(a) No transaction, class of transactions,
or activity may be deemed permissible under sections 248.4 through
248.6 if the transaction, class of transactions, or activity would:
(1) Involve or result in
a material conflict of interest between the banking entity and its
clients, customers, or counterparties;
(2) Result, directly or indirectly, in a material exposure by the
banking entity to a high-risk asset or a high-risk trading strategy;
or
(3) Pose a threat to the safety
and soundness of the banking entity or to the financial stability
of the United States.
(b) Definition of material conflict of interest.
(1) For purposes of this section, a material
conflict of interest between a banking entity and its clients, customers,
or counterparties exists if the banking entity engages in any transaction,
class of transactions, or activity that would involve or result in
the banking entity’s interests being materially adverse to the interests
of its client, customer, or counterparty with respect to such transaction,
class of transactions, or activity, and the banking entity has not
taken at least one of the actions in paragraph (b)(2) of this section.
(2) Prior to effecting the specific
transaction or class or type of transactions, or engaging in the specific
activity, the banking entity:
(i) Timely
and effective disclosure.
(A) Has made clear, timely, and effective
disclosure of the conflict of interest, together with other necessary
information, in reasonable detail and in a manner sufficient to permit
a reasonable client, customer, or counterparty to meaningfully understand
the conflict of interest; and
(B) Such
disclosure is made in a manner that provides the client, customer,
or counterparty the opportunity to negate, or substantially mitigate,
any materially adverse effect on the client, customer, or counterparty
created by the conflict of interest; or
(ii) Information
barriers. Has established, maintained, and enforced information
barriers that are memorialized in written policies and procedures,
such as physical separation of personnel, or functions, or limitations
on types of activity, that are reasonably designed, taking into consideration
the nature of the banking entity’s business, to prevent the conflict
of interest from involving or resulting in a materially adverse effect
on a client, customer, or counterparty. A banking entity may not rely
on such information barriers if, in the case of any specific transaction,
class or type of transactions or activity, the banking entity knows
or should reasonably know that, notwithstanding the banking entity’s
establishment of information barriers, the conflict of interest may
involve or result in a materially adverse effect on a client, customer,
or counterparty.
(c) Definition of high-risk asset and high-risk
trading strategy. For purposes of this section:
(1) High-risk asset means an
asset or group of related assets that would, if held by a banking
entity, significantly increase the likelihood that the banking entity
would incur a substantial financial loss or would pose a threat to
the financial stability of the United States.
(2) High-risk trading strategy means
a trading strategy that would, if engaged in by a banking entity,
significantly increase the likelihood that the banking entity would
incur a substantial financial loss or would pose a threat to the financial
stability of the United States.
