The Federal Reserve has issued a set of Frequently Asked Questions (FAQ) providing guidance on the Volcker Rule that will make it easier for non-US banking entities to invest in third-party managed private funds, even when interests in such funds are marketed and sold to US investors, PDI’s sister publication Private Funds Management reports.
The Volcker Rule, a key provision of the Dodd-Frank Act, prohibits banks from sponsoring, acquiring or retaining ownership interests in “covered funds,” which include most private funds. However, an exemption permits non-US banks to make investments in covered funds “solely outside the United States” (SOTUS) as long as those funds are not also offered to US residents.
The FAQ clarifies that the Volcker Rule does not prevent a third-party manager from offering or selling the fund’s interests to US investors, so long as the banking entity is not involved in the marketing or sales activity. In other words, eligible foreign banks will still be able to invest in funds regardless of whether those funds also have US investors, so long as they do not participate in marketing the fund.
This aspect of the rule has long been seen as ambiguous by many in the industry. There has been a lot of dialogue with the Federal Reserve in hopes that they would issue some guidance of this nature, noted Satish Kini, partner and chair of the banking group at Debevoise & Plimpton in a call with pfm. “This is very positive guidance and helpful for both private equity sponsors and foreign banks,” said Kini.
As long as the GP is not affiliated with the non-US bank, it can offer covered fund interests simultaneously to that bank and to US investors and without using parallel funds or other complicated structures. Also, there is no requirement that the GP prohibit transfers from non-US investors to US investors.
For foreign banks, the FAQ means they no longer need representations or other assurances that a third-party fund sponsor will not make an offering targeting US residents. The only Volcker Rule-related assurances that a non-US bank will need for a SOTUS fund would be representations to ensure the fund qualifies as a covered fund so the bank can qualify for the SOTUS exemption.