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2013-31511

2013-31511

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Vol. 79 Friday, No. 21 January 31, 2014 Book 2 of 2 Books Pages 5535–6076 Part II
Department of the Treasury
Office of the Comptroller of the Currency
Board of Governors of the Federal Reserve System Federal Deposit Insurance Corporation Securities and Exchange Commission
12 CFR Parts 44, 248, and 351 17 CFR Part 255 Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds; Final Rule
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5536
Federal Register
/Vol. 79, No. 21/Friday, January 31, 2014/Rules and Regulations
DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency 12 CFR Part 44
[Docket No. OCC–2011–0014] RIN 1557–AD44
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 12 CFR Part 248
[Docket No. R–1432] RIN 7100 AD82
FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR Part 351
RIN 3064–AD85
SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 255
[Release No. BHCA–1; File No. S7–41–11] RIN 3235–AL07
Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds
AGENCY
:
Office of the Comptroller of the Currency, Treasury (‘‘OCC’’); Board of Governors of the Federal Reserve System (‘‘Board’’); Federal Deposit Insurance Corporation (‘‘FDIC’’); and Securities and Exchange Commission (‘‘SEC’’).
ACTION
:
Final rule.
SUMMARY
:
The OCC, Board, FDIC, and SEC (individually, an ‘‘Agency,’’ and collectively, ‘‘the Agencies’’) are adopting a rule that would implement section 13 of the BHC Act, which was added by section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (‘‘Dodd-Frank Act’’). Section 13 contains certain prohibitions and restrictions on the ability of a  banking entity and nonbank financial company supervised by the Board to engage in proprietary trading and have certain interests in, or relationships with, a hedge fund or private equity fund.
DATES
:
The final rule is effective April 1, 2014.
FOR FURTHER INFORMATION CONTACT
:
OCC:
Ursula Pfeil, Counsel, or Deborah Katz, Assistant Director, Legislative and Regulatory Activities Division, (202) 649–5490; Ted Dowd, Assistant Director, or Roman Goldstein, Senior Attorney, Securities and Corporate Practices Division, (202) 649– 5510; Kurt Wilhelm, Director for Financial Markets Group, (202) 649– 6360; Stephanie Boccio, Technical Expert for Credit and Market Risk Group, (202) 649–6360, Office of the Comptroller of the Currency, 250 E Street SW., Washington, DC 20219.
Board:
Christopher M. Paridon, Counsel, (202) 452–3274, or Anna M. Harrington, Senior Attorney, Legal Division, (202) 452–6406; Mark E. Van Der Weide, Deputy Director, Division of Bank Supervision and Regulation, (202) 452–2263; or Sean D. Campbell, Deputy Associate Director, Division of Research and Statistics, (202) 452–3760, Board of Governors of the Federal Reserve System, 20th and C Streets NW., Washington, DC 20551.
FDIC:
Bobby R. Bean, Associate Director,
, or Karl R. Reitz, Chief, Capital Markets Strategies Section,
Capital Markets Branch, Division of Risk Management Supervision, (202) 898– 6888; Michael B. Phillips, Counsel,
, or Gregory S. Feder, Counsel,
, Legal Division, Federal Deposit Insurance Corporation, 550 17th Street NW., Washington, DC 20429.
SEC:
 Josephine J. Tao, Assistant Director, Angela R. Moudy, Branch Chief, John Guidroz, Branch Chief,  Jennifer Palmer or Lisa Skrzycki, Attorney Advisors, Office of Trading Practices, Catherine McGuire, Counsel, Division of Trading and Markets, (202) 551–5777; W. Danforth Townley, Attorney Fellow, Jane H. Kim, Brian McLaughlin Johnson or Marian Fowler, Senior Counsels, Division of Investment Management, (202) 551–6787; David Beaning, Special Counsel, Office of Structured Finance, Division of Corporation Finance, (202) 551–3850;  John Cross, Office of Municipal Securities, (202) 551–5680; or Adam Yonce, Assistant Director, or Matthew Kozora, Financial Economist, Division of Economic and Risk Analysis, (202) 551–6600, U.S. Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549.
