Draft ICI Comment Letter Recommending Volcker Rule Reforms for Regulated Funds; Feedback Requested by 10/16
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October 12, 2018 TO: Bank-Affiliated Member Advisory CommitteeICI Global Regulated Funds Committee
SEC Rules Committee RE: Draft ICI Comment Letter Recommending Volcker Rule Reforms for Regulated Funds; Feedback Requested by 10/16
As we reported previously, the five agencies (collectively, “Agencies”) responsible for implementing Section 619 of the Dodd-Frank Act, known as the “Volcker Rule,” issued a notice of proposed rulemaking (“NPR”) to amend the implementing regulations adopted in 2013.[1] The preamble to the NPR (“Preamble”) states that the amendments “are intended to provide banking entities with clarity about what activities are prohibited and to improve supervision and implementation of” the Volcker Rule. Comments are due October 17.
Attached for your review is ICI’s draft comment letter, which focuses on issues specific to regulated US and similar funds organized outside the United States (collectively, “regulated funds”). We provide proposed rule text to address these issues in two appendices to the letter. The executive summary of the letter is set forth below. Please provide any comments on the draft letter by email to Rachel Graham (rgraham@ici.org) or Frances Stadler (frances@ici.org) no later than the close of business on Tuesday, October 16.
Congress enacted the Volcker Rule to restrict banks from using their own resources to trade for purposes unrelated to serving clients and to address perceived conflicts of interest in certain transactions or relationships. To accomplish these goals, the Volcker Rule prohibits banks and their affiliates (referred to as “banking entities”) from engaging in “proprietary trading.” The Volcker Rule also generally prohibits banking entities from sponsoring or investing in hedge funds, private equity funds, or other similar funds (referred to as “covered funds”). In the 2013 final rule, the Agencies appropriately excluded RICs from the definition of covered fund. They also sought to provide a corresponding exclusion for similar funds organized outside the United States.
The implementing regulations nonetheless resulted in several concerns for the global regulated fund industry, some of which are the subject of guidance in the preamble to the 2013 final rule, Agency staff responses to frequently asked questions (“FAQs”), and the preamble to the Proposal. To alleviate these concerns in a more effective and complete manner than current interpretive relief—while also fully effectuating Congress’s intent—we strongly encourage the Agencies to revise the 2013 final rule. Our recommendations would help fulfill the Agencies’ stated desire, through this rulemaking, “to provide banking entities with greater clarity and certainty about what activities are permitted.”
The rule changes we propose would:
- Avoid impeding the activities and investments of regulated funds. The current lack of sufficient exclusions for regulated funds and their activities leaves open the possibility that such a fund could be deemed to be a “banking entity” and thus subject to the full panoply of trading and investment restrictions in the Volcker Rule. This is an untenable result, and one that is directly at odds with the intent of Congress.
- Eliminate unnecessary constraints on banking entities’ ability to offer regulated funds in jurisdictions outside the United States. In contrast to the exclusion for RICs, the “foreign public fund” exclusion from the definition of “covered fund” is available only to regulated non-US funds that adhere to certain additional conditions, including regarding their distribution. These conditions are at odds with the Agencies’ intent to treat regulated non-US funds in a manner similar to RICs and to limit the extraterritorial application of the Volcker Rule.
We strongly urge the Agencies to resolve regulated fund issues through formal rule changes, which provide greater certainty and permanence than Agency or staff guidance. Recent Agency statements highlighting the differences between supervisory guidance and rules reinforce our strong preference for rule changes.
Rachel H. Graham
Associate General Counsel
Frances M. Stadler
Associate General Counsel & Corporate Secretary
endnotes
[1] See Proposed Revisions to Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds (as issued by the U.S. Securities and Exchange Commission on June 5, 2018), available at https://www.sec.gov/rules/proposed/2018/bhca-3.pdf.