Modified Volcker Rule to Give Commercial Banks More Leeway in Fund Investing

Thoughtware Alert Sep 10, 2020
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Ban on financial institutions’ investment in funds gets eased effective October 1, 2020.

Federal regulators recently modified the Volcker Rule to narrow down and relax restrictions on financial institutions’ investment in hedge funds and private equity funds (known as the “covered funds”), giving banks more leeway to invest in or sponsor funds.

The Volcker Rule, which refers to Section 13 of the Bank Holding Company Act, was first approved in 2013 and went into effect July 2015. It restricts commercial banks and financial institutions (community banks are exempt) from proprietary trading or direct ownership in hedge funds and private equity funds. The rule was implemented to protect customers’ deposits from exposure to excess risks that generate returns that don’t directly benefit customers.

However, exemptions in the rule allow banks to engage in risk hedging trading and activities on behalf of their customers.

The recent modification to the Volcker Rule just announced in June 2020 will allow banks to invest more easily and directly in investment funds. Small business investment companies, public welfare investment funds, credit funds, venture capital funds, family wealth management, and customer facilitation vehicles will be exempt from the “covered funds,” and therefore, banks will be allowed to trade and hold interest in these exempted funds.

In addition, the definition of an exempted foreign public fund is simplified and no longer needs to have a same public offering place as its registered operations jurisdiction to be eligible for exemption from covered funds.  

The new rule also loosens the limitation on debt securitization previously restricted from as covered funds and will allow banks’ debt securitization to hold a small portion of debt investments.

The new rule is effective October 1, 2020.

With the lifting of certain limitations, commercial banks may more actively participate in fund investing. It’s expected that in the coming years, there will be an even more active market in the venture capital world. For more information, reach out to your BKD Trusted Advisor™ or use the Contact Us form below.
 

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