Volcker Rule: Agencies Release New Guidance Providing Clarification Regarding Banking Entity Status of Certain Foreign Public Funds and Restricting Scope of Joint Venture Exclusion

Sullivan & Cromwell LLP - June 12, 2015

Earlier today, the staffs of the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission and the Commodity Futures Trading Commission (collectively, the “Agencies”) provided two important additions to their existing list of Frequently Asked Questions (“FAQs”) addressing the implementation of section 13 of the Bank Holding Company Act of 1956, as amended (the“BHC Act”), commonly known as the “Volcker Rule.”

In the first of the new FAQs, the staffs of the Agencies clarify the circumstances under which a foreign public fund excluded from the definition of covered fund could be deemed to be a banking entity subject to the Volcker Rule’s restrictions on proprietary trading and covered fund activities.  The FAQ provides that the staffs of the Agencies “would not advise” that the activities and investments of a foreign public fund be attributed to a banking entity for purposes of the Volcker Rule, or that a foreign public fund be deemed a banking entity solely by virtue of its relationship with a sponsoring banking entity, where the following conditions are met:

  • The foreign public fund meets the conditions of the exclusion from the definition of covered fund provided under Section _.10(c)(1) of the Final Rule;
  • The banking entity does not own, control or hold with the power to vote 25% or more of the voting shares of the foreign public fund after the applicable seeding period (which remains subject, in the case of a foreign public fund sponsored by a U.S. banking entity, to the 15% ownership interest limitation (together with shares held by the foreign public fund, affiliates, directors and employees) under Section _.10(c)(1)(ii) of the Final Rule); and
  • If the banking entity sponsors, provides investment advisory, commodity trading advisory, administrative or other services to the fund, such activities are in compliance with limitations under applicable regulation, order or other authority, including applicable limitations in the relevant foreign jurisdiction.

The second of the new FAQs clarifies the scope of the exclusion from the definition of covered fund for certain joint ventures.  The FAQ specifies that the exclusion would not be available to an issuer that:
  • Raises money from a small number of investors primarily for the purpose of investing in securities, whether the securities are intended to be traded frequently, held for a longer duration, held to maturity or held until the dissolution of the entity;
  • Raises money from investors primarily for the purpose of investing in securities for resale or other disposition or otherwise trading in securities merely because one of the purposes for establishing the vehicle may be to provide financing to an entity to obtain and hold securities; or
  • Raises money from investors primarily for the purpose of sharing in the benefits, income, gains or losses from ownership of securities—as opposed to conducting a business or engaging in operations or other non-investment activities—even if the vehicle may have other purposes.

The FAQ notes that any determination of whether an arrangement is a “joint venture,” which is not defined separately in the Final Rule, will depend on the facts and circumstances, though the “basic elements of a joint venture are well recognized, including under state law.”