Procedures for a Banking Entity to Request an Extension of the One-Year Seeding Period for a Covered Fund
OF THE FEDERAL RESERVE SYSTEM
WASHINGTON, D.C. 20551
SUPERVISION AND REGULATION
July 24, 2017
TO THE OFFICER IN CHARGE OF SUPERVISION AT EACH FEDERAL RESERVE BANK AND TO FINANCIAL INSTITUTIONS SUBJECT TO SECTION 13 OF THE BANK HOLDING COMPANY ACT
Procedures for a Banking Entity to Request an Extension of the One-Year Seeding Period for a Covered Fund
Applicability: This guidance applies to all banking entities, including those banking entities with $10 billion or less in consolidated assets, that are subject to section 13 of the Bank Holding Company Act (also known as the Volcker Rule), regardless of the banking entities’ primary financial regulatory agency.
The Federal Reserve is issuing this letter to provide banking entities1 with information on the procedures for submitting an application for an extension of the one-year seeding period for a hedge fund or private equity fund (referred to as a "covered fund") pursuant to section 13 of the Bank Holding Company Act of 1956 (BHC Act) and the implementing rules issued by the Board of Governors of the Federal Reserve System (Board), the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC) (collectively, the "agencies").2 Under the statute, a banking entity must apply to the Board for an extension of the one-year seeding period for a covered fund regardless of the banking entity's primary financial regulatory agency.
Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act added a new section 13 to the BHC Act, also known as the Volcker Rule, which generally prohibits any banking entity from engaging in proprietary trading or from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with a covered fund, subject to certain exemptions.3 The agencies issued rules implementing section 13 of the BHC Act on December 10, 2013, which became effective on April 1, 2014.4
Under section 13 and the implementing regulations, a banking entity is permitted to acquire and retain an ownership interest in a covered fund in connection with organizing and offering the covered fund as long as certain requirements are met.5 section 13(d)(4)(A) of the BHC Act and the implementing regulations permit a banking entity to acquire and retain an ownership interest in a covered fund that the banking entity organizes and offers for the purpose 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, subject to several limitations.6
The statute and final rule require a banking entity to actively seek unaffiliated investors to reduce its investment in the covered fund, no later than one year after the date of establishment of the fund,7 to an amount that is not more than three percent of the total outstanding ownership interests in the fund (referred to as the "per-fund limitation").8 A banking entity may request the Board's approval for an extension of time beyond the one-year period, for up to two additional years, to conform an investment to the per-fund limitation (referred to as the "seeding period").9 Under the statute, the Board may grant an extension of the seeding period if the Board finds that the extension would be consistent with safety and soundness and in the public interest.10
Requirements for Submitting Requests
In filing a request for an extension of the seeding period, a banking entity must provide the reasons for filing the application, including information that addresses each of the relevant factors contained in 12 CFR 248.12(e).11 The banking entity also must explain its plan for reducing the permitted investment in each covered fund through redemption, sale, dilution or other methods, to the per-fund limitation by the end of the extended seeding period. Additionally, a banking entity should represent whether or not it meets all of the applicable requirements of section 13(d)(1)(G) of the BHC Act and 12 CFR 248.11 with respect to permitted organizing and offering of a covered fund.12
Procedures for Filing an Extension Request
A banking entity should submit its request for an extension of the seeding period in writing to the Applications Unit of the Federal Reserve Bank in the district where the top-tier banking entity is headquartered.13 The request should be submitted at least 90 days prior to the expiration of the applicable time period.14 The request should include the name of the banking entity requesting the extension, cite the section of the rule under which it is seeking an extension, and identify its primary financial regulatory agency. In the case of a banking entity that is primarily supervised by another agency, the banking entity should provide a copy of the extension request and all related correspondence related to the request to the relevant agency.15 The Federal Reserve will consult with that agency before acting on an extension request as required under the implementing rules.16
In addition to the information required to be submitted pursuant to the implementing rules for seeding period extension requests, a banking entity should provide the name, phone number, and email address of the entity's point of contact to whom Board and Reserve Bank staff may submit all inquiries.
Authority to grant (but not to deny) requests has been delegated to the Federal Reserve Banks, in consultation with Board staff.17 Federal Reserve Banks may approve extension requests if all of the following criteria are met:
- No significant issues have been identified regarding the banking entity's compliance program required under section __.20 of the final rule designed to help ensure and monitor compliance with the prohibitions and restrictions of the Volcker Rule;
- The banking entity has represented that all of the requirements under the Volcker Rule for organizing and offering a covered fund have been met, including the aggregate funds limitation and the capital deduction requirement;18
- The banking entity provides a plan for reducing the permitted investment in a covered fund through redemption, sale, dilution, or other methods by the end of the extension period; and
- The primary federal agency responsible for enforcing compliance with the Volcker Rule by the banking entity that invests in or sponsors the covered fund (if other than the Federal Reserve) does not object to the extension.
Consistent with the statute, the extension would be granted for a period of up to two years. The responsible Federal Reserve Bank should expect to act on an extension request within 30 days of receiving all required information. If the request does not meet the requirements for delegated action, the Federal Reserve Bank will immediately refer the matter to the Board. The Board may then approve or deny the request based on the relevant facts. In reviewing an extension request, the Board may consider any of the factors in the implementing rules.19 Refer to Attachment C, Sample Acknowledgment Letter.
Federal Reserve Banks are asked to distribute this letter to their supervised financial institutions and to appropriate supervisory staff. The Federal Reserve has provided a copy of this letter to the other agencies to inform their supervised institutions of this guidance.
Questions regarding this guidance may be directed to:
- Division of Supervision and Regulation: Anna Harrington, Senior Supervisory Financial Analyst, at (202) 452-6406; Sean Campbell, Associate Director, at (202) 452-3706; and Kevin Tran, Supervisory Financial Analyst, at (202) 452-2309.
