Debevoise & Plimpton

The Volcker Rule — an in-depth Q&A about the covered funds provisions

More than two years after they were originally proposed, on 10 December 2013, the federal banking agencies, the Securities and Exchange Commission and the Commodity Futures Trading Commission (the ‘agencies’) adopted final regulations (the ‘Final Rule’) to implement section 13 of the Bank Holding Company Act (BHCA) (commonly known as the ‘Volcker Rule’).

In a prior Client Update, we provided our initial analysis of this highly complex new regulation. This update presents a more in-depth analysis of the covered funds aspects of the Final Rule and their implications for affected institutions. For the benefit of clients and friends seeking a way to understand the new regulatory framework and the principal features of the covered funds restrictions, we present in question-and-answer format a discussion of the most prominent components relating to the covered funds aspects of the Final Rule.

Before delving into the specifics, we note that the Volcker Rule contains two general prohibitions regarding fund activities. First, except as otherwise permitted, a banking entity may not, as principal, directly or indirectly, acquire or retain any ownership interest in or sponsor a covered fund. Second, a banking entity may not enter into ‘covered transactions’ (as defined in section 23A of the Federal Reserve Act) with a covered fund for which the banking entity, directly or indirectly, serves as investment manager, investment adviser or sponsor. We review each aspect of the funds prohibitions and the various exceptions to them below…

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