Request for Comments

The Board invites comments on all aspects of the proposed rule. Comments are specifically requested on the following matters:

1. Are the definitions contained in the proposed rule appropriate? Would other definitions be more consistent with the language or purposes of the Volcker Rule?

2. Is the proposed requirement that at least 75 percent of a fund's assets be ``illiquid assets'' or related hedges appropriate in order for a fund to meet the definition of ``principally invested''? Would an alternative number, metric, or other indicia be more consistent with the purposes of the Volcker Rule?

3. Are the enumerated criteria for determining what qualifies as a ``liquid asset'' appropriate? If not, what additional or alternative metrics or screens should the Board consider?

4. Are there particular types of assets that should be defined, by rule, as illiquid? If so, what types of assets would these be? Would the assets generally be considered illiquid assets under the terms of the proposed rule?

5. What will the potential impact of the proposed rule be on affected entities?

6. Are there any additional factors that the Board should consider in reviewing a request for an extension of the conformance period? Are there additional factors that the Board should consider in reviewing a request for an extension with respect to an illiquid fund?

7. Are there specific additional conditions or limitations that the Board should, by rule, impose in connection with granting an extension of the conformance period? If so, what conditions or limitations would be appropriate? Alternatively, should the Board and the other Federal agencies responsible for implementing the Volcker Rule consider what conditions or limitations might be appropriate to apply to prohibited activities that are conducted during the conformance period (including any extension thereof) on a tailored or casebycase basis?

8. Are there other matters that the Board should address as part of the conformance period rulemaking required by section 13(c)(6) of the BHC Act?
IV. Administrative Law Matters

A. Paperwork Reduction Act Analysis

In accordance with the Paperwork Reduction Act of 1995 (``PRA''),\50\ the Board reviewed the proposed rule under the authority delegated to the Board by Office of Management and Budget (``OMB''). The Board may not conduct or sponsor, and a respondent is not required to respond to, an information collection unless it displays a currently valid OMB control number.

\50\ 44 U.S.C. 3506; 5 CFR 1320, Appendix A.1.

Sections 225.181(c) and 225.182(c) of the proposed rule contain collections of information that are subject to the PRA. The OMB control number for these information collections will be assigned. These collections of information would only be required for banking entities and nonbank financial companies supervised by the Board that voluntarily decide to seek an extension of time to conform their activities to the Volcker Rule or divest their interest in an illiquid hedge fund or private equity fund. As discussed in the Supplementary Information, the DoddFrank Act generally requires banking entities and nonbank financial holding companies supervised by the Board to conform their activities and investments to the restrictions in the Volcker Rule within 2 years of the effective date of the Volcker Rule's restrictions. The proposed rule implements this conformance period and, as permitted by the DoddFrank Act, permits a banking entity or nonbank financial company supervised by the Board to request an extension of time to conform its activities to the Volcker Rule. Section 225.181(c) would require an application for an extension by a banking entity to be (1) submitted in writing to the Board at least 90 days prior to the expiration of the applicable time period, (2) provide the reasons why the banking entity believes the extension should be granted, and (3) provide a detailed explanation of the banking entity's plan for divesting or conforming the activity or investment(s). Section 225.182(c) would require an application for an extension by a nonbank financial holding company to be (1) submitted in writing to the Board at least 90 days prior to the expiration of the applicable time period, (2) provide the reasons why the nonbank financial holding company believes the extension should be granted, and (3) provide a detailed explanation of the company's plan for coming into compliance with the requirements of the Volcker Rule. A banking entity or nonbank financial company supervised by the Board may request confidential treatment of information submitted as part of an extension request in accordance with the Freedom of Information Act.

The estimated burden per request is 1 hour. It is estimated that there were approximately 7,200 banking entities as of December 31, 2009. Of that number, the Board estimates that approximately 720 banking entities would request an extension of the conformance period under the proposed rule. Therefore, the total amount of annual burden is estimated to be 720 hours. The number of nonbank financial companies supervised by the Board will be determined by the FSOC in accordance with the procedures established under the DoddFrank Act. Accordingly, the Board is unable at this time to estimate the number of nonbank financial companies supervised by the Board that might request an extension of the Volcker Rule conformance period under the proposed rule.

Comments are invited on:
(a) Whether the information collection is necessary for the proper performance of the agency functions; including whether the information has practical utility;
(b) The accuracy of the estimate of the burden of the information collection, including the cost of compliance;
(c) Ways to enhance the quality, utility, and clarity of the information to be collected; and
(d) Ways to minimize the burden of information collection on respondents, including through the use of automated collection techniques or other forms of information technology.
[[Page 72748]]

B. Initial Regulatory Flexibility Act Analysis

In accordance with Section 3(a) of the Regulatory Flexibility Act, 5 U.S.C. 601 et seq., (``RFA''), the Board is publishing an initial regulatory flexibility analysis of the proposed rule. The RFA requires an agency either to provide an initial regulatory flexibility analysis with a proposed rule for which a general notice of proposed rulemaking is required or to certify that the proposed rule will not have a significant economic impact on a substantial number of small entities. Based on this analysis and for the reasons stated below, the Board believes that this proposed rule would not have a significant economic impact on a substantial number of small entities. Nevertheless, the Board is publishing an initial regulatory flexibility analysis and requesting public comment in the following areas. A final regulatory flexibility analysis will be conducted after consideration of comments received during the public comment period.

