Key Takeaways
- • On January 30, 2020, five federal agencies (Federal Reserve Board, OCC, FDIC, SEC, and CFTC) jointly approved a Notice of Proposed Rulemaking to simplify and tailor the "covered fund" provisions of the Volcker Rule, with comment period closing April 1, 2020.
- • The Proposed Rule introduces new exclusions for certain fund types, adds flexibility to existing exclusions, eliminates certain extraterritorial outcomes, and permits low-risk transactions with related funds—representing a tailored rather than sweeping overhaul of existing regulations.
- • The Proposed Rule spans over 160 pages and includes 87 separate questions soliciting industry comment, indicating substantial potential revisions to how banking entities can engage with hedge funds, private equity funds, and other covered funds.
- • Key proposed simplifications address foreign public funds, loan securitizations, and small business investment companies, reflecting agency intent to reduce regulatory burden while maintaining prudential safeguards.
- • The Proposed Rule retains the basic structure and principles of current covered fund provisions while adding new asset-type exemptions for funds consisting solely of loans, debt instruments, and related incidental assets.
Summary
On January 30, 2020, the Federal Reserve Board, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, U.S. Securities and Exchange Commission, and Commodity Futures Trading Commission jointly issued a Notice of Proposed Rulemaking to amend the Volcker Rule's "covered fund" provisions. The initiative represents a targeted revision effort following the agencies' November 2019 finalization of proprietary trading amendments, which had included only minor changes to covered fund restrictions. This new proposal signals a more comprehensive rulemaking focused specifically on fund-related activities.
The Volcker Rule, enacted in 2010 as Section 619 of the Dodd-Frank Wall Street Reform Act, generally prohibits banking entities from acquiring or retaining ownership interests in "covered funds" such as hedge funds and private equity funds, subject to specific exceptions. Banking entities also face restrictions on sponsoring covered funds unless they comply with detailed requirements or qualify for non-U.S. activity exceptions. The Proposed Rule seeks to streamline these restrictions through a tailored regulatory approach rather than introducing wholesale changes to the existing framework.
The Proposed Rule introduces several categories of relief and simplification. New exclusions target funds whose assets consist solely of loans, debt instruments, rights, and incidental assets. The proposal also simplifies existing provisions affecting foreign public funds, loan securitizations, and small business investment companies. Additionally, the rule permits low-risk transactions between banking entities and related funds, and eliminates certain extraterritorial regulatory outcomes that had created compliance complexities for international operations. According to Schulte Roth & Zabel commentators, however, the Proposed Rule "does not offer sweeping changes, as many in the banking and fund industries would have preferred."
The Proposed Rule spans more than 160 pages in its original format and poses 87 separate questions soliciting detailed industry feedback, many with multiple subparts. The comprehensive scope indicates the agencies sought extensive stakeholder input on nuanced implementation issues. The public comment period closed on April 1, 2020, providing institutional investors, hedge funds, private equity sponsors, and banking organizations opportunity to shape the final regulations. The proposal demonstrates regulatory intent to reduce compliance burden and operational friction while maintaining prudential safeguards against excessive risk-taking by systemically important financial institutions.
The Volcker Rule, enacted in 2010 as Section 619 of the Dodd-Frank Wall Street Reform Act, generally prohibits banking entities from acquiring or retaining ownership interests in "covered funds" such as hedge funds and private equity funds, subject to specific exceptions. Banking entities also face restrictions on sponsoring covered funds unless they comply with detailed requirements or qualify for non-U.S. activity exceptions. The Proposed Rule seeks to streamline these restrictions through a tailored regulatory approach rather than introducing wholesale changes to the existing framework.
The Proposed Rule introduces several categories of relief and simplification. New exclusions target funds whose assets consist solely of loans, debt instruments, rights, and incidental assets. The proposal also simplifies existing provisions affecting foreign public funds, loan securitizations, and small business investment companies. Additionally, the rule permits low-risk transactions between banking entities and related funds, and eliminates certain extraterritorial regulatory outcomes that had created compliance complexities for international operations. According to Schulte Roth & Zabel commentators, however, the Proposed Rule "does not offer sweeping changes, as many in the banking and fund industries would have preferred."
The Proposed Rule spans more than 160 pages in its original format and poses 87 separate questions soliciting detailed industry feedback, many with multiple subparts. The comprehensive scope indicates the agencies sought extensive stakeholder input on nuanced implementation issues. The public comment period closed on April 1, 2020, providing institutional investors, hedge funds, private equity sponsors, and banking organizations opportunity to shape the final regulations. The proposal demonstrates regulatory intent to reduce compliance burden and operational friction while maintaining prudential safeguards against excessive risk-taking by systemically important financial institutions.
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