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Agencies Clarify Application of Volcker to Registered Fund Seeding

Agencies involved with the implementation of the Volcker Rule recently released guidance relating to the seeding of registered funds by a banking entity. The agencies are the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and the Commodity Futures Trading Commission. The guidance states that the “[s]taff of the Agencies would not advise the Agencies to treat a [registered fund] as a banking entity under the implementing rules solely on the basis that the [registered fund] is established with a limited seeding period, absent other evidence that the [registered fund] was being used to evade [the Volcker Rule] and the implementing rules.” Further, it notes that the staff understands that the seeding period “may take some time, for example, three years.”

The adopting release to the Volcker Rule had left some question as to whether the seeding of registered funds by a banking entity would cause the fund to be treated as a banking entity and thus subject to certain restrictions, such as a prohibition on proprietary trading. Such a restriction would have made it effectively impossible for the registered fund to implement its investment objectives. The release noted that a registered fund could itself be a banking entity subject to the Volcker Rule if a banking entity owned greater than 25 percent of the fund’s voting securities. However, the rule provided an exclusion for a “seeding vehicle” that is formed and operated “pursuant to a written plan, developed in accordance with the banking entity’s compliance program, that reflects the banking entity’s determination that the vehicle will become a registered investment company or SEC-regulated business development company within the time period provided” by the Volcker Rule. In practice, many funds are seeded after the initial registration with the SEC, leading to concern that the exclusion was of little help. With the new guidance, the agencies resolved the ambiguity.

A more in depth analysis of the guidance by Dechert can be found here