US Agencies (CFTC, FDIC, FED, OCC, and SEC) finalized a rule modifying the Volcker rule's prohibition on banking entities investing in or sponsoring hedge funds or private equity funds—known as covered funds. The final amendments are intended to improve and streamline the regulations implementing section 13 of the Bank Holding Company Act by modifying and clarifying requirements related to the covered fund provisions of the rules. The rule will be effective on October 01, 2020.
The final rule is similar to the proposal, with certain targeted adjustments, and it modifies three areas of the Volcker Rule by
- Streamlining the covered funds portion of rule
- Addressing the extraterritorial treatment of certain foreign funds
- Permitting banking entities to offer financial services and engage in other activities that do not raise concerns that the Volcker rule was intended to address
Under the final rule, qualifying foreign excluded funds are not required to have compliance programs or comply with the reporting and additional documentation requirements. However, any banking entity that owns or sponsors a qualifying foreign excluded fund will still be required to have in place appropriate compliance programs for itself and its other subsidiaries and provide reports and additional documentation as required. In a statement accompanying this rule, the FED Governor Lael Brainard said: "I supported exempting community banks from the Volcker rule, and I support addressing the unintended application of the Volcker rule to certain funds organized outside of the United States and offered to foreign investors, known as foreign excluded funds. However, I am concerned key changes in the final rule weaken core protections in the Volcker Rule and will permit banking entities to return to risky activities seen in the 2008 financial crisis."
The Volcker rule generally prohibits banking entities from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring, or having certain relationships with a hedge fund or private equity fund. The rule contains certain restrictions on the ability of a banking entity or a 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 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.
Effective Date: October 01, 2020
Keywords: Americas, US, Banking, Volcker Rule, Securitization, Covered Funds Restrictions, BHC Act, US Agencies
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