October 24, 2021

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Agencies Propose Volcker Rule Amendments Relating to Covered Funds

On January 30, 2020, the Federal Reserve Board, FDIC, OCC, SEC and CFTC proposed amendments to certain Volcker Rule restrictions relating to banking entity activities with hedge funds or private equity funds (covered funds). Currently, the Volcker Rule restricts the ability of banking entities to hold an ownership interest in, sponsor or have certain other relationships with a covered fund. The proposed amendments are intended to improve and streamline the Volcker Rule’s covered funds provisions to allow banking entities to provide comprehensive financial services in a manner consistent with the requirements and spirit of the Volcker Rule, but that are currently prohibited.

Key elements of the proposed amendments are as follows:

  • Foreign Funds. The proposal would limit the extraterritorial impact of the Volcker Rule and streamline foreign fund restrictions. The Volcker Rule currently excludes foreign public funds from its covered funds provisions, subject to certain restrictions. The proposal would align these restrictions with those related to the exclusion for domestic registered investment companies. In addition, the proposal would exempt from certain covered funds restrictions foreign funds that are controlled by foreign banking entities and thereby subject to the more rigorous compliance obligations of banking entities.

  • Exclusions from the Covered Funds Provisions. The proposal would also modify, expand and add exclusions from the covered funds provisions as follows:

    • The Volcker Rule currently excludes loan securitizations from the covered funds provisions. The proposal would codify existing staff-level guidance to allow loan securitizations to hold a small amount of non-loan assets.

    • The proposal would revise the exclusion for small business investment companies to clarify how the exclusion applies to a fund that surrenders its SBIC license during the wind-down phase of its life cycle. The proposal would also create a new exclusion for venture capital funds. In addition, the proposal solicits comments on the application of the public welfare investment exclusion with respect to rural business investment companies and qualified opportunity zone funds.

    • The proposal creates a new exclusion that would allow banking entities to invest in and have certain relationships with credit funds that extend credit that the banking entity may otherwise provide directly.

    • The proposal would exclude entities created and used to facilitate customer transactions and investment strategies, and would exclude wealth management vehicles for family portfolios, with the aim of allowing banking entities to provide comprehensive financial services through a covered funds structure.

  • Transactions with Sponsored Covered Funds. The proposal would amend the Volcker Rule to permit a banking entity to engage in certain covered transactions with a covered fund the banking entity sponsors or advises, which would allow banking entities to provide traditional banking services to related covered funds, such as standard payment, clearing and settlement services.

  • Ownership Interest Definition. The proposal would modify the treatment of certain loans to covered funds, which loans are currently deemed to be ownership interests of the loaning bank entity. The proposal would provide a safe harbor to exclude bona fide senior loans or senior debt instruments from the definition of ownership interest in a covered fund. The proposal would also simplify the manner in which banking entities would calculate ownership interest in covered funds.

Comments to the proposal are due by April 1, 2020. A copy of the proposal is available here.

© 2021 Vedder PriceNational Law Review, Volume X, Number 58

About this Author

John Marten Investment Attorney Vedder Price Law FIrm

John S. Marten, a Shareholder in the Chicago office of Vedder Price, has substantial experience representing clients in the investment management industry.

As a member of the firm’s Investment Services group, Mr. Marten counsels clients on a wide variety of matters involving the application of the federal securities laws to investment companies, investment advisers and broker-dealers. He has significant experience counseling investment company clients with respect to new products and was recently involved in the creation of two mutual funds...

(312) 609 7753
Nathaniel Segal Investment Attorney Vedder Price Law Firm

Nathaniel Segal is counsel at Vedder Price and a member of the Investment Services group. He focuses his practice on investment companies and investment advisers in connection with the organization and operation of investment products and services, including traditional mutual funds, closed-end investment companies (including interval funds and listed closed-end funds), variable insurance products and registered hedge funds, as well as mutual funds utilizing complex hedging and absolute return strategies. Mr. Segal has experience in conducting transactional due diligence...

(312) 609 7747
Jacob Tiedt,Vedder Price law firm investment services attorney

Jacob C. Tiedt is a Shareholder at Vedder Price and a member of the Investment Services group.

Mr. Tiedt’s practice includes the representation of registered mutual funds, closed-end funds and exchange-traded funds; private funds; investment advisers; and other financial institutions on a broad range of regulatory, governance and compliance matters. Mr. Tiedt regularly counsels clients on matters relating to SEC registration, disclosure and compliance; shareholder solicitation; NYSE, Nasdaq and FINRA regulation; corporate governance; and board administration. Mr....

Adam Goldman Investment Attorney Vedder Price

Adam S. Goldman is an Associate in the Chicago office of Vedder Price and a member of the firm’s Investment Services practice group.

Prior to joining Vedder Price, Mr. Goldman practiced at a boutique financial services firm, representing broker-dealers, investment advisers, commodity pool operators, private equity funds, and other investment services clients in transactional, litigation, and compliance matters. Mr. Goldman also counseled public companies on required filings under the 1933 and 1934 Acts and other regulatory issues.

While in law school, Mr. Goldman competed in...

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