Reena Sahni is a partner at Shearman & Sterling LLP. This post is based on a Shearman publication by Ms. Sahni, Nathan Greene, Bradley Sabel, Timothy Byrne, Sylvia Favretto and Christina Berlin.
The US federal banking agencies with responsibility for enforcing the Volcker Rule have issued temporary one year no-action relief with respect to certain private non-US investment funds that are not “covered funds” for purposes of the Volcker Rule, but that could be treated as “banking entities” for purposes of the Volcker Rule due to a foreign bank’s investment in or governance arrangements with the fund. [1] Such funds are referred to as “qualifying foreign excluded funds.” The relief generally provides that the US banking agencies will not take action against a foreign bank or treat a qualifying foreign excluded fund as a banking entity based on the foreign bank’s acquisition or retention of an ownership interest in, or sponsorship of, the qualifying foreign excluded fund.
The no-action relief is significant because being treated as a banking entity would cause the non-US fund itself to be subject to the Volcker Rule’s limitations on proprietary trading and other restrictions. Such limitations and restrictions could significantly impair the operations of a fund whose purpose is to engage in making proprietary investments for clients in the same manner as a covered fund.