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Senator Hagan Explains Volcker Provisions of Dodd-Frank Act

By Jim Hamilton

Senator Kay Hagan (D-NC) was pleased to see that the Volcker Rule as modified by the Dodd-Frank Act will permit banking entities several years to bring their full range of activities into conformance with the new rule. In particular, Section 619(c)(2) ensures that the new investment restrictions under Section 619(d)(1)(G)(iii) and Section 619(d)(4), including the numerical limitations under section 619(d)(4)(B)(ii), will only apply to a banking entity at the end of the period that is 2 years after the section?s effective date. This date for the regulators to begin applying the new rules can also be extended into the future for up to three one-year periods under section 619(c)(2) and can also separately be extended for illiquid funds with contractual commitments as of May 1, 2010, under Section 619(c)(3), on a one-time basis for up to 5 years. Only after all of these time periods and extensions have run will any of the limitations under Section 619(d)(1)(G) and Section 619(d)(4) be applied by regulators. (Cong. Record, July 15, 2010, S5889).

As an added protection, Section 619(f) applies Sections 23A and 23B of the Federal Reserve Act to transactions between all of a banking entity?s affiliates and hedge or private equity funds where the banking entity organizes, offers, serves as an investment manager, investment adviser, or sponsor of such funds under Section 619(d). These restrictions are also applied to transactions between a banking entity?s affiliates and other funds that are controlled by a hedge or private equity fund permitted for the banking entity under 619(d). Importantly, noted Senator Hagan, these 23A and 23B restrictions do not apply to funds not controlled by funds permitted for the banking entity under Secti on 619(d), and it should also be clear that under Section 619 there are no new restrictions or limitations of any type placed on the portfolio investments of any hedge or private equity fund permitted for a banking entity under Section 619.

Also, as a condition of sponsorship, Section 619(d)(1)(G)(v) requires that a banking entity does not, directly or indirectly, guarantee or assume or otherwise insure the obligations or performance of any sponsored hedge or private equity fund or of any other hedge or private equity fund in which the sponsored fund invests. While this restricts guarantees by the banking entity as well as the insuring of obligation or performance, explained Senator Hagan, it does not limit other normal banking relations with funds merely due to a non-control investment
by a fund sponsored by the banking entity. (Cong. Record, July 15, 2010, S5889).

Section 619(f) limits transactions under 23A and 23B of the Federal Reserve Act with a fund controlled by the banking entity or a fund sponsored by the banking entity. However, Senator Hagan noted that 619(f) does not limit in any manner transactions and normal banking relationships with a fund not controlled by the banking entity or a fund sponsored by the banking entity.

Section 619(d)(4)(I) permits certain banking entities to operate hedge and private equity funds outside of the United States provided that no ownership interest in any hedge or private equity fund is offered for sale or sold to a U.S. resident. For consistency?s sake, Senator Hagan would expect that, apart from the U.S. marketing restrictions, these provisions will be applied by the regulators in conformity with and incorporating the Federal Reserve?s current precedents, rulings, positions, and practices under Sections 4(c)(9) and 4(c)(13) of the Bank Holding Company Act so as to provide greater certainty and utilize the established legal framework for funds operated by bank holding companies outside of the United States. (Cong. Record, July 15, 2010, S5889-5890).

Full post as published by Jim Hamilton's World of Securities Regulation on September 14, 2010 (boomark / email).