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Volume XI, Number 289

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Agencies Release New Volcker Rule Guidance on the Ability of Non-U.S. Banks to Invest in Third-Party Covered Funds

On February 27, 2015, the regulatory agencies responsible for implementing the Volcker Rule released a Frequently Asked Question (FAQ) on the Volcker Rule. The FAQ clarifies that a non-U.S. banking entity may invest in "covered funds" that are marketed to U.S. residents by unaffiliated third parties, as long as the non-U.S. banking entity (including its affiliates) does not engage in the offer or sale of interests in the covered funds (and provided certain other conditions are met). A non-U.S. banking entity is a banking entity that is not organized, and is not directly or indirectly controlled by a banking entity that is organized, under U.S. or state laws. Covered funds include private funds that would be investment companies but for Section 3(c)(1) or 3(c)(7) of the Investment Company Act and certain commodity pools.

The Volcker Rule generally prohibits banking entities from acquiring or retaining an ownership interest in or sponsoring a covered fund.[1] However, under an exemption to the Volcker Rule, referred to as the "SOTUS Exemption," non-U.S. banking entities may invest in covered funds subject to certain conditions, including the requirement that "no ownership interest in the covered fund is offered for sale or sold to a resident of the United States" (the Marketing Restriction). The FAQ clarifies that the Marketing Restriction only applies to the activities of the non-U.S. banking entity investing in a covered fund, and not to the activities of a third party that is unaffiliated with the non-U.S. banking entity. The FAQ also provides that a non-U.S. banking entity that sponsors or serves, directly or indirectly, as the investment manager, investment adviser, commodity pool operator or commodity trading advisor to a covered fund will be considered to be engaged in the offering and sale of ownership interests in such fund, and thus the SOTUS Exemption will not be available to the non-U.S. banking entity if such ownership interests are offered or sold to U.S. residents.   

Accordingly, while a non-U.S. banking entity may not invest in a covered fund with respect to which the non-U.S. banking entity (including its affiliates) offers or sells ownership interests to U.S. residents, a non-U.S. banking entity may invest in a covered fund sponsored by anunaffiliated third party with respect to which an unaffiliated third party offers or sells ownership interests to U.S. residents, subject to certain conditions.

If you have any questions regarding the agencies' guidance set forth in the new FAQ or the SOTUS Exemption, please feel free to contact your usual contact at Proskauer or any of the Proskauer lawyers listed in this alert. 

 

[1] The Volcker Rule permits a banking entity to act as sponsor to, and to acquire and retain a de minimis ownership interest in, a covered fund organized in connection with the provision of advisory services by the banking entity to its customers.

© 2021 Proskauer Rose LLP. National Law Review, Volume V, Number 72
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About this Author

Bruce Lieb, Financial Attorney, Proskauer Law Firm
Managing Partner

Bruce Lieb is Managing Partner of the Firm. He is a former co-chair of the Corporate Department and former member of Proskauer’s seven-person Executive Committee. Although Bruce has a broad background in general corporate and securities law, he has concentrated his practice on private equity transactions, including mergers and acquisitions, the formation of private investment funds, and equity and debt financings. Bruce has extensive experience in the representation of financial services companies, including investment banks, investment advisers and bank and thrift...

212-969-3320
Robert G Leonard, Proskauer Rose Law Firm, Private Investment Attorney
Partner

Robert G. Leonard is a Partner in the Hedge Funds Group. For more than 25 years Rob has been structuring, organizing and representing hedge funds, funds of funds and other private investment funds (both domestic and offshore) and investment advisers.

212-969-3355
Michael F Mavrides, Proskauer Rose Law Firm, Private Investment Attorney
Partner

Michael F. Mavrides is a Partner in the Hedge Funds Group. Mike focuses his practice on representing domestic and offshore hedge funds, funds of funds and other private investment funds, including private equity and real estate investment funds. He regularly advises funds and their managers on a wide variety of issues, including formation and structuring, seed capital, anchor capital and other strategic arrangements, placement agency, solicitation and other marketing arrangements, succession planning, separately managed accounts, and all types of portfolio management, trading and...

212-969-3670
Christopher M Wells, Proskauer Rose Law Firm, Private Investment Attorney
Partner

Christopher M. Wells is a Partner and head of the Hedge Funds Group. Chris advises hedge funds, funds of funds and other pooled investment vehicles and their managers on all aspects of fund formation, operations and compliance.

212-969-3600
Howard Beber, Tax Attorney, Proskauer Rose Law Firm
Partner

Howard J. Beber is a partner in the Corporate Department and co-head of the Private Funds Group, which is recognized by Chambers GlobalChambers USA and US Legal 500. His practice focuses on representing private equity funds and institutional investors on a broad range of issues including fund formations, secondary transactions and portfolio investments. 

Howard is actively involved in all stages of fund formation and fund sponsor representation, counseling on terms and marketing strategy, preparing offering documents...

617-526-9754
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