SUPPLEMENTARY INFORMATION
:
Table of Contents
I. Background II. Notice of Proposed Rulemaking III. Overview of Final Rule A. General Approach and Summary of Final Rule B. Proprietary Trading Restrictions C. Restrictions on Covered Fund Activities and Investments D. Metrics Reporting Requirement E. Compliance Program Requirement IV. Final Rule A. Subpart B—Proprietary Trading Restrictions 1. Section
 ll 
.3: Prohibition on Proprietary Trading and Related Definitions a. Definition of ‘‘Trading Account’’  b. Rebuttable Presumption for the Short- Term Trading Account c. Definition of ‘‘Financial Instrument’’ d. Proprietary Trading Exclusions 1. Repurchase and Reverse Repurchase Arrangements and Securities Lending 2. Liquidity Management Activities 3. Transactions of Derivatives Clearing Organizations and Clearing Agencies 4. Excluded Clearing-Related Activities of Clearinghouse Members 5. Satisfying an Existing Delivery Obligation 6. Satisfying an Obligation in Connection With a Judicial, Administrative, Self- Regulatory Organization, or Arbitration Proceeding 7. Acting Solely as Agent, Broker, or Custodian 8. Purchases or Sales Through a Deferred Compensation or Similar Plan 9. Collecting a Debt Previously Contracted 10. Other Requested Exclusions 2. Section
 ll 
.4(a): Underwriting Exemption a. Introduction  b. Overview 1. Proposed Underwriting Exemption 2. Comments on Proposed Underwriting Exemption 3. Final Underwriting Exemption c. Detailed Explanation of the Underwriting Exemption 1. Acting as an Underwriter for a Distribution of Securities a. Proposed Requirements That the Purchase or Sale Be Effected Solely in Connection With a Distribution of Securities for Which the Banking Entity Acts as an Underwriter and That the Covered Financial Position be a Security i. Proposed Definition of ‘‘Distribution’’ ii. Proposed Definition of ‘‘Underwriter’’ iii. Proposed Requirement That the Covered Financial Position Be a Security  b. Comments on the Proposed Requirements That the Trade Be Effected Solely in Connection With a Distribution for Which the Banking Entity Is Acting as an Underwriter and That the Covered Financial Position Be a Security i. Definition of ‘‘Distribution’’ ii. Definition of ‘‘Underwriter’’ iii. ‘‘Solely in Connection With’’ Standard c. Final Requirement That the Banking Entity Act as an Underwriter for a Distribution of Securities and the Trading Desk’s Underwriting Position Be Related to Such Distribution i. Definition of ‘‘Underwriting Position’’ ii. Definition of ‘‘Trading Desk’’ iii. Definition of ‘‘Distribution’’ iv. Definition of ‘‘Underwriter’’ v. Activities Conducted ‘‘in Connection With’’ a Distribution 2. Near Term Customer Demand Requirement
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5537
Federal Register
/Vol. 79, No. 21/Friday, January 31, 2014/Rules and Regulations
a. Proposed Near Term Customer Demand Requirement  b. Comments Regarding the Proposed Near Term Customer Demand Requirement c. Final Near Term Customer Demand Requirement 3. Compliance Program Requirement a. Proposed Compliance Program Requirement  b. Comments on the Proposed Compliance Program Requirement c. Final Compliance Program Requirement 4. Compensation Requirement a. Proposed Compensation Requirement  b. Comments on the Proposed Compensation Requirement c. Final Compensation Requirement 5. Registration Requirement a. Proposed Registration Requirement  b. Comments on Proposed Registration Requirement c. Final Registration Requirement 6. Source of Revenue Requirement a. Proposed Source of Revenue Requirement  b. Comments on the Proposed Source of Revenue Requirement c. Final Rule’s Approach to Assessing Source of Revenue 3. Section
 ll 
.4(b): Market-Making Exemption a. Introduction  b. Overview 1. Proposed Market-Making Exemption 2. Comments on the Proposed Market- Making Exemption a. Comments on the Overall Scope of the Proposed Exemption  b. Comments Regarding the Potential Market Impact of the Proposed Exemption 3. Final Market-Making Exemption c. Detailed Explanation of the Market- Making Exemption 1. Requirement to Routinely Stand Ready To Purchase And Sell a. Proposed Requirement To Hold Self Out  b. Comments on the Proposed Requirement To Hold Self Out i. The Proposed Indicia ii. Treatment of Block Positioning Activity iii. Treatment of Anticipatory Market Making iv. High-Frequency Trading c. Final Requirement To Routinely Stand Ready To Purchase And Sell i. Definition of ‘‘Trading Desk’’ ii. Definitions of ‘‘Financial Exposure’’ and ‘‘Market-Maker Inventory’’ iii. Routinely Standing Ready To Buy and Sell 2. Near Term Customer Demand Requirement a. Proposed Near Term Customer Demand Requirement  b. Comments Regarding the Proposed Near Term Customer Demand Requirement i. The Proposed Guidance for Determining Compliance With the Near Term Customer Demand