• Volcker Rule Compliance: "Covered Funds"
  • March 24, 2015 | Author: Theodore W. Jones
  • Law Firm: Jones Walker LLP - Baton Rouge Office
  • Congress enacted the "Volcker Rule" provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank," or the "Act") to prevent banks from taking excessive risks through proprietary trading and fund investing. The "covered funds" provisions of the Volcker Rule adopted by federal regulators under the Act in December of 2013 significantly restrict banks' ownership in, and their ability to enter into certain transactions with, hedge and private equity funds, certain foreign funds, and commodity pools. This arguably necessitates clarity when trying to determine what constitutes a permitted versus prohibited fund activity. However, due to the complexity of the Volcker Rule, some confusion persists when trying to address this and related important questions.

    The Volcker Rule contains a number of detailed definitions which must be carefully navigated before a banking entity transacts with, invests in, or provides services to a fund. These definitions often dictate whether or not certain fund activities are permissible in connection with a bank's otherwise legal asset management services. Moreover, there are at least 14 different exemptions from the covered fund prohibition which are fact specific and sometimes difficult to establish given interpretation challenges under the Volcker Rule.

    Consequently, banks should work closely with counsel and outside accountants to: (i) survey their funds and services provided to them; (ii) classify funds, ownership, and services as permissible or impermissible; (iii) conform non-compliant entities/activities to become permissible; and (iv) implement a program to ensure prospective Volcker Rule compliance. In addition, and given current uncertainties under the Volcker Rule, banks should also require prompt counterparty notice of any event or change in circumstances that might cause bank fund activities to become non-compliant as well as special withdrawal rights where bank withdrawal from any such activity becomes necessary to re-establish Volcker Rule compliance.