Supervisory Guidance on the Capital Treatment of Certain Investments in Covered Funds under the Regulatory Capital Rule and the Volcker Rule

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BOARD OF GOVERNORS

OF THE

FEDERAL RESERVE SYSTEM

WASHINGTON, D.C. 20551

DIVISION OF SUPERVISION

AND REGULATION

SR 15-13

October 29, 2015

Revised June 16, 2022

On June 16, 2022 this letter was revised to modify its applicability. The 2018 enactment of the

Economic Growth, Regulatory Relief, and Consumer Protection Act modified the scope of the

statutory definition of “banking entity” in section 13 of the Bank Holding Company Act (also

referred to as the Volcker Rule) to exclude certain community banks and their affiliates, and in

2019, the regulations implementing the Volcker Rule were updated to reflect the statutory

change. See 84 Fed. Reg. 35008 (July 22, 2019).

In connection with these modifications, the following changes apply to the guidance attached to this

SR letter. For the definition of “banking entity” in the guidance, please refer to the updated

definition in this letter. In terms of reporting deductions of covered funds on regulatory reports,

banking organizations with $100 billion or more in total consolidated assets (rather than $50

billion or more, as noted in the attachment), should reflect this treatment of covered funds on the

FR Y-14 Capital Assessments and Stress Testing Reports, where applicable. Further, the FDIC and

OCC agency-specific Dodd-Frank Act Stress Testing (DFAST) reporting templates described in the

attachment have been eliminated.

TO THE OFFICER IN CHARGE OF SUPERVISION

AT EACH FEDERAL RESERVE BANK

SUBJECT:

Supervisory Guidance on the Capital Treatment of Certain Investments in

Covered Funds under the Regulatory Capital Rule and the Volcker Rule

Applicability: The guidance in this letter and attachment applies to state member banks, bank

holding companies, and savings and loan holding companies (not substantially engaged in insurance

underwriting or commercial activities) supervised by the Federal Reserve and subject to section 13

of the Bank Holding Company Act

Covered Funds under the Regulatory Capital Rule and the Volcker Rule

Applicability: The guidance in this letter and attachment applies to state member banks, bank

holding companies, and savings and loan holding companies (not substantially engaged in insurance

underwriting or commercial activities) supervised by the Federal Reserve and subject to section 13

of the Bank Holding Company Act. See footnotes 2 and 3 for further detail on applicability.

The Federal Reserve (Board), together with the Office of the Comptroller of the Currency

(OCC) and the Federal Deposit Insurance Corporation (FDIC), is issuing the attached Deduction

Methodology for Investments in Covered Funds (guidance) to clarify the interaction between the

agencies’ regulatory capital rule and the Volcker Rule with respect to the appropriate capital

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treatment for investments in certain private equity funds and hedge funds (“covered funds”).1 In

particular, the guidance clarifies supervisory expectations on how a banking organization’s

regulatory capital deductions of investments in covered funds made pursuant to section 13 of the

Bank Holding Company Act (also referred to as the Volcker Rule) and implementing regulations

relate to deductions of these investments pursuant to the regulatory capital rule.2

Federal Reserve Banks are asked to distribute this letter to financial institutions supervised

by the Federal Reserve, particularly banking entities covered by the Volcker Rule,3 as well as to

their own supervisory and examination staff. Questions concerning the deduction mechanics

described in the attached guidance should be sent via the Board’s public website.4

Michael S. Gibson

Director

Division of Supervision and Regulation

Attachment:

• Deduction Methodology for Investments in Covered Funds

1 See 12 CFR part 217 (regulatory capital rule). See also 12 U.S.C. 1851; 12 CFR part 248 (Volcker Rule)

ination staff. Questions concerning the deduction mechanics

described in the attached guidance should be sent via the Board’s public website.4

Michael S. Gibson

Director

Division of Supervision and Regulation

Attachment:

• Deduction Methodology for Investments in Covered Funds

1 See 12 CFR part 217 (regulatory capital rule). See also 12 U.S.C. 1851; 12 CFR part 248 (Volcker Rule).

2 “Banking organizations” include national banks, state member banks, state non-member banks, federal savings

associations, state savings associations, and top-tier bank holding companies and savings and loan holding companies

domiciled in the United States not subject to the Federal Reserve’s Small Bank Holding Company and Savings and

Loan Holding Company Policy Statement (12 CFR part 225, appendix C), other than certain savings and loan holding

companies that are substantially engaged in insurance underwriting or commercial activities.

