(a) Permitted
risk-mitigating hedging activities.
(1) The prohibition contained in section
248.10(a) does not apply with respect to an ownership interest in
a covered fund acquired or retained by a banking entity that is designed
to reduce or otherwise significantly mitigate the specific, identifiable
risks to the banking entity in connection with:
(i) A compensation arrangement with
an employee of the banking entity or an affiliate thereof that directly
provides investment advisory, commodity trading advisory or other
services to the covered fund; or
(ii) A position taken by the banking entity when acting as intermediary
on behalf of a customer that is not itself a banking entity to facilitate
the exposure by the customer to the profits and losses of the covered
fund.
(2) Requirements. The risk-mitigating hedging
activities of a banking entity are permitted under this paragraph
(a) only if:
(i)
The banking entity has established and implements, maintains and enforces
an internal compliance program in accordance with subpart D of this
part that is reasonably designed to ensure the banking entity’s compliance
with the requirements of this section, including:
(A) Reasonably designed written policies
and procedures; and
(B) Internal
controls and ongoing monitoring, management, and authorization procedures,
including relevant escalation procedures; and
(ii) The acquisition or retention of
the ownership interest:
(A) Is made in accordance with the written policies, procedures,
and internal controls required under this section;
(B) At the inception of the hedge, is designed
to reduce or otherwise significantly mitigate one or more specific,
identifiable risks arising:
(1)
Out of a transaction conducted solely to accommodate a specific customer
request with respect to the covered fund; or
(2) In connection with the compensation
arrangement with the employee that directly provides investment advisory,
commodity trading advisory, or other services to the covered fund;
(C) Does not give rise,
at the inception of the hedge, to any significant new or additional
risk that is not itself hedged contemporaneously in accordance with
this section; and
(D) Is subject to
continuing review, monitoring and management by the banking entity.
(iii) With respect
to risk-mitigating hedging activity conducted pursuant to paragraph
(a)(1)(i), the compensation arrangement relates solely to the covered
fund in which the banking entity or any affiliate has acquired an
ownership interest pursuant to paragraph (a)(1)(i) and such compensation
arrangement provides that any losses incurred by the banking entity
on such ownership interest will be offset by corresponding decreases
in amounts payable under such compensation arrangement.
(b) Certain permitted covered
fund activities and investments outside of the United States.
(1) The prohibition
contained in section 248.10(a) of this subpart does not apply to the
acquisition or retention of any ownership interest in, or the sponsorship
of, a covered fund by a banking entity only if:
(i) The banking entity is not organized
or directly or indirectly controlled by a banking entity that is organized
under the laws of the United States or of one or more States;
(ii) The activity or investment by the
banking entity is pursuant to paragraph (9) or (13) of section 4(c)
of the BHC Act;
(iii) No ownership
interest in the covered fund is offered for sale or sold to a resident
of the United States; and
(iv)
The activity or investment occurs solely outside of the United States.
(2) An activity or investment
by the banking entity is pursuant to paragraph (9) or (13) of section
4(c) of the BHC Act for purposes of paragraph (b)(1)(ii) of this section
only if:
(i) The
activity or investment is conducted in accordance with the requirements
of this section; and
(ii) (A) With respect to a banking entity that is a foreign banking
organization, the banking entity meets the qualifying foreign banking
organization requirements of section 211.23(a), (c) or (e) of the
Board’s Regulation K (12 CFR 211.23(a), (c) or (e)), as applicable;
or
(B) With respect to a banking entity
that is not a foreign banking organization, the banking entity is
not organized under the laws of the United States or of one or more
States and the banking entity, on a fully-consolidated basis, meets
at least two of the following requirements:
(1)
Total assets of the banking entity held outside of the United States
exceed total assets of the banking entity held in the United States;
(2) Total revenues derived from
the business of the banking entity outside of the United States exceed
total revenues derived from the business of the banking entity in
the United States; or
(3) Total
net income derived from the business of the banking entity outside
of the United States exceeds total net income derived from the business
of the banking entity in the United States.
