On December 10, 2013, the federal banking agencies and the SEC (the “Agencies”) finalized the rulemaking to implement the “Volcker Rule” provisions of the Dodd-Frank Act. The Volcker Rule imposes broad restrictions on proprietary trading and investing in and sponsoring private equity and hedge funds by banking organizations.
The Agencies received over 18,000 comments from the banking industry and other interested parties. It is noted that these rules also apply to the following three non-banks agencies under Board supervision: American International Group Inc., General Electric Capital Corp, and Prudential Financial Inc.
This executive summary is Part VII of a 7-Part Series on Subpart C of the final rule which prohibits or restricts acquiring or retaining an ownership interest in, and certain relationships with, a covered fund, defines terms relevant to covered fund activities and investments, as well as establishes exemptions from the restrictions on covered fund activities and investments and limitations on those exemptions.
Section 13(a)(1)(B) of the BHC Act generally prohibits a banking entity from acquiring or retaining any ownership in, or acting as sponsor to, a covered fund. Section 13(d) of the BHC Act contains certain exemptions to this prohibition. Subpart C of the final rule implements these and other provisions of section 13 related to covered funds. Additionally, subpart C contains a discussion of the internal controls, reporting and recordkeeping requirements applicable to covered fund activities and investments.
Activities or Investments Solely Outside of the United States
In order to address the risks that the principal risks of covered fund investments and sponsorship by foreign banking entities permitted under the foreign funds exemption occur and remain solely outside of the United States, the rule provides that an activity or investment occurs solely outside the United States for purposes of the foreign fund exemption only if:
- The banking entity acting as sponsor, or engaging as principal in the acquisition or retention of an ownership interest in the covered fund, is not itself, and it not controlled directly or indirectly by, a banking entity that is located in the United States or established under the laws of the United States or of any State;
- The banking entity (including relevant personnel) that makes the decision to acquire or retain the ownership interest or act as sponsor to the covered fund is not located in the United States or organized under the laws of the United States or of any State;
- The investment or sponsorship, including any transaction arising from risk-mitigating hedging related to an ownership interest, is not accounted for as principal directly or indirectly on a consolidated basis by any branch or affiliate that is located in the United States or organized under the laws of the United States or of any State;
- No financing for the banking entity’s ownership or sponsorship is provided, directly or indirectly, by any branch or affiliate that is located in the United States or organized under the laws of the United States or of any State.
As stated above, these requirements are designed to ensure that any foreign banking entity engaging in activity under the foreign fund exemption does so in a manner that ensures the risk and sponsorship of the activity or investment occurs and resides solely outside of the United States.
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