United States: Federal Banking Agencies Announce No-Action Position On Certain Foreign Excluded Funds Under The Volcker Rule

Section 13 of the Bank Holding Company Act of 1956, as amended, and its implementing  regulations1 (the "Volcker Rule") generally prohibit a "banking entity" from engaging in proprietary trading and from investing in, sponsoring, or having certain relationships with "covered funds."

On July 21, 2017, the Board of Governors of the Federal Reserve System (the "Board"), the Office of the Comptroller of the Currency (the "OCC"), and the Federal Deposit Insurance Corporation (the "FDIC" and, together with the Board and the OCC, the "Banking Agencies") jointly released a Statement regarding Treatment of Certain Foreign Funds under the Rules Implementing Section 13 of the Bank Holding Company Act (the "Statement").2 In issuing the Statement, the Banking Agencies consulted with staffs of the Securities and Exchange Commission (the "SEC") and the Commodity Futures Trading Commission (the "CFTC").3

In short, the Banking Agencies will not enforce the prohibitions and restrictions of the Volcker Rule with respect to the activities of certain "qualifying foreign excluded funds" (as defined below) controlled by "foreign banking entities"4 for a one-year period through July 21, 2018. During this enforcement moratorium, the staffs of the Banking Agencies and of the SEC and CFTC will consider ways in which the Volcker Rule implementing regulations may be amended, or other appropriate action may be taken to address any unintended consequences of the Volcker Rule for foreign excluded funds in foreign jurisdictions. The no-action position is responsive to long-standing issues regarding treatment of foreign excluded funds raised by foreign banks and the Institute of International Bankers. As explained below, the no-action position is limited in scope and is effective for one year only, making it difficult for foreign banks to rely on it for more permanent organizational changes. Nonetheless, the Statement recognizes a problem in the implementing regulations that needs to be addressed and may foreshadow the Banking Agencies willingness to consider other changes to the implementing regulations.

ISSUES RELATED TO FOREIGN EXCLUDED FUNDS

A "foreign excluded fund" is generally understood to be a fund (i) in which a foreign banking entity invests or that it sponsors; (ii) organized under the laws of a foreign jurisdiction, the ownership interests of which are offered and sold solely outside the United States; and (iii) that is, or holds itself out as being, an entity or arrangement that raises money from investors primarily for the purpose o investing in financial instruments for resale or other disposition or otherwise trading in financial instruments.5

Under the implementing regulations, a "foreign excluded fund" may itself be a banking entity, thereby making the foreign excluded fund subject to the prohibitions of the Volcker Rule. In the Statement, the Banking Agencies recognize that the application of the Volcker Rule's restrictions and limitations to foreign excluded funds may have certain unintended consequences. At the same time, the Banking Agencies expressed concerns that a foreign banking entity could use a controlled foreign excluded fund to avoid otherwise applicable requirements under the Volcker Rule. The no-action relief announced by the Banking Agencies in the Statement is designed to provide a temporary solution while other action is considered, including possible amendment to the regulation and/or congressional action.

NO-ACTION RELIEF

For one year, until July 21, 2018, the Banking Agencies will not propose to take action against a foreign banking entity based on attribution of the activities and investments of a "qualifying foreign excluded fund" to the foreign banking entity or against the qualifying foreign excluded fund as a banking entity.

A "qualifying foreign excluded fund" means an entity that:

  1. is organized or established outside the United States, the ownership interests of which are offered and sold solely outside the United States;
  2. would be a covered fund were the entity organized or established in the United States, or is, or holds itself out as being, an entity or arrangement that raises money from investors primarily for the purpose of investing in financial instruments for resale or other disposition or otherwise trading in financial instruments;
  3. would not otherwise be a banking entity except by virtue of the foreign banking entity's acquisition or retention of an ownership interest in, or sponsorship of, the entity;
  4. is established and operated as part of a bona fide asset management business;6 and
  5. is not operated in a manner that enables the foreign banking entity to evade the requirements of the Volcker Rule.

For this no-action relief to apply, the foreign banking entity's investment in or sponsorship of the qualifying foreign excluded fund must meet the requirements under the exemption for activities solely outside the United States, as if the fund were a "covered fund" under the so-called "SOTUS" exemption—an acronym for fund activities taking place "solely outside of the United States."7 The SOTUS exemption contains certain restrictions not applicable to the foreign fund exclusion. For example, the SOTUS exemption imposes certain geographic restrictions on fund activity to make sure that material fund activity and sponsorship take place solely outside of the United States.8

Footnotes

1 All citations to the regulations implementing the Volcker Rule are to the regulations as promulgated by the Board of Governors of the Federal Reserve System.

2 A copy of the Statement is available at: https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20170721a1.pdf. The Board of Governors of the Federal Reserve System's press release is available at: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20170721a.htm.

3 The Banking Agencies, together with the SEC and CFTC, have promulgated implementing regulations under the Volcker Rule.

4 A foreign banking entity is defined in the Statement as a banking entity that is not, and is not controlled by, a banking entity that is located in or organized under the laws of the United States or of any state.

5 A foreign excluded fund arises by inference from the genesis in the rulemaking process of the third prong of the definition of "covered fund" contained in 12 C.F.R. § 248.10(b)(1)(iii). This third prong defines as a "covered fund" certain foreign funds controlled by U.S. banking entities. The third prong implies that a fund that meets the characteristics described above in the text but is sponsored or invested in by a foreign banking entity is not a covered fund.

6 This requirement is not part of the SOTUS exemption and appears to be borrowed from the "asset-management exemption" contained in 12 C.F.R. § 248.11.

712 C.F.R. § 248.13(b).

8 Based on the language of the Statement and its intention to grant relief, it does not appear that the Banking Agencies would require that a foreign banking entity adopt a formal compliance structure under 12 C.F.R. § 248.20 generally required for reliance on the SOTUS exemption (and other permitted covered fund activity), but foreign banking entities relying on the no-action position should expect to be able to demonstrate that they meet the conditions for the no-action position.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Marc-Alain Galeazzi
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.