• Volcker Agencies Clarify That Non-U.S. Banking Entities May Invest in Certain Private Funds with U.S. Investors
  • March 17, 2015
  • Law Firm: Sutherland Asbill Brennan LLP - Washington Office
  • On February 27, 2015, the federal agencies responsible for implementing the Volcker Rule published guidance in the form of a FAQ, which makes it easier for a non-U.S. banking entity to invest in a private fund that has been marketed or sold to U.S. residents. According to the FAQ, a non-U.S. banking entity should be able to invest in a third-party fund (as defined below) that has been offered for sale or sold to U.S. residents so long as the non-U.S. banking entity complies with the U.S. marketing restriction and other requirements of the “SOTUS” - solely outside of the United States - exemption. Non-U.S. banking entities may, as a result, retain or acquire investments in certain third-party private equity funds, hedge funds and other covered funds that have been offered or sold by third-party sponsors or distributors to U.S. residents. For example, as a result of the new guidance it is now clear, that Cayman feeder funds may include both tax exempt U.S. investors and non-U.S. banking entities that comply with the SOTUS exemption as clarified by the guidance.

    Section 13 of the Bank Holding Company Act, referred to as the Volcker Rule, generally prohibits any banking entity from, among other things, acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with, a hedge fund, private equity fund or other covered fund, subject to certain exemptions. The SOTUS exemption excludes from this prohibition certain covered fund activities conducted by non-U.S. banking entities, provided that, among other things, “no ownership interest in the covered fund is offered for sale or sold to a resident of the United States” (referred to as the “U.S. marketing restriction”). An ownership interest in a covered fund is not offered for sale or sold to a resident of the U.S. only if it is sold “pursuant to an offering that does not target residents of the United States.”

    According to the FAQ, the U.S. marketing restriction would prohibit an investment by a non-U.S. banking entity in a covered fund that is offered or sold to U.S. residents unless the fund qualifies as a “third-party fund,” i.e., where the non-U.S. banking entity (including its affiliates) does not sponsor, or serve, directly or indirectly, as investment manager, investment adviser, commodity pool operator or commodity trading advisor to the covered fund. In the context of such third-party funds, the non-U.S. banking entity - not the unaffiliated fund sponsor - must comply with the U.S. marketing restriction, which ensures that the non-U.S. banking entity seeking to rely on the SOTUS exemption does not engage in an offering that targets U.S. residents. By contrast, in the case of a fund that does not qualify as a third-party fund, the non-U.S. banking entity is deemed to have participated in any offer or sale of covered fund ownership interests to U.S. residents. Accordingly, it is inconsistent with the U.S. marketing restriction for a non-U.S. banking entity to invest in a covered fund offered or sold to U.S. residents that does not qualify as a third-party fund.