On July 16, 2015, US financial regulators issued additional guidance on banking entity ownership of certain funds excluded from coverage under the Volcker Rule. A substantial investment by a banking entity in registered investment companies (RIC) or foreign public funds (FPF), which are funds excluded from coverage under the Volcker Rule, will not transform those funds into banking entities solely on the basis that the RIC or FPF is established by the banking entity with a limited “seeding period,” unless there is evidence that the RIC or FPF was being used to evade the application of the Volcker Rule.

The Volcker Rule and its regulations generally prohibit banking entities and affiliates from engaging in proprietary trading or sponsoring or acquiring ownership interests in certain private funds (“covered funds”). In order to assist affected entities in complying with the rule, the agencies that issued the regulations have been issuing guidance periodically in the form of Frequently Asked Questions (FAQ) that appear on each of the agencies’ websites. In order to achieve consistency in interpretations, industry inquiries on Volcker Rule compliance are referred to a committee of representatives of the regulators that issued the rules, with one answer then being adopted by all the regulators. The July 16 issuance is the 16th question that they have addressed.

The agencies noted that RICs and FPFs are excluded from coverage under the Volcker Rule and that a banking entity may own a significant portion of the shares of a RIC or FPF during what is called a “seeding period,” which is a time period (which could be up to three years) during which the banking entity is “testing the fund’s investment strategy, establishing a track record of the fund’s performance for marketing purposes, and attempting to distribute the fund’s shares.” Staffs of the agencies concluded that it would not advise that a RIC or FPF be treated as a banking entity solely on the basis of the level of ownership in the RIC or FPF by a banking entity during a seeding period.

Access the banking, securities and commodities regulators’ Frequently Asked Questions.

Previous Regulation Tomorrow posts on the Volcker Rule’s Frequently Asked Questions:

  1. Agencies issue more Volcker Rule guidance on covered funds
  2. Agencies provide clarification on the “SOTUS” Volcker Rule exception
  3. Regulators issue additional Volcker Rule guidance
  4. Regulators clarify FOIA treatment for certain Volcker rule reports
  5. Regulators provide more Volcker guidance
  6. Volcker Rule FAQs updated by Federal Reserve Board and OCC
  7. Volcker Rule FAQs and examination guidelines released