3 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, for example, a bank holding company or savings and loan holding company); (iii) any

company that is treated as a bank holding company 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. The rule excludes from the definition of IDI an insured depository institution if it

has, and every company that controls it has, total consolidated assets of $10 billion or less and total trading assets and

trading liabilities, on a consolidated basis, that are 5 percent or less of total consolidated assets. See 12 U.S.C

States); and (iv) any affiliate or

subsidiary of any of the foregoing. The rule excludes from the definition of IDI an insured depository institution if it

has, and every company that controls it has, total consolidated assets of $10 billion or less and total trading assets and

trading liabilities, on a consolidated basis, that are 5 percent or less of total consolidated assets. See 12 U.S.C.

1851(h)(1); 12 CFR 44.2(c) and (r) (OCC), 12 CFR 248.2(c) and (r) (Board), 12 CFR 351.2(c) and (r) (FDIC), 17 CFR

255.12(c) and (r) (Securities and Exchange Commission), and 17 CFR 75.12(c) and (r) (Commodity Futures Trading

Commission).

4 http://www.federalreserve.gov/apps/contactus/feedback.aspx.

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________________________________________________________________________________

Office of the Comptroller of the Currency

Board of Governors of the Federal Reserve System

Federal Deposit Insurance Corporation

________________________________________________________________________________

November 6, 2015

Deduction Methodology for Investments in Volcker Rule Covered Funds

Purpose

The Office of the Comptroller of the Currency (OCC), Federal Reserve Board (FRB), and

the Federal Deposit Insurance Corporation (FDIC) are issuing this guidance to clarify the

interaction between the agencies’ regulatory capital rule and the Volcker Rule with respect to the

appropriate capital treatment for investments in certain private equity funds and hedge funds

(covered funds)

s

Purpose

The Office of the Comptroller of the Currency (OCC), Federal Reserve Board (FRB), and

the Federal Deposit Insurance Corporation (FDIC) are issuing this guidance to clarify the

interaction between the agencies’ regulatory capital rule and the Volcker Rule with respect to the

appropriate capital treatment for investments in certain private equity funds and hedge funds

(covered funds).

Background

In July 2013, the FRB and OCC issued a final rule (regulatory capital rule) that increased the

quality and quantity of regulatory capital held by banking organizations and strengthened the

framework for calculating regulatory capital to better reflect the underlying risks taken by banking

organizations.1 The FDIC adopted an interim final rule that was substantively identical to the

regulatory capital rule in July 2013 and later issued a final rule in April 2014 identical to the FRB’s

and the OCC’s final rule.2 In December 2013, the FDIC, OCC, and FRB, along with the U.S.

Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission,

adopted a final rule to implement section 13 of the Bank Holding Company Act, also known as the

Volcker rule, which was added by section 619 of the Dodd-Frank Wall Street Reform and

Consumer Protection Act, and which prohibits any banking entity3 from engaging in proprietary

1 “Banking organization” includes national banks, state member banks, state non-member banks, federal savings

associations, state savings associations, and top-tier bank holding companies domiciled in the United States not subject

to the Federal Reserve’s Small Bank Holding Company Policy Statement (12 CFR part 225, appendix C), as well as

top-tier savings and loan holding companies domiciled in the United States, other than (i) savings and loan holding

companies subject to the FRB’s Small Bank Holding Company Policy Statement and (ii) certain savings and loan

holding companies that are substantially engaged in insurance underwriting or commercial activities

lding Company Policy Statement (12 CFR part 225, appendix C), as well as

top-tier savings and loan holding companies domiciled in the United States, other than (i) savings and loan holding

companies subject to the FRB’s Small Bank Holding Company Policy Statement and (ii) certain savings and loan

holding companies that are substantially engaged in insurance underwriting or commercial activities.

2 78 Fed. Reg. 62018 (October 11, 2013) (FRB and OCC); 78 Fed. Reg. 20754 (April 14, 2014) (FDIC). These rules

are codified at OCC - 12 CFR part 3 (national banks and federal savings associations); FRB - 12 CFR part 217 (state

member banks, bank holding companies, and savings and loan holding companies); and FDIC - 12 CFR part 324 (state

non-member banks and state savings associations).

3 A “banking entity” is defined by statute as any insured depository institution, any company affiliated with an insured

depository institution, as well as any foreign bank that has a branch, agency, or commercial lending company in the

United States, with certain limited exceptions. Any banking organization that is subject to the regulatory capital rule

would be included within the definition of banking entity under the Volcker rule. 12 U.S.C. 1851(h)(1).

