On December 10, 2013, final rules were adopted by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission and the SEC in order to implement Section 619 of the Dodd-Frank Act, commonly referred to as  the “Volcker Rule.” The Volcker Rule generally prohibits banking entities from engaging in proprietary trading or owning, sponsoring or having other certain relationships with hedge funds and private equity funds, i.e. “covered funds.”

The Volcker Rule was proposed in October 2011, and the agencies received more than 18,000 comment letters. Among the comment letters submitted was a letter from the Investment Company Institute (ICI) which voiced certain concerns that portions of the rule as proposed could have potential negative consequences on the registered fund  industry. The final rule as adopted was revised in light of some of the ICI’s concerns.

In its comment letter, the ICI expressed concern with the definition of covered fund under the proposed rule, noting that, as defined, covered funds could include registered investment companies. As adopted, the final Volcker Rule includes a specific exclusion from the definition of covered fund for all SEC-registered investment companies and certain non-U.S. public funds.

The ICI also expressed its concern that a registered investment company could fall under the definition of “banking entity” in certain situations, and consequently be subject to all the prohibitions and restrictions of the Volcker Rule. Specifically, for funds sponsored by a banking entity, when substantially all of the fund’s shares are owned by the fund’s sponsor immediately following the launch of a new fund, it could be considered a subsidiary or affiliate of the banking entity. Under the Bank Holding Company Act, a subsidiary or affiliate of a banking entity would be considered a banking entity itself. However, rather than provide an express exclusion for registered investment companies from  the definition of banking entity, the adopting release reiterated that a registered investment company would not be considered an affiliate of a banking entity solely by virtue of being advised, organized, sponsored or managed by a banking entity.

Finally, the ICI’s comment letter also noted that the Volcker Rule may impact banking entities’ ability to act as authorized participants (APs) for ETFs due to the prohibition on proprietary trading, which may have a negative impact on the ETF marketplace. In its comment letter, the ICI suggested certain revisions to the proposed rule. However, the adopting release notes that the activities of APs should be evaluated under the market-making exemption included in the rule.

The Volcker Rule becomes effective April 1, 2014, and the compliance deadline is July 21, 2015.