The Volcker Rule, adopted as a new section 13 of the BHC Act, applies to all banking entities and nonbank financial companies supervised by the Board, regardless of size. The Board is proposing to amend Regulation Y to implement the provisions of the DoddFrank Act that allow a banking entityincluding a small banking entityor a nonbank financial company supervised by the Board to obtain, with the Board's approval, an extended period of time to conform its activities and investments to the requirements of the Volcker Rule. Under the proposed rule, a banking entity of any size may request up to three oneyear extensions of the general twoyear conformance period provided under section 13 of the BHC Act, as well as one extension of up to five years to divest certain ownership interests in a hedge fund or private equity fund that qualifies as an ``illiquid fund'' under the statute and proposed rule. The SUPPLEMENTARY INFORMATION provides additional information regarding the reasons for, and the objective and legal basis of, the proposed rule.

Under regulations issued by the Small Business Administration (``SBA''), a bank or other depository institution is considered ``small'' if it has $175 million or less in assets.\51\ As of December 31, 2009, there were approximately 2450 small bank holding companies, 293 small savings association, 132 small national banks, 73 small State member banks, 665 small State nonmember banks, and 21 small foreign banking organizations that are subject to section 8 of the International Banking Act of 1978. As of that date, there were no nonbank financial companies supervised by the Board. The Volcker Rule would affect only those entities that engage in activities or that hold investments prohibited or restricted under the terms of the Volcker Rule. As explained above, the Board estimates that of the total number of banking entities that would be affected by the Volcker Rule, approximately 10 percent would likely file an extension request under the proposed rule. Based on its supervisory experience, the Board believes that small banking entities are less likely to be engaged in the types of activities or hold investments prohibited under the Volcker Rule, and as such estimates that only 5 percent of small banking entities likely would file an extension request under the proposal. The Board specifically seeks comment on whether this estimate is appropriate. The Board notes that the impact of the proposal on entities choosing to take advantage of the proposal's extended conformance period provided under the proposed rule would be positive and not adverse. This is because the proposed rule would allow affected entities to seek and obtain an extended period of time to conform their activities, investments, or relationships to the requirements of the Volcker Rule. The Board also has taken several steps to reduce the potential burden of the proposed rule on all banking entities, including small banking entities. For example, the proposed rule establishes a straightforward process for banking entities, including small banking entities, to request an extension of the conformance period or an extended transition period with respect to an investment in an illiquid fund, and permits such requests to be submitted in letter form. The proposed rule also uses standards drawn from existing federal banking and securities regulations to help define the types of funds that may qualify as an ``illiquid fund'' under the statute and the proposed rule, which should assist small banking entities in determining whether their investments qualify for the extended transition period available for investments in illiquid funds. \51\ 13 CFR 121.201.

As discussed in the SUPPLEMENTARY INFORMATION, the DoddFrank Act requires that the Board adopt rules implementing the Volcker Rule's conformance period by January 21, 2011. The Board does not believe that the proposed rule duplicates, overlaps, or conflicts with any other Federal rules. The Board requests comment on whether there are additional steps that the Board could take to reduce the potential burden on small banking entities consistent with the terms and purpose of section 13 of the BHC Act. The Board will carefully review any comments received on these issues during the public comment period. Solicitation of Comments on Use of Plain Language

Section 722 of the GLBA required the Federal banking agencies to use plain language in all proposed and final rules published after January 1, 2000. The Board invites comment on how to make the interim final rule easier to understand. For example, the Board requests comment on such questions as:

List of Subjects in 12 CFR Part 225

Administrative practice and procedure, Banks, banking, Holding companies, Reporting and recordkeeping requirements, Securities. Authority and Issuance

For the reasons stated in the preamble, the Board proposes to amend Regulation Y, 12 CFR part 225, as set forth below:

Proposed Rules

The Board proposes to adopt rules under part 225 of Title 12, Chapter II of the Code of Federal Regulations, as follows:
PART 225BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL

(REGULATION Y)

1. The authority citation for part 225 is revised to read as follows:

Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p 1, 1843(c)(8), 1844(b), 1851, 1972(1), 3106, 3108, 3310, 33313351, 3907, and 3909; 15 U.S.C. 6801 and 6805.
[[Page 72749]]

Subpart LConditions to Orders

2. Add a new subpart L heading as set forth above, and designate Sec. 225.200 under subpart L.

3. Add Subpart K to part 225 to read as follows: Subpart KProprietary Trading and Relationships with Hedge Funds and Private Equity Funds
Sec.
225.180 Definitions.
225.181 Conformance period for banking entities engaged in prohibited proprietary trading or private fund activities.
225.182 Conformance period for nonbank financial companies supervised by the board engaged in proprietary trading or private fund activities.
Subpart KProprietary Trading and Relationships with Hedge Funds and Private Equity Funds
Sec. 225.180 Definitions.

