On December 10, 2013, five U.S. financial regulators (the Agencies) adopted the Volcker Rule. The Volcker Rule was created by Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) and prohibits banking entities from engaging in “proprietary trading” and making investments and conducting certain other activities with “private equity funds and hedge funds.”

The Volcker Rule applies to the following types of entities:

• Any FDIC-insured depository institution
• Any company that controls an FDIC-insured depository institution
• Any company that is treated as a bank holding company under the International Banking Act of 1978
• Any affiliate or subsidiary of any of the above

It should be noted that non-U.S. banks with a branch, agency or commercial lending subsidiary in the U.S., or that has any US residents as investors in its funds, will not be subject to the Volcker Rule.

The fundamental prohibitions of the Volcker Rule apply to banking entities of any size.

Definition of Covered Fund

The Volcker Rule generally prohibits banking entities from making investments in, acting as sponsors of, sharing a name with and conducting certain other activities related to, “covered funds.” The following are covered funds for the purpose of the Volcker Rule:

• An issuer that would be an investment company as defined in the Investment Company Act of 1940 but for Section 3(c)(1) or Section 3(c)(7) thereof (this category would include private equity funds, venture capital funds and hedge funds that rely on the exemptions in these sections)
• Any commodity pool for which the commodity pool operator has claimed an exemption under CFTC Rule 4.7 or a commodity pool that is substantively similar
• Foreign funds sponsored or owned, directly or indirectly, by a U.S. banking entity (except foreign public funds)

Certain categories of entities are excluded from the definition of covered fund. Entities that are specifically excluded include UCITS funds subject to compliance with a number of conditions. For example, in the case of a UCITS which has a U.S. bank as promoter, the UCITS must be primarily sold to persons or entities other than the promoter, affiliates of the promoter and their employees and directors.

Timing

The Volcker Rule comes into effect on 1 April 2014. Banking entities have until 21 July 2015 to ensure compliance.

Contributed by Niall Crowley