Banking agencies announce they will hold off for two years enforcing Volcker Rule restrictions on some foreign funds

No action will be taken enforcing Volcker Rule restrictions for certain foreign funds by the federal banking agencies for an additional two years, the agencies said Wednesday.

In a release, the Federal Deposit Insurance Corp. (FDIC), the Federal Reserve and the Office of the Comptroller of the Currency (OCC) said that “certain foreign funds” that are organized and offered outside of the U.S. are excluded from the definition of “covered fund” under their rules implementing the Volcker Rule. (The agencies noted that the rule generally restricts banking entities from engaging in proprietary trading and from owning, sponsoring, or having certain relationships with hedge funds or private equity funds, known as “covered funds.”)

However, the agencies said in their announcement, the foreign funds could become subject to restrictions under the Volcker Rule because of “governance arrangements with or investment by foreign banking entities.”

In their joint statement, the agencies indicated that the action was prompted by concerns expressed from “a number of foreign banking entities, foreign government officials, and other market participants” about possible unintended consequences and extraterritorial impact of the Volcker Rule and implementing regulations for certain foreign funds excluded from the “covered fund” definition.

“In particular, these parties have contended that certain foreign excluded funds may fall within the definition of ‘banking entity’  under section 13 and implementing regulations if they are affiliates or subsidiaries of a foreign banking entity under the BHC (Bank Holding Company) Act,” the agencies stated. “As a consequence, such funds would be subject to the requirements of section 13 and the Agencies’ implementing rules imposed on banking entities, including compliance obligations, restrictions on proprietary trading, and restrictions on investing in or sponsoring covered funds.”

The agencies also noted they had consulted with federal securities and commodities regulators in making the announcement (the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), respectively).

Federal bank regulatory agencies announce coordination of reviews for certain foreign funds under Volcker Rule