Recently, leaders of the House of Representatives indicated that the House will vote this week on a Senate bill, the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Bill”),1 without any changes from the Senate version, and that the Bill is likely to pass.2 If signed by President Trump, as expected, the resulting law would represent the first significant deregulatory piece of legislation amending the Dodd-Frank Act.
The Bill is wide-ranging and makes changes to a number of financial services laws,3 including the Volcker Rule.4 While the major provisions of the Volcker Rule would remain unchanged, the Bill makes three notable changes to (or affecting) the Volcker Rule: (1) an exemption for community banks, (2) increased opportunities to have funds and their investment advisers co-brand by sharing names, and (3) an expansion of the scope of the Section 3(c)(1) exemption of the Investment Company Act for small venture capital funds.
Community Bank Exemption
The Bill would create a new exemption to the Volcker