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


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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.


John S. Marten


Nathaniel Segal


Jacob C. Tiedt


Adam S. Goldman