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Vedder Thinking | Articles Agencies Adopt Volcker Rule Amendments Relating to Covered Funds


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On June 25, 2020, the Federal Reserve Board, FDIC, OCC, SEC and CFTC adopted 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 amendments, which will become effective on October 1, 2020, reduce the extraterritorial impact of Volcker Rule regulations on foreign funds and clarify and expand the Volcker Rule’s covered fund provisions applicable to banking entities to allow banking entities to provide comprehensive financial services in a manner consistent with the requirements and spirit of the Volcker Rule.

Foreign Funds. The amendments codify a 2017 policy statement from the staffs of the federal banking regulators (the Federal Reserve Board, FDIC and OCC) that limits 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 amendments modify these restrictions to more closely align with those related to the exclusion for domestic registered investment companies. In addition, the amendments exempt from certain covered fund restrictions foreign funds that are controlled by foreign banking entities, which funds are subject to the more rigorous compliance obligations applicable to banking entities.

Exclusions from the Covered Fund Provisions. The amendments also modify, expand or add exclusions from the Volcker Rule’s covered fund provisions.

  • The Volcker Rule currently excludes loan securitizations from its covered fund provisions. The amendments codify existing guidance from the staffs of the federal banking regulators, the SEC and the CFTC regarding this exclusion to allow loan securitizations to hold a small amount of debt securities.
  • The amendments 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, and they also create a new exclusion for venture capital funds that allows banking entities to directly invest in such funds. The amendments also clarify the application of the public welfare investment exclusion to include rural business investment companies and qualified opportunity zone funds.
  • The amendments create a new exclusion that will 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 amendments exclude entities created and used to facilitate customer transactions and investment strategies and 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 amendments modify the Volcker Rule to permit a banking entity to engage in certain covered transactions with a covered fund sponsored or advised by the banking entity. This aspect of the final rule is intended to allow banking entities to provide low-risk, traditional banking services to related covered funds, such as standard payment, clearing and settlement services.

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

The adopting release for the Volcker Rule amendments is available here.


John S. Marten


Nathaniel Segal


Jacob C. Tiedt