- Legal Division: Flora Ahn, Senior Counsel, at (202) 452-2317, Greg Frischmann, Counsel, at (202) 452-2803, Brian Chernoff, Senior Attorney, at (202) 452-2952, and Kirin Walsh, Attorney, at (202) 452-3058.
In addition, questions may be sent via the Board's public website.20
Michael S. Gibson
Supervision and Regulation
- SR letter 16-18, "Procedures for a Banking Entity to Request an Extended Transition Period for Illiquid Funds."
- SR letter 15-13, "Supervisory Guidance on the Capital Treatment of Certain Investments in Covered Funds under the Regulatory Capital Rule and the Volcker Rule"
- The term "banking entity" is defined by statute to include, with limited exceptions: (i) any insured depository institution (IDI) (as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813)); (ii) any company that controls an IDI (including a bank holding company (BHC), savings and loan holding company (SLHC), and any other company that controls an insured depository institution but that is not a BHC or SLHC, such as the parent company of an industrial loan company); (iii) any company that is treated as a BHC for purposes of section 8(a) of the International Banking Act of 1978 (for example, any foreign bank operating a branch or agency in the United States); and (iv) any affiliate or subsidiary of any of the foregoing (for example, a broker-dealer subsidiary of a BHC). 12 U.S.C. 1851(h)(1). Return to text
- In addition to the Board's rule (12 CFR 248.12(e)), a banking entity may apply for an extension of time, as applicable, pursuant to the OCC's rule (12 CFR 44.12(e)); the FDIC's rule (12 CFR 351.12(e)); the SEC's rule (17 CFR 255.12(e)); or the CFTC's rule (17 CFR 75.12(e)). Return to text
- See 12 U.S.C. 1851. Return to text
- See "Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships with, Hedge Funds and Private Equity Funds," 79 Federal Register 5536; 79 Federal Register 5808 (Jan. 31, 2014). The Board's rule is set forth in 12 CFR Part 248 (Regulation VV). The Board also previously announced procedures for submitting a request for an extended transition period for a covered fund that qualifies as an illiquid fund pursuant to section 13 of the BHC Act. See Board of Governors of the Federal Reserve System, "Statement of Policy Regarding Illiquid Fund Investments under Section 13 of the Bank Holding Company Act," December 12, 2016, available at https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20161212b1.pdf; and SR 16-18, "Procedures for a Banking Entity to Request an Extended Transition Period for Illiquid Funds." Return to text
- See 12 U.S.C. 1851(d)(1)(G) & (d)(4); 12 CFR 248.11(a)-(b). Return to text
- 12 U.S.C. 1851(d)(4)(A); 12 CFR 248.12(a)(1). Return to text
- The final rule defines "date of establishment" of a covered fund to mean the date on which the investment adviser or similar entity to the covered fund begins making investments pursuant to the written investment strategy for the fund. In the case of an issuing entity of asset-backed securities, the date of establishment is the date on which the assets are initially transferred into the issuing entity of the asset-backed securities. See 12 CFR 248.12(a)(2)(iv). Return to text
- See 12 U.S.C. 1851(d)(4)(B); see 12 CFR 248.12(a)(2). The final rule permits a banking entity to hold a greater amount of a covered fund under the per-fund limitation if required in order to meet the risk retention requirements of section 15G of the Securities Exchange Act and implementing regulations. See 12 CFR 248.12(a)(2)(ii)(B). The statute and final rule also provide that a banking entity's aggregate investments in all covered funds may not exceed three percent of the banking entity's applicable tier 1 capital (referred to as the "aggregate funds limitation"). Additionally, and consistent with the statute, the final rule requires that a banking entity's investment in a covered fund, including retained earnings, be deducted from tier 1 capital of the banking entity for purposes of determining compliance with applicable regulatory capital standards (referred to as the "capital deduction requirement"). 12 U.S.C. 1851(d)(4)(B); see also 12 CFR 248.12 and SR letter 15-13, "Supervisory Guidance on the Capital Treatment of Certain Investments in Covered Funds under the Regulatory Capital Rule and the Volcker Rule." Return to text
- See 12 U.S.C. 1851(d)(4)(C); 12 CFR 248.12(e). Return to text
- See 12 U.S.C. 1851(d)(4)(C). In the implementing rules, the agencies recognized the potential for evasion of the restrictions contained in section 13 of the BHC Act through misuse of requests for extensions of the seeding period for covered funds and stated that the Board and the other agencies would monitor requests for extensions of the seeding period for activity in covered funds that is inconsistent with the requirements of section 13 of the BHC Act. See 79 Federal Register at 5725 and 5736. Return to text
- See 12 CFR 248.12(e)(2). See Attachment A, List of Factors Addressed in a Bank's Request. Return to text
- 12 U.S.C. 1851(d)(1)(G); 12 CFR 248.11(a). Return to text
- For banking entities not regulated by the Federal Reserve, the following link provides information on each of the 12 Reserve Banks, including their addresses: www.federalreserveeducation.org/about-the-fed/structure-and-functions/districts/. For Federal Reserve-regulated banking entities, notices may also be submitted electronically through the Federal Reserve System's Electronic Applications System, E-Apps. Return to text
- See 12 CFR 248.12(e)(1)(i). Return to text
- See Attachment B, List of Contacts at Other Agencies. Return to text
- See 12 CFR 248.12(e)(4). Return to text
- See Board Order at https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20170724a1.pdf Return to text
- See 12 U.S.C. 1851(d)(1)(G); 12 CFR 248.11(a)-(b). Return to text
- See 12 CFR 248.12(e)(2). Return to text
- See http://www.federalreserve.gov/apps/contactus/feedback.aspx. Return to text