The Volcker rule generally prohibits banking entities from engaging in proprietary trading and from sponsoring and/or investing in certain types of “covered” investment funds. The implementing regulation that the Agencies released in December 2013 makes it clear that registered investment companies and foreign public funds are not covered funds for purposes of the Volcker rule. However, the implementing regulation and the Agencies’ prior guidance did not clearly address the circumstances in which registered investment companies, foreign public funds and business development companies may themselves become banking entities for purposes of the Volcker rule during a seeding period in which a banking entity may own all or a significant portion of the fund’s equity. This circumstance has created considerable ambiguity about whether a banking entity may provide seed capital to these types of funds.
The new guidance states that the staffs of the Agencies would not advise the Agencies to treat a registered investment company or a foreign public fund as a banking entity for purposes of the Volcker rule solely on the basis of the level of ownership in the registered investment company or foreign public fund during the seeding period. The guidance recognizes that the seeding period “may take some time” and gives as an example three years, which generally would be measured from the date on which the investment adviser or other similar entity begins making investments pursuant to the fund’s written investment strategy. The guidance indicates that it is not expected that it would be necessary for a banking entity to submit an application to the Federal Reserve Board to determine the length of the permitted seeding period in the ordinary course. In a footnote, the guidance extends similar treatment to business development companies.
The guidance is quite helpful to banking entities that wish to provide seed capital to registered investment companies, foreign public funds and business development companies, although some questions remain about the precise length of the permitted seeding period and how it should be measured.
The guidance issued by the staffs of 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 is available here.
Questions concerning this guidance or other aspects of the Volcker rule should be directed to Bill Stern in Goodwin Procter’s New York office.