The Economic Growth, Regulatory Relief and Consumer Protection Act (“the Reform Act”) was signed into law on May 24, 2018.1 The Reform Act, which was effective upon enactment, amended Section 13 of the Bank Holding Company Act of 1956, also known as the Volcker Rule.2 As outlined in our June 2018 and March 2019 Client Alerts, the Reform Act provides relief from the Volcker Rule for small banking institutions and general relief to all “Banking Entities” from certain naming restrictions applicable to “Covered Funds.”
A Banking Entity includes an FDIC insured depository institution, any company that controls such an institution, any company that is treated as a bank holding company for purposes of the International Banking Act of 1978, or any affiliate or subsidiary of such entity.3 A Covered Fund refers to a hedge fund or private equity fund.
On December 21, 2018, the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission and the Commodity Futures Trading Commission (collectively, the “Agencies”) issued a joint notice of proposed rulemaking (“NPRM”) seeking comment on proposed changes to the Volcker Rule.4
On July 9, 2019, the Agencies announced that they have adopted a final rule, which is unchanged from the NPRM, implementing the statutory amendments to the Volcker Rule in a manner consistent with the Reform Act.
The regulations implement the Reform Act without modification:
- Exempt Banking Entities (and any company that controls them) from the Volcker Rule if they have (1) less than $10 billion in total consolidated assets and (2) trading assets and liabilities that are not more than 5% of their total consolidated assets; and
- Permit Covered Funds to share a name or a variation of the same name as a Banking Entity that is an investment adviser to the fund so long as (i) the name does not include the word “bank” and (ii) the investment adviser is not, and does not itself share the same name or variation of the same name as, an insured depository institution, a company that controls an insured depository institution, or a company that is otherwise treated as a bank holding company. As noted by the Agencies, the condition that the name does not include the word “bank” is already a condition under the regulations.
When the Reform Act was passed, some commenters speculated that the Volcker Rule exemption could be available to a Banking Entity with over $10 billion in assets so long as it maintained a trading portfolio smaller than 5% of its total assets. Adoption of the final rule provides clarification that no Banking Entity above $10 billion will be afforded the exemption; a Banking Entity must satisfy both conditions to qualify.
The final rule will take effect upon publication in the Federal Register. The full text of the final rule can be found here: “Revisions to Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds.”
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The changes made to the Volcker Rule by the Reform Act and the final rule may provide for additional opportunities for Banking Entities to participate with Covered Funds. Seward & Kissel LLP will continue to provide insight on any developments regarding the Volcker Rule and the Reform Act. If you have any questions, please contact Paul Clark, Casey Jennings or Lauren Michnick in the Washington, DC Office at 202-737-8833 or contact any member of our Investment Management Group.
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1 Economic Growth, Regulatory Relief, and Consumer Protection Act, 115 S. 2155, 2017 S. 2155, 115 S. 2155.
2 Bank Holding Company Act of 1956, 12 U.S.C.S. § 1851.
3 Id.
4 Proposed Revisions to Prohibitions and Restrictions on Proprietary Trading and Certain Interests In, and Relationships With, Hedge Funds and Private Equity Funds, 84 Fed. Reg. 2778.
