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Fed Issues Guidance on Volcker Seeding Period Extension
Practical Law Legal Update w-008-8171 (Approx. 4 pages)
Fed Issues Guidance on Volcker Seeding Period Extension
by Practical Law Finance
| Published on 26 Jul 2017 • USA (National/Federal) |
The Federal Reserve Board (FRB) issued guidance on procedures for banking entities to request an extension under the one-year seeding period for covered funds under the Volcker Rule.
On July 24, 2017, the Federal Reserve Board (FRB) issued guidance on procedures for banking entities to request an extension under the one-year seeding period for hedge funds and private equity funds (covered funds) under the Volcker Rule. The seeding period refers to the timeframe in which banking entities must conform their time-limited "seeding" investments of initial equity in covered funds to Volcker Rule requirements.
The Volcker Rule prohibits covered banking entities, which include insured depository institutions, bank holding companies (BHCs), and thrift holding companies, as well as their affiliates and subsidiaries, from engaging in proprietary trading or acquiring or retaining any ownership interest in, or sponsoring, a covered fund (see Practice Note, Summary of the Dodd-Frank Act: The Volcker Rule).
However, banking entities are permitted to invest in a covered fund that the banking entity organizes and offers, subject to certain requirements, for the purposes of:
- Establishing the covered fund with sufficient initial equity for the fund to attract investors; or
- Making a de minimis investment under certain conditions (see "Seed Funding and De Minimis Investments" in Legal Update, Volcker Rule Finalized).
Banking entities that invest in covered funds must seek investors to reduce the entity's investment to less than 3% of the total outstanding ownership interests in the fund (referred to as the "per-fund limitation"). The per-fund limitation must be met within a year from the date of the establishment of the fund, but banking entities may request extensions for up to two additional years to meet this requirement.
Banking entities must apply for seeding period extensions with the FRB regardless of the banking entity's primary financial regulator.
The FRB's guidance on the seeding period extension requires banking entities to submit:
- Reasons for the extension, including the following facts and circumstances:
- whether the investment may result in material exposure of the banking entity to high-risk assets or trading strategies;
- the contractual terms of the banking entity's interest in the covered fund;
- the date on which the covered fund is expected to meet the per-fund limitation, for that covered fund;
- the total exposure of the banking entity to the investment and risks that the covered fund may pose to the banking entity as well as to the financial stability of the US;
- the cost of divesting or disposing of the investment;
- whether there includes a material conflict of interest between the banking entity and unaffiliated parties including clients, customers, or counterparties to whom the banking entity owes a duty;
- the banking entity's prior efforts to reduce its ownership interests in the covered fund; and
- market conditions.
- An explanation of the banking entity's plan to conform the investment to the per-fund limitation.
- Whether the banking entity meets all applicable requirements under the Volcker Rule for the organization and offering of the covered fund (see Practice Note, Summary of the Dodd-Frank Act: The Volcker Rule: Hedge and Private Equity Funds).
In addition, the guidance provides procedures for banking entities to adhere to when submitting a request for an extension. These procedures detail where a banking entity should submit its request, the applicable timeframe for the request, and what information the banking entity should include in the request.
Requests for extensions may be approved if the following criteria are met:
- No significant issues have been found with the banking entity's compliance with the requirements of the Volcker Rule.
- The banking entity has met all the requirements for organizing and offering a covered fund.
- The banking entity provides a plan for reducing the permitted investment in a covered fund by the end of the extension period.
- The primary federal agency responsible for enforcing compliance with the Volcker Rule (if other than the Federal Reserve) does not object to the extension.
The guidance also includes a list of factors addressed in a request for the extension, a list of contacts at other agencies, and a sample acknowledgement letter.
For more information on the Volcker Rule, see Practice Note, Summary of the Dodd-Frank Act: The Volcker Rule.