Procedures for a Banking Entity to Request an Extension of the One-Year Seeding Period for a Covered Fund

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BOARD OF GOVERNORS

OF THE

FEDERAL RESERVE SYSTEM

WASHINGTON, D.C. 20551

DIVISION OF SUPERVISION

AND REGULATION

SR 17-5

July 24, 2017

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). An attachment to this letter containing a list of

contacts at other agencies was also made inactive.

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

SUBJECT: 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 that are subject to section 13 of the

Bank Holding Company Act (also known as the Volcker Rule). See footnote 1 for further detail

on applicability.

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

1 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);

ion for an extension of the one-year seeding period for a

1 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. 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) (SEC), and 17 CFR 75.12(c) and (r) (CFTC).

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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

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.

Background

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

Under section 13 and the implementing regulations,4 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 implementing regulations 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

2 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 ru

he 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

2 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)).

3 See 12 U.S.C. 1851.

4 The Board’s rule is set forth in 12 CFR Part 248 (Regulation VV).

5 See 12 U.S.C. 1851(d)(1)(G) & (d)(4); 12 CFR 248.11(a)-(b).

6 12 U.S.C. 1851(d)(4)(A); 12 CFR 248.12(a)(1).

7 The implementing regulations define “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).

8 See 12 U.S.C. 1851(d)(4)(B); see 12 CFR 248.12(a)(2). The implementing regulations permit 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

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).

8 See 12 U.S.C. 1851(d)(4)(B); see 12 CFR 248.12(a)(2). The implementing regulations permit 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

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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 sect

ubmit 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,

requirements of section 15G of the Securities Exchange Act and implementing regulations. See

12 CFR 248.12(a)(2)(ii)(B). The statute and implementing regulations 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.”

9 See 12 U.S.C. 1851(d)(4)(C); 12 CFR 248.12(e).

10 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.

11 See 12 CFR 248.12(e)(2)

ned 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.

11 See 12 CFR 248.12(e)(2). See Attachment A, List of Factors Addressed in a Bank’s Request.

12 12 U.S.C. 1851(d)(1)(G); 12 CFR 248.11(a).

13 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.

14 See 12 CFR 248.12(e)(1)(i).

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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.The

Federal Reserve will consult with that agency before acting on an extension request as required

under the implementing rules.15

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

at agency before acting on an extension request as required

under the implementing rules.15

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.16 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;17

• 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 would be expected 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

nted for a period of up to two

years. The responsible Federal Reserve Bank would be expected 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.18 Refer to Attachment C, Sample Acknowledgment Letter.

15 See 12 CFR 248.12(e)(4).

16 See Board Order at https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20170724a1.pdf.

17 See 12 U.S.C. 1851(d)(1)(G); 12 CFR 248.11(a)-(b).

18 See 12 CFR 248.12(e)(2).

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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 letter and the attachments should be sent via the Board’s public website.19

Michael S. Gibson

Director

Division of Supervision and Regulation

Attachments:

A. List of Factors Addressed in a Bank’s Request

B. List of Contacts at Other Agencies (Inactive)

C. Sample Acknowledgment Letter

Cross References to:

• 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”

19 See http://www.federalreserve.gov/apps/contactus/feedback.aspx.

hments:

A. List of Factors Addressed in a Bank’s Request

B. List of Contacts at Other Agencies (Inactive)

C. Sample Acknowledgment Letter

Cross References to:

• 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”

19 See http://www.federalreserve.gov/apps/contactus/feedback.aspx.

SR letter 17-5 - Attachment A

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Attachment A

List of Factors Addressed in a Bank’s Request

The rule provides that the Board may extend the seeding period for up to two additional years if

the Board finds that an extension would be consistent with safety and soundness and not

detrimental to the public interest. In reviewing any application, the Board may consider all the

facts and circumstances related to the permitted investment in a covered fund, including:

(i)

Whether the investment would result, directly or indirectly, in a material exposure by

the banking entity to high-risk assets or high-risk trading strategies;

(ii)

The contractual terms governing the banking entity’s interest in the covered fund;

(iii)

The date on which the covered fund is expected to have attracted sufficient

investments from investors unaffiliated with the banking entity to enable the banking

entity to comply with the limitations in section __.12(a)(2)(i) of the final rule;

(iv)

The total exposure of the covered banking entity to the investment and the risks that

disposing of, or maintaining, the investment in the covered fund may pose to the

banking entity and the financial stability of the United States;

m investors unaffiliated with the banking entity to enable the banking

entity to comply with the limitations in section __.12(a)(2)(i) of the final rule;

(iv)

The total exposure of the covered banking entity to the investment and the risks that

disposing of, or maintaining, the investment in the covered fund may pose to the

banking entity and the financial stability of the United States;

(v)

The cost to the banking entity of divesting or disposing of the investment within the

applicable period;

(vi)

Whether the investment or the divestiture or conformance of the investment would

involve or result in a material conflict of interest between the banking entity and

unaffiliated parties, including clients, customers or counterparties to which it owes a

duty;

(vii)

The banking entity’s prior efforts to reduce through redemption, sale, dilution, or

other methods its ownership interests in the covered fund, including activities related

to the marketing of interests in such covered fund;

(viii) Market conditions; and

(ix)

Any other factor that the Board believes appropriate.

SR letter 17-5 – Attachment C

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Attachment C

Sample Acknowledgment Letter

[DATE]

[NAME]

[TITLE]

[FIRM NAME]

[ADDRESS]

[CITY, STATE, ZIP CODE]

Dear [NAME]:

This is to acknowledge receipt by the Federal Reserve Bank of [DISTRICT] (“Reserve

Bank”), as of [RECEIPT DATE], of the request dated [APPLICATION DATE], by

[APPLICANT], [CITY], [STATE] (the “Applicant”), for an extension of the one-year seeding

period for a hedge fund or private equity fund pursuant to section 13 of the Bank Holding

Company Act, 12 U.S.C. § 1851.

Consistent with the statute, an extension may be granted for a period of up to two years.

The Reserve Bank expects 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 by the Reserve

Bank, the Reserve Bank will refer the matter to the Board

of the Bank Holding

Company Act, 12 U.S.C. § 1851.

Consistent with the statute, an extension may be granted for a period of up to two years.

The Reserve Bank expects 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 by the Reserve

Bank, the Reserve Bank will refer the matter to the Board. The Board may then approve or deny

the request based on the relevant facts.

Please contact [RESERVE BANK PRIMARY CONTACT] at [PHONE NUMBER] or

[ALTERNATE RESERVE BANK CONTACT], if you have any questions regarding this letter.

Sincerely,

Name of Reserve Bank Official

Title