On January 30, the five regulatory agencies responsible for implementing the Volcker Rule approved a notice of proposed rulemaking that would make significant revisions to the "covered funds" provisions of the rule (the "Proposal"). The Proposal aims to revise aspects of the rule that have constrained banking activities that the rule was not intended to restrict, including certain activities outside the United States. The Proposal would also codify a number of interpretive clarifications. Key elements include:

  • New covered fund exclusions for credit funds, venture capital funds, family wealth management vehicles and client facilitation vehicles, but no change to the baseline definition of covered fund.
  • Revisions to address practical obstacles to reliance on the existing exclusions for loan securitizations, foreign public funds and SBICs.
  • Clarifications about when debt interests in covered funds could be characterized as "ownership interests", including the treatment of creditor rights upon default and a safe harbor for senior loans and senior debt interests.
  • Limiting the rule's extraterritorial impact on the non-U.S. funds activities of foreign banks by codifying existing no-action relief.
  • Exclusions from the "Super 23A" prohibition for certain low-risk transactions, such as intraday extensions of credit and clearing.
  • Clarification that otherwise permissible direct investments alongside covered funds should not be counted towards the 3% limit on what a banking entity can hold in a sponsored covered fund.

Comments are due April 1, 2020. A link to the Proposal is available here and a blackline against the current rule text is available here. Our highlights memo providing a summary overview of the Proposal is available here.


The Volcker Rule, adopted as part of the Dodd-Frank Act as Section 13 of the Bank Holding Company Act (the "BHC Act"), generally prohibits banking entities from (i) engaging in proprietary trading or (ii) acquiring or retaining an interest in, sponsoring, or having certain relationships with a covered fund, subject to certain exceptions.

The statute charged five agencies with implementing the Volcker Rule—the Board of Governors of the Federal Reserve (the "FRB"), the Office of the Comptroller of the Currency (the "OCC"), the Federal Deposit Insurance Corporation, the Securities and Exchange Commission (the "SEC") and the Commodity Futures Trading Commission (together, the "Agencies").

Under the statute, a covered fund (a hedge fund or private equity fund in the statute) is defined as an issuer that would be an investment company as defined in the Investment Company Act of 1940 but for section 3(c)(1) or 3(c)(7) of that Act, or such similar funds as the Agencies may determine.

The Agencies adopted the original final implementing regulation in December 2013 (the "2013 rule"). In the 2013 rule, the Agencies defined a covered fund to include certain funds beyond those specified by statute (e.g., certain commodity pools and certain foreign funds), and provided for a number of exclusions (e.g., for foreign public funds, joint ventures and loan securitization vehicles, among others).

The Volcker Rule as implemented was frequently criticized as overly complex, and many commenters suggested that it ended up restricting activity that Congress had not intended to prohibit.

In June 2017, the Treasury Department released a report in response to Executive Order 13772, in which it recommended significant statutory and regulatory changes to the Volcker Rule. In August 2017, the OCC released a request for information that solicited comments from the public on suggestions for revising and improving the rule's administration and implementing regulations. Revisions to the rule's covered funds prohibitions were a subject of recommendations and comment in connection with both initiatives.

In July 2018, the Agencies issued a notice of proposed rulemaking that included proposed amendments intended to simplify and tailor application of the rule. However, many of the concerns about the covered funds provisions of the rule were addressed only in questions soliciting comment, as opposed to specific proposed amendments.

In November 2019, the Agencies approved a final rule that simplified and clarified the proprietary trading and compliance program provisions of the rule, but deferred the covered funds changes to a new proposal.

If adopted, the Proposal would leave the basic framework of the funds provisions intact, but provide important new exclusions from the covered funds definition to limit its scope, and clarify other exclusions to reflect practical concerns that have limited their utility. Two themes common to many elements of the Proposal include (i) changes designed to avoid prohibiting banking entities from doing indirectly (through an investment vehicle) what they are permitted to do directly, and (ii) changes designed to avoid inadvertent interference with traditional banking activities that do not present the risks that the Volcker Rule was intended to address. Many of the proposed changes are also intended to simplify and lessen compliance burdens.

The Proposal would also incorporate into the rule important limitations on the extraterritorial application of the rule to funds activities of non-U.S. banks outside the United States by codifying temporary relief the Agencies previously provided in a policy statement, as well as interpretive guidance issued as an "FAQ".

Please click here to read the full alert memorandum. Our highlights memo of January 31, 2020 providing a summary overview of the Proposal is also available here.

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