U.S. Federal Regulators’ amendments to Volcker Rule offer greater flexibility for banks and asset managers

Key takeaways:
  • Five U.S. financial regulators (the “Agencies”)  have issued a final rule (the “Final Rule”) that amends regulations (the “Existing Regulations”) implementing Section 13 of the Bank Holding Company Act of 1956 (the “BHCA”), commonly known as the “Volcker Rule.” The Final Rule provides new exceptions to some of the Volcker Rule’s key restrictions on sponsorship of, investment in, and transactions with certain types of private funds (“Covered Funds”).
  • The Final Rule exempts from the Volcker Rule’s prohibitions on proprietary trading by Banking Entities (as defined below) and restrictions on sponsorship and investment in Covered Funds certain non-U.S. funds that are not offered to U.S. investors (“Foreign Funds”) but which would otherwise be subject to these requirements because they are “controlled” (as defined under the BHCA) by a non-U.S. bank.
  • The Final Rule also establishes new exceptions from the Covered Fund definition for certain credit and venture capital funds, as well as vehicles used to provide financial services to customers and families, though these exceptions come with a number of strings attached.
  • Last, the Final Rule clarifies that some loans to and debt instruments issued by Covered Funds are permissible investments for banks and adds new exceptions to the Volcker Rule’s prohibition on certain transactions between banks and the Covered Funds that they sponsor, advise or manage.

The Volcker Rule has imposed considerable burdens on the asset management industry, and in many cases has limited the ability of banks to invest in, manage or sponsor private funds. On June 25, 2020, the Agencies adopted the Final Rule, which makes a number of important changes to the Existing Regulations and will afford banks active in the asset management space greater flexibility in servicing clients and making some types of investments.

The Volcker Rule applies to any U.S. bank, U.S. bank holding company or non-U.S. bank that has a U.S. branch, agency or bank subsidiary, along with all their affiliates around the world (collectively, “Banking Entities”). The Existing Regulations generally prohibit a Banking Entity from “sponsoring,” or investing in certain equity and equity-like securities (“Ownership Interests”) issued by, a Covered Fund. Under its “Super 23A” prohibition, the Volcker Rule also prohibits a Banking Entity from entering into certain types of transactions (“Covered Transactions”)  with Covered Funds that the Banking Entity either sponsors or to which it provides investment advice or management services.

Our analysis summarizes the Final Rule’s changes to the Existing Regulations that affect fund and asset management businesses. The Final Rule takes effect on October 1, 2020.

Read our full analysis here.