US Agencies (CFTC, FDIC, FED, OCC, and SEC) are proposing to amend the regulations implementing Section 13 of the Bank Holding Company Act (Volcker Rule). The proposal would modify the restrictions for banking entities investing in, sponsoring, or having certain relationships with covered funds. Comments must be received on or before April 01, 2020. Additionally, FED has published statements by Chair Jerome H. Powell, Vice Chair for Supervision Randal K. Quarles, and Governor Lael Brainard on the proposed rule. Ms. Brainard does not support the proposal and is concerned that several of the proposed changes will weaken core protections in the Volcker rule and enable banking firms again to engage in high-risk activities related to covered funds.
The proposed rule would improve and streamline the covered funds portion of the rule, address the treatment of certain foreign funds, and permit banking entities to offer financial services and engage in other permissible activities that do not raise concerns that the Volcker rule was intended to address. In particular, it would:
- Limit the extraterritorial impact of the rule on foreign funds offered by foreign banks to foreign individuals
- Permit certain low-risk transactions (including intraday credit and payment, settlement and clearing transactions) between a banking entity and covered funds for which the banking entity serves as investment adviser or sponsor
- Simplify existing provisions of the rule related to foreign public funds, loan securitizations, and small business investment companies
- Permit banking entities to invest in or sponsor certain types of funds that do not raise the concerns the Volcker Rule was intended to address, such as credit funds, venture capital funds, customer facilitation funds, and family wealth management vehicles
- Clarify that credit exposures to a covered fund would generally not constitute fund ownership interests under the Volcker Rule
- Clarify an ambiguity from the 2013 rulemaking about the treatment of parallel investments made by a banking entity in the same underlying investments as a sponsored covered fund
The Volcker Rule contains certain restrictions on the ability of a banking entity or non-bank financial company supervised by FED to engage in proprietary trading and have certain interests in, or relationships with, a hedge fund or private equity fund. The rule prohibits any banking entity from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with a covered fund, subject to certain exemptions. The Volcker Rule defines a covered fund as an issuer that would be an investment company as defined in the Investment Company Act of 1940 but for section 3(c)(1) or 3(c)(7) of that Act, or such similar funds as the agencies by rule determine. The regulations implementing the Volcker Rule define covered fund by including the statutory definition as well as certain additions (for example, commodity pools that are not publicly offered) and exclusions (such as foreign public funds). Since adoption of the implementing regulations in 2013, opportunities have been identified, consistent with the statute, for revising the regulations to improve, streamline, and clarify the covered fund provisions.
Comment Due Date: April 01, 2020
Keywords: Americas, US, Banking, Securities, Volcker Rule, Securitization, Covered Fund Restrictions, US Agencies
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