Requirement ii. Potential Inventory Restrictions and Differences Across Asset Classes iii. Predicting Near Term Customer Demand iv. Potential Definitions of ‘‘Client,’’ ‘‘Customer,’’ or ‘‘Counterparty’’ v. Interdealer Trading and Trading for Price Discovery or To Test Market Depth vi. Inventory Management vii. Acting as an Authorized Participant or Market Maker in Exchange-Traded Funds viii. Arbitrage or Other Activities That Promote Price Transparency and Liquidity ix. Primary Dealer Activities x. New or Bespoke Products or Customized Hedging Contracts c. Final Near Term Customer Demand Requirement i. Definition of ‘‘Client,’’ ‘‘Customer,’’ and ‘‘Counterparty’’ ii. Impact of the Liquidity, Maturity, and Depth of the Market on the Analysis iii. Demonstrable Analysis of Certain Factors iv. Relationship to Required Limits 3. Compliance Program Requirement a. Proposed Compliance Program Requirement  b. Comments on the Proposed Compliance Program Requirement c. Final Compliance Program Requirement 4. Market Making-Related Hedging a. Proposed Treatment of Market Making- Related Hedging  b. Comments on the Proposed Treatment of Market Making-Related Hedging c. Treatment of Market Making-Related Hedging in the Final Rule 5. Compensation Requirement a. Proposed Compensation Requirement  b. Comments Regarding the Proposed Compensation Requirement c. Final Compensation Requirement 6. Registration Requirement a. Proposed Registration Requirement  b. Comments on the Proposed Registration Requirement c. Final Registration Requirement 7. Source of Revenue Analysis a. Proposed Source of Revenue Requirement  b. Comments Regarding the Proposed Source of Revenue Requirement i. Potential Restrictions on Inventory, Increased Costs for customers, and Other Changes To Market-Making Services ii. Certain Price Appreciation-Related Profits Are an Inevitable or Important Component of Market Making iii. Concerns Regarding the Workability of the Proposed Standard in Certain Markets or Asset Classes iv. Suggested Modifications to the Proposed Requirement v. General Support for the Proposed Requirement or for Placing Greater Restrictions on a Market Maker’s Sources of Revenue c. Final Rule’s Approach To Assessing Revenues 8. Appendix B of the Proposed Rule a. Proposed Appendix B Requirement  b. Comments on Proposed Appendix B c. Determination To Not Adopt Proposed Appendix B 9. Use of Quantitative Measurements 4. Section
 ll 
.5: Permitted Risk- Mitigating Hedging Activities a. Summary of Proposal’s Approach to Implementing the Hedging Exemption  b. Manner of Evaluating Compliance With the Hedging Exemption c. Comments on the Proposed Rule and Approach to Implementing the Hedging Exemption d. Final Rule 1. Compliance Program Requirement 2. Hedging of Specific Risks and Demonstrable Reduction Of Risk 3. Compensation 4. Documentation Requirement 5. Section
 ll 
.6(a)–(b): Permitted Trading in Certain Government and Municipal Obligations a. Permitted Trading in U.S. Government Obligations  b. Permitted Trading in Foreign Government Obligations c. Permitted Trading in Municipal Securities d. Determination To Not Exempt Proprietary Trading in Multilateral Development Bank Obligations 6. Section
 ll 
.6(c): Permitted Trading on Behalf of Customers a. Proposed Exemption for Trading on Behalf of Customers  b. Comments on the Proposed Rule c. Final Exemption for Trading on Behalf of Customers 7. Section
 ll 
.6(d): Permitted Trading by a Regulated Insurance Company 8. Section
 ll 
.6(e): Permitted Trading Activities of a Foreign Banking Entity a. Foreign Banking Entities Eligible for the Exemption  b. Permitted Trading Activities of a Foreign Banking Entity 9. Section
 ll 
.7: Limitations on Permitted Trading Activities a. Scope of ‘‘Material Conflict of Interest’’ 1. Proposed Rule 2. Comments on the Proposed Limitation on Material Conflicts of Interest a. Disclosure  b. Information Barriers 3. Final Rule  b. Definition of ‘‘High-Risk Asset’’ and ‘‘High-Risk Trading Strategy’’ 1. Proposed Rule 2. Comments on Proposed Limitations on High-Risk Assets and Trading Strategies 3. Final Rule c. Limitations on Permitted Activities That Pose a Threat to Safety and Soundness of the Banking Entity or the Financial Stability of the United States B. Subpart C—Covered Fund Activities and Investments 1. Section
 ll 
.10: Prohibition on Acquisition or Retention of Ownership Interests in, and Certain Relationships With, a Covered Fund a. Prohibition Regarding Covered Fund Activities and Investments  b. ‘‘Covered Fund’’ Definition 1. Foreign Covered Funds 2. Commodity Pools 3. Entities Regulated Under the Investment Company Act c. Entities Excluded From Definition of Covered Fund 1. Foreign Public Funds 2. Wholly-Owned Subsidiaries 3. Joint Ventures 4. Acquisition Vehicles
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