(3) An ownership interest
in a covered fund is not offered for sale or sold to a resident of
the United States for purposes of paragraph (b)(1)(iii) of this section
only if it is not sold and has not been sold pursuant to an offering
that targets residents of the United States in which the banking entity
or any affiliate of the banking entity participates. If the banking
entity or an affiliate sponsors or serves, directly or indirectly,
as the investment manager, investment adviser, commodity pool operator
or commodity trading advisor to a covered fund, then the banking entity
or affiliate will be deemed for purposes of this paragraph (b)(3)
to participate in any offer or sale by the covered fund of ownership
interests in the covered fund.
(4)
An activity or investment occurs solely outside of the United States
for purposes of paragraph (b)(1)(iv) of this section only if:
(i) The banking entity acting as
sponsor, or engaging as principal in the acquisition or retention
of an ownership interest in the covered fund, is not itself, and is
not controlled directly or indirectly by, a banking entity that is
located in the United States or organized under the laws of the United
States or of any state;
(ii)
The banking entity (including relevant personnel) that makes the decision
to acquire or retain the ownership interest or act as sponsor to the
covered fund is not located in the United States or organized under
the laws of the United States or of any state; and
(iii) The investment or sponsorship,
including any transaction arising from risk-mitigating hedging related
to an ownership interest, is not accounted for as principal directly
or indirectly on a consolidated basis by any branch or affiliate that
is located in the United States or organized under the laws of the
United States or of any state.
(5) For purposes of this section, a U.S.
branch, agency, or subsidiary of a foreign bank, or any subsidiary
thereof, is located in the United States; however, a foreign bank
of which that branch, agency, or subsidiary is a part is not considered
to be located in the United States solely by virtue of operation of
the U.S. branch, agency, or subsidiary.
(c) Permitted covered fund interests and activities
by a regulated insurance company. The prohibition contained in
section 248.10(a) of this subpart does not apply to the acquisition
or retention by an insurance company, or an affiliate thereof, of
any ownership interest in, or the sponsorship of, a covered fund only
if:
(1) The insurance company
or its affiliate acquires and retains the ownership interest solely
for the general account of the insurance company or for one or more
separate accounts established by the insurance company;
(2) The acquisition and retention of the
ownership interest is conducted in compliance with, and subject to,
the insurance company investment laws and regulations of the state
or jurisdiction in which such insurance company is domiciled; and
(3) The appropriate federal banking
agencies, after consultation with the Financial Stability Oversight
Council and the relevant insurance commissioners of the states and
foreign jurisdictions, as appropriate, have not jointly determined,
after notice and comment, that a particular law or regulation described
in paragraph (c)(2) of this section is insufficient to protect the
safety and soundness of the banking entity, or the financial stability
of the United States.
(d) Permitted covered fund activities and investments of qualifying foreign
excluded funds.
(1)
The prohibition contained in section 248.10(a) does not apply to a
qualifying foreign excluded fund.
(2) For purposes of this paragraph (d), a qualifying foreign excluded
fund means a banking entity that:
(i) Is organized or established outside
the United States, and the ownership interests of which are offered
and sold solely outside the United States;
(ii) (A) Would be a covered fund if the entity
were organized or established in the United States, or
(B) Is, or holds itself out as being, an entity
or arrangement that raises money from investors primarily for the
purpose of investing in financial instruments for resale or other
disposition or otherwise trading in financial instruments;
(iii) Would not otherwise be a banking
entity except by virtue of the acquisition or retention of an ownership
interest in, sponsorship of, or relationship with the entity, by another
banking entity that meets the following:
(A) The banking entity is not organized, or
directly or indirectly controlled by a banking entity that is organized,
under the laws of the United States or of any State; and
(B) The banking entity’s acquisition of an
ownership interest in or sponsorship of the fund by the foreign banking
entity meets the requirements for permitted covered fund activities
and investments solely outside the United States, as provided in section
248.13(b);
(iv)
Is established and operated as part of a bona fide asset management
business; and
(v) Is not operated
in a manner that enables the banking entity that sponsors or controls
the qualifying foreign excluded fund, or any of its affiliates, to
evade the requirements of section 13 of the BHC Act or this part.
