On July 16, 2015, the agencies responsible for implementing the Volcker rule (Agencies) issued FAQ 16, which provides guidance on the circumstances under which a seed investment would not cause (i) a registered investment company (RIC), (ii) a business development company (BDC) that has elected to be regulated under section 54(a) of the Investment Company Act of 1940 (SEC-regulated BDC), or (iii) a foreign public fund (FPF) to be treated as a “banking entity” under Section 13 of the Bank Holding Company Act and the implementing rules (Volcker Rule). “Banking entities” are, for example, subject to the Volcker Rule’s proprietary trading prohibition. If a bank holding company owned as a seed investment 25% or more of any class of voting securities of a RIC or SEC-regulated BDC, the bank holding company would generally be considered to control the RIC or SEC-regulated BDC under the Volcker Rule. As a result, in the absence of FAQ 16 the RIC or SEC-regulated BDC could be treated as a “banking entity” subject to the Volcker Rule.

FAQ 16 provides that the staff of the Agencies would not advise the Agencies:

  • to treat a RIC, SEC-regulated BDC or FPF as a banking entity solely on the basis that it is established with a limited seeding period, absent other evidence that a BDC, RIC, or FPF was being used to evade the Volcker Rule;
  • to treat a RIC, SEC-regulated BDC or FPF as a banking entity solely on the basis of the level of ownership of the RIC, BDC or FPF by a banking entity during a seeding period; or
  • to expect that an application be submitted to the Board of Governors of the Federal Reserve System to determine the length of the seeding period.

The Agencies indicated that “the seeding period for an entity that is a RIC or FPF may take some time, for example, three years, the maximum period of time expressly permitted for seeding a covered fund under the implementing rules.” This language suggests a “facts and circumstances” approach to a time limit for a bank holding company’s reducing ownership and appears to set the expectation that three years generally may be the outer limit. The Agencies may be expected to apply the same approach to an SEC-regulated BDC’s seeding period, given the Volcker Rule’s parallel treatment of RICs, SEC-regulated BDCs and FPFs.

The text of FAQ 16 is provided below and is available athttp://www.federalreserve.gov/bankinforeg/volcker-rule/faq.htm#16