For purposes of this subpart:
(a) Banking entity means
(1) Any insured depository institution;
(2) Any company that controls an insured depository institution; (3) Any company that is treated as a bank holding company for purposes of section 8 of the International Banking Act of 1978; and (4) Any affiliate or subsidiary of any of the foregoing entities. (b) 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. 80a1 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 section 13(b)(2) of the Bank Holding Company Act (12 U.S.C. 1851(b)(2)), determine. (c) Insured depository institution has the same meaning as ordered to that term in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813), except that for purposes of this subpart the term shall not include an institution that functions solely in a trust or fiduciary capacity if
(1) All or substantially all of the deposits of such institution are in trust funds and are received in a bona fide fiduciary capacity; (2) 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;
(3) 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
(4) 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. 416(b)(7)).
(d) 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 (12 U.S.C. 5311).
(e) Board means the Board of Governors of the Federal Reserve System.
(f) Illiquid fund means a hedge fund or private equity fund that as of May 1, 2010:
(1) Was principally invested in illiquid assets; or
(2) Was invested in, and contractually committed to principally invest in, illiquid assets; and
(3) Makes all investments pursuant to, and consistent with, an investment strategy to principally invest in illiquid assets. (g) Illiquid assets means any real property, security, obligation, or other asset that
(1) Is not a liquid asset; or
(2) Because of statutory or regulatory restrictions applicable to the hedge fund, private equity fund or asset, cannot be offered, sold, or otherwise transferred by the hedge fund or private equity fund to a person that is unaffiliated with the relevant banking entity, provided that any asset may be considered an illiquid asset under this paragraph (g)(2) only for so long as such statutory or regulatory restriction is applicable.
(h) Liquid asset means:
(1) Cash or cash equivalents;
(2) An asset that is traded on a recognized, established exchange, trading facility or other market on which there exist independent, bona fide offers to buy and sell so that a price reasonably related to the last sales price or current bona fide competitive bid and offer quotations can be determined for a particular asset almost instantaneously;
(3) An asset for which there are bona fide, competitive bid and offer quotations in a recognized interdealer quotation system or similar system or for which multiple dealers furnish bona fide, competitive bid and offer quotations to other brokers and dealers on request;
(4) An asset the price of which is quoted routinely in a widely disseminated publication that is readily available to the general public or through an electronic service that provides indicative data from realtime financial networks;
(5) An asset with an initial term of one year or less and the payments on which at maturity may be settled, closedout, or paid in cash or one or more other liquid assets described in paragraphs (h)(1), (2), (3), or (4) of this section; and
(6) Any other asset that the Board determines, based on all the facts and circumstances, is a liquid asset.
(i) Principally invested and related definitions.A hedge fund or private equity fund
(1) Is principally invested in illiquid assets if at least 75 percent of the fund's consolidated total assets (as reflected on the fund's financial statements prepared in accordance with applicable accounting standards) are
(i) Illiquid assets; or
(ii) Riskmitigating hedges entered into in connection with and related to individual or aggregated positions in, or holdings of, illiquid assets;
(2) Is contractually committed to principally invest in illiquid assets if the fund's organizational documents, or other documents that constitute a contractual obligation of the fund, provide for the fund to be principally invested in assets described in paragraph (i)(1) of this section during the period beginning on the date when capital contributions are first received for the purpose of making investments and ending on the fund's expected termination date; and
(3) Has an investment strategy to principally invest in illiquid assets if the fund
(i) Markets or holds itself out to investors as intending to principally invest in assets described in paragraph (i)(1) of this section; or
(ii) Has a documented investment policy of principally investing in assets described in paragraph (i)(1) of this section.
Sec. 225.181 Conformance period for banking entities engaged in prohibited proprietary trading or private fund activities.
(a) Conformance period. (1) In general.Except as provided in paragraph (b)(2) or (3), a banking entity shall bring its activities and investments into compliance with the requirements of section 13 of the Bank Holding Company Act (12 U.S.C. 1851) and this
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subpart no later than 2 years after the earlier of:
(i) July 21, 2012; or
(ii) 12 months after the date on which final rules adopted under section 13(b)(2) of the Bank Holding Company Act (12 U.S.C. 1851(b)(2)) are published in the Federal Register.
(2) New banking entities.A company that was not a banking entity, or a subsidiary or affiliate of a banking entity, as of July 21, 2010, and becomes a banking entity, or a subsidiary or affiliate of a banking entity, after that date shall bring its activities and investments into compliance with the requirements of section 13 of the Bank Holding Company Act (12 U.S.C. 1851) and this subpart before the later of (i) The conformance date determined in accordance with paragra

FOR FURTHER INFORMATION CONTACT

Brian P. Knestout, Senior Attorney, (202) 4522249, Jeremy R. Newell, Senior Attorney, (202) 4523239, Christopher M. Paridon, Senior Attorney, (202) 4523274, or Kieran J. Fallon, Associate General Counsel, (202) 4525270, Legal Division; David K. Lynch, Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, NW., Washington, DC 20551. Users of
Telecommunication Device for Deaf (TDD) only, call (202) 2634869.