SIFMA provided several recommendations to improve the "covered funds" provisions of the Volcker Rule.

As previously covered, the Federal Reserve Board ("FRB"), FDIC, OCC, SEC and CFTC (the "Agencies") proposed a set of amendments to the Volcker Rule's "covered funds" provisions.

The Volcker Rule (i.e., Section 619 of Dodd-Frank) generally prohibits banking entities from (i) engaging in proprietary trading and (ii) acquiring or retaining ownership interests in certain hedge funds and private equity funds.

SIFMA recommended that the Agencies adopt proposed exclusions relating to family wealth management vehicles, customer facilitation vehicles, qualifying venture capital funds (including an expansion of this exclusion to encompass certain qualifying long-term investment funds), qualifying credits funds (with certain modifications), and tender option bond vehicles.

SIFMA also recommended that the Agencies modify the exclusions for foreign public funds, loan securitization vehicles, SBICs, and certain vehicles eligible to receive qualified investment consideration under the Community Reinvestment Act for public welfare investment funds.

On the "ownership interest" definition, SIFMA urged the agencies to:

  • clarify that an interest will not be considered an ownership interest if the sole reason is that the holder has removed an investment manager;
  • implement a safe harbor from the proposed ownership interest definition for certain senior debt securities or loans; and
  • adopt the exclusion of covered fund ownership interest from erroneous acquisition or retention.

Regarding the "Confirmation of Certain Agency Guidance," SIFMA also asked the Agencies to confirm that: (i) FAQs 5, 14 and 16 in the final rule preamble are "revoked or unmodified," and are able to be relied on by banking entities in continuity; and (ii) FAQs 5 and 16 in the final rule preamble are both "revoked or unmodified," and are able to be relied on by banking entities in continuity with regard to ETFs.

As explained more fully in the comment letter, SIFMA also encouraged the Agencies to:

  • adopt (i) proposed exemptions for qualifying foreign excluded fund activities and investments and (ii) the proposed rule regarding co-investments of construction on parallel investments by banking entities in the same covered fund portfolio companies;
  • eliminate the amendment requiring a banking entity to include the ownership interests value in covered funds that are sponsored or advised by said banking entity, and subjected to certain criteria; and
  • allow banking entities to comply voluntarily, partially or entirely, with the amendments adopted by a final rule that would implement the Proposal before the final rule compliance that would implement the Proposal beginning on its effective date, as opposed to the 2013 Final Rule.

Comments on the proposal are due by April 1, 2020.

A Cadwalader memorandum with greater analysis is forthcoming.

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