Non-US banks under the Volcker Rule — a framework for analysing covered fund status

On 10 December, federal regulators voted to approve the final Volcker Rule, which, among other things, relaxed the proposed restrictions on the ability of a non-US bank to own interests in, sponsor and engage in transactions with certain types of investment vehicles.

The eased restrictions reflect an overall limitation on the extraterritorial effect of the Volcker Rule on non-US banks and are put into effect through excluding from the definition of ‘covered fund’, solely with respect to non-US banks, certain non-US investment vehicles offered outside the US and adding new exclusions from the definition of ‘covered fund’ that both US and non-US banks can seek to rely on, including exclusions for loan securitisation vehicles and non-US public funds. The result is that a non-US bank may now invest in, sponsor and engage in so-called ‘Super 23A’ covered transactions with these types of vehicles free from the limits of the Volcker Rule.

The initial step in determining whether the Volcker Rule’s prohibitions on covered funds apply to a non-US bank is to analyse whether an investment vehicle is a covered fund, and a material part of that analysis is based on principles found in the US federal securities laws. This analysis may present challenges for non-US banks that are unfamiliar with those principles but that nonetheless must structure and offer investment vehicles so as to ensure that such vehicles remain out of the Volcker Rule’s reach…

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