With the July compliance date fast approaching, the agencies responsible for the Volcker Rule regulations have been adding to their Frequently Asked Questions (FAQ) webpages more often.
On February 27, 2015, it issued a new FAQ regarding the “Solely Outside the United States” (SOTUS) exemption that is available for foreign banks that are subject to the Volcker Rule.
The Volcker Rule generally prohibits entities from engaging in proprietary trading or sponsoring or acquiring ownership interests in certain private equity (“covered”) funds. There are exemptions to both prohibitions, including one for a foreign bank that makes an investment in a covered fund that otherwise would be prohibited under the Volcker Rule, if, among other conditions, no ownership interest in the covered fund is offered for sale or sold to a resident of the United States (the “Marketing Restriction”) and the activity or investment occurs solely outside of the United States (a requirement that carries its own conditions, not relevant for purposes of this FAQ).
The new FAQ answers the question of whether a non-US bank that makes an investment in a covered fund, with no other connection to such fund (such as sponsoring or advising it) still may use the SOTUS exemption if persons unaffiliated with the non-US bank do offer ownership interests in that fund to US persons.
In their response, the agencies confirm that the “[M]arketing [R]estriction, as implemented in the final rule, constrains the foreign banking entity in connection with its own activities with respect to covered funds rather than the activities of unaffiliated third parties.” (emphasis added.)
However, the agencies also clarify the limits of such confirmation:
A foreign banking entity that participates in an offer or sale of covered fund interests to a resident of the United States thus cannot rely on the SOTUS covered fund exemption with respect to that covered fund. Further, where a banking entity sponsors or serves, directly or indirectly, as the investment manager, investment adviser, commodity pool operator or commodity trading advisor to a covered fund, that banking entity will be viewed by the staffs as participating in any offer or sale by the covered fund of ownership interests in the covered fund, and therefore such foreign banking entity would not qualify for the SOTUS covered fund exemption for that covered fund if that covered fund offers or sells covered fund ownership interests to a resident of the United States.
Access the banking, securities and commodities regulators’ Frequently Asked Questions.
Previous Regulation Tomorrow posts on the Volcker Rule’s Frequently Asked Questions