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trading or from acquiring or retaining an ownership interest in, sponsoring, or having certain

relationships with, a covered fund.4

Certain covered funds could be subject, under the regulatory capital rule and the Volcker

rule, to overlapping tier 1 capital deductions. Specifically, the Volcker rule requires a banking

organization to deduct the full amount of the banking organization’s investment in a covered fund

from tier 1 capital.5 Simultaneously, under the regulatory capital rule, a covered fund that meets the

definition of an “investment in the capital of an unconsolidated financial institution”6 (a covered

fund UFI) also could be subject to a deduction from tier 1 capital

ker rule requires a banking

organization to deduct the full amount of the banking organization’s investment in a covered fund

from tier 1 capital.5 Simultaneously, under the regulatory capital rule, a covered fund that meets the

definition of an “investment in the capital of an unconsolidated financial institution”6 (a covered

fund UFI) also could be subject to a deduction from tier 1 capital. The potential overlapping capital

treatment for covered funds is discussed in the preambles of both the Volcker rule and the

regulatory capital rule, and the preamble to the Volcker rule explains that the federal banking

agencies would review the interaction between the requirements of the Volcker rule and the

requirements of the regulatory capital rule and reconcile the two rules.7 To clarify the interaction

between the two rules with respect to these capital treatments, the methodology described in this

guidance outlines mechanics aimed at reconciling the treatment across these rules. A banking

organization should be able to demonstrate to its primary federal regulatory agency that the banking

organization is in compliance with the Volcker rule and that all amounts of investments in covered

funds have been deducted from tier 1 capital.

The Volcker rule, including the required capital deduction for investments in a covered fund,

became effective on July 21, 2015, for investments in and relationships with a covered fund made

after December 31, 2013.8 The FRB acted to give banking entities until July 21, 2016, to conform

investments in and relationships with covered funds that were in place prior to December 31, 2013

(legacy covered funds) and announced its intention to grant banking entities an additional one-year

extension of the conformance period until July 21, 2017, to conform ownership interests in and

relationships with legacy covered funds. As a result, for legacy covered funds, the Volcker rule

capital deduction will not become effective until July 21, 2017

ere in place prior to December 31, 2013

(legacy covered funds) and announced its intention to grant banking entities an additional one-year

extension of the conformance period until July 21, 2017, to conform ownership interests in and

relationships with legacy covered funds. As a result, for legacy covered funds, the Volcker rule

capital deduction will not become effective until July 21, 2017.

4 See 12 U.S.C. 1851; 12 CFR part 44 (OCC); 12 CFR part 248 (FRB); 12 CFR part 351 (FDIC). For defining hedge

fund and private equity fund, see 12 U.S.C. 1851(h)(2). For defining covered fund, see 12 CFR 44(10)(b)-(c) (OCC),

12 CFR 248.10(b)-(c) (FRB), and 12 CFR 351.10(b)-(c) (FDIC).

5 See 12 CFR 44.12(d) (OCC), 12 CFR 248.12(d) (FRB), and 12 CFR 351.12(d) (FDIC); see also 12 CFR 44.12(b)-(c)

(OCC), 12 CFR 248 10(b)-(c) (FRB), and 12 CFR 351.10(b)-(c) (FDIC).

6 See definitions of “financial institution,” “non-significant investment in the capital of an unconsolidated financial

institution,” and “significant investment in the capital of an unconsolidated financial institution” in 12 CFR 3.2 (OCC),

12 CFR 217.2 (FRB), and 12 CFR 324.2 (FDIC). For an explanation of the regulatory capital treatment that applies to

investments in the capital of an unconsolidated financial institution, which includes covered fund UFIs, see 12 CFR

3.22 (OCC), 12 CFR 217.22 (FRB), and 12 CFR 324.22 (FDIC).

7 See 78 Fed. Reg. at 62072 (October 11, 2013). See also 79 Fed. Reg. at 5731 (January 31, 2014).

8 See FRB Order Approving Extension of Conformance Period (Dec. 10, 2013), available at

http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20131210b1.pdf; see also FRB Order Approving

Extension of Conformance Period under Section 13 of the Bank Holding Company Act (December 18, 2014), available

at http://www.federalreserve.gov/newsevents/press/bcreg/20141218a.htm.

(January 31, 2014).

8 See FRB Order Approving Extension of Conformance Period (Dec. 10, 2013), available at

http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20131210b1.pdf; see also FRB Order Approving

Extension of Conformance Period under Section 13 of the Bank Holding Company Act (December 18, 2014), available

at http://www.federalreserve.gov/newsevents/press/bcreg/20141218a.htm.

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Deduction Methodology

1. The banking organization determines the amount of its investment in covered funds9 that is

subject to a full deduction from tier 1 capital pursuant to section ___.12(d) of the Volcker

rule.10

2. If the amount in step 1 is greater than zero, the banking organization must determine

whether any investment in a covered fund is also an investment in a covered fund UFI under

the regulatory capital rule.

3. If the banking organization determines in step 2 that no covered fund is an investment in a

covered fund UFI under the regulatory capital rule, the banking organization must fully

deduct the amount calculated in step 1 from tier 1 capital pursuant to the Volcker rule and

proceed to step 5.11

4. If the banking organization determines in step 2 that an investment in a covered fund is also

an investment in a covered fund UFI, such that a part or the aggregate of its covered funds is

deducted from common equity tier 1 capital or additional tier 1 capital under

sections ___.22(c) and (d) of the regulatory capital rule,12 such deducted amounts count

toward the amount required to be deducted that was calculated in step 1.

5. Any remaining amount of covered funds that is not deducted from either common equity tier

1 capital or additional tier 1 capital under the regulatory capital rule in accordance with step

4 must be fully deducted from tier 1 capital pursuant to the Volcker rule. A banking

organization must deduct the full amount of covered funds required to be deducted under

section ___.12(d) according to the valuation methodology specified therein.

6

not deducted from either common equity tier

1 capital or additional tier 1 capital under the regulatory capital rule in accordance with step

4 must be fully deducted from tier 1 capital pursuant to the Volcker rule. A banking

organization must deduct the full amount of covered funds required to be deducted under

section ___.12(d) according to the valuation methodology specified therein.

6. A banking organization may exclude from risk-weighted assets (for calculating risk-based

capital ratios), average total consolidated assets (for calculating the tier 1 leverage ratio),

total leverage exposure (for calculating the supplementary leverage ratio), and total assets

(for calculating whether a bank is critically undercapitalized for prompt corrective action

purposes), amounts that are deducted from capital (i) under paragraphs (c) and (d) of

section ___.22 of the regulatory capital rule (step 4) or (ii) under paragraph (d) of section 12

of the Volcker rule (steps 3 or 5).

9 See 12 CFR 44.12(d) (OCC), 12 CFR 248.12(d) (FRB), and 12 CFR 351.12(d) (FDIC).

10 See 12 CFR 44.12(d) (OCC), 12 CFR 248.12(d) (FRB), and 12 CFR 351.12(d) (FDIC).

11 Id. The Volcker rule requires that deductions be made from tier 1 capital. A banking organization can comply with

this rule through a deduction from additional tier 1 capital or common equity tier 1 capital. See 12 CFR 44.12(d)

(OCC), 12 CFR 248.12(d) (FRB), and 12 CFR 351.12(d) (FDIC).

12 Certain investments in the capital of unconsolidated financial institutions must be deducted from common equity tier

1 capital while others may be deducted from additional tier 1 capital, the two elements that comprise tier 1 capital,

under the regulatory capital rule. See 12 CFR 3.22(c)-(d) (OCC), 12 CFR 217.22(c)-(d) (FRB), and 12 CFR 324.22(c)-

12(d) (FRB), and 12 CFR 351.12(d) (FDIC).

12 Certain investments in the capital of unconsolidated financial institutions must be deducted from common equity tier

1 capital while others may be deducted from additional tier 1 capital, the two elements that comprise tier 1 capital,

under the regulatory capital rule. See 12 CFR 3.22(c)-(d) (OCC), 12 CFR 217.22(c)-(d) (FRB), and 12 CFR 324.22(c)-

(d) (FDIC).

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Reporting of Volcker Rule Deductions

A banking organization should report deductions of covered funds made pursuant to the

Volcker rule under steps 3 or 5 in line items 17 (BHCAP857 and RCFA/RCOAP857) and 24

(BHCAP864 and RCFA/RCOAP864) of Schedule HC-R of the FR Y-9C Consolidated Financial

Statements for Holding Companies report form or Schedule RC-R of the FFIEC 031 or 041

Consolidated Reports of Condition and Income (Call Report forms), as applicable.13 In addition,

banking organizations with $50 billion or more in total consolidated assets should reflect this

treatment on the applicable DFAST reporting templates as follows: (i) DFAST-14A (OCC), (ii)

DFAST-14(A) (FDIC); or (iii) the FR Y-14Q and FR Y-14A, Capital Assessment and Stress-

Testing forms, Regulatory Capital Transitions Schedules, line items 24 (CQCDP857) and 30

(CQCDP864) and on the FR Y-14A’s Summary Schedule for Capital – DFAST and Capital –

CCAR Worksheets on line items 65 (CASDP857 and CPSDP857) and 72 (CASDP864 and

CPSDP865) (FRB). Further, banking organizations that are required to complete the FFIEC 101

Regulatory Capital Reporting for Institutions Subject to the Advanced Capital Adequacy

Framework should reflect this treatment in line items 27 (AAABP857) and 41 (AAABP898) of

schedule A of the FFIEC 101.

13 Reporting forms and instructions for holding companies are available at

http://www.federalreserve.gov/apps/reportforms/default.aspx and for insured depository institutions at

http://www.ffiec.gov/ffiec_report_forms.htm.