The Final Rule creates a new exclusion from the Covered Fund definition for venture capital funds. While the Final Rule makes a number of important changes to the Volcker Rule’s Covered Fund provisions, the most significant modifications for the investment management industry are likely to be two of the four new exclusions from the Covered Fund definition, for venture capital funds and credit funds. Likewise, investment managers that are affiliated with banks will likely have greater flexibility to sponsor certain funds that were Covered Funds. Any such addition to or expansion of the list of exclusions increases the investment options for Banking Entities in funds that, before the Final Rule, were Covered Funds. Among other things, the Final Rule also broadens four already-existing exclusions. The Final Rule creates four new exclusions from the Covered Fund definition, including exclusions for venture capital funds and credit funds, plus two additional new exclusions. While the Volcker Rule was designed to restrict investments in and sponsorship of hedge funds and private equity funds by Banking Entities, many other types of investment vehicles are captured by the Covered Fund definition. The Volcker Rule prohibits “banking entities” (“Banking Entities”) 4 from engaging in “proprietary trading” (“Proprietary Trading”) 5 and from acquiring or retaining ownership interests in, sponsoring, or having certain relationships with Covered Funds. 3 The Final Rule will take effect on October 1, 2020. On June 25, 2020, the Board of Governors of the Federal Reserve (“Board”) announced that the five federal agencies with rulemaking authority over the Volcker Rule (the “Agencies”) 1 have adopted a final rule (the “Final Rule”) 2 increasing the ability of banks and their affiliates to invest in and sponsor “covered funds,” as defined in the Volcker Rule (“Covered Funds”). New carveouts from the list of transactions prohibited by the Volcker Rule’s “Super 23A” provisions.Codification of staff guidance regarding treatment of certain foreign funds as banking entities and.Clarification of, and a safe harbor from, the definition of an “ownership interest” in a covered fund relating to certain debt interests.Broadened versions of existing exclusions from the covered fund definition.A clarification that a banking entity’s investments made in parallel with investments made by a covered fund will not be counted against the banking entity’s 3% investment limit in that covered fund, if applicable. Four new exclusions from the “covered funds” definition, including exclusions for venture capital funds and credit funds, such that banking entities will be eligible to invest in and/or sponsor such funds.As further discussed below, these changes include: Investment managers should be aware of these changes, as they will impact what types of funds can be organized and offered by bank-affiliated managers, as well as whether and to what extent banking entities can invest in certain investment funds. A new final rule has made significant changes to several key provisions of the Volcker Rule that restrict investments by banking entities in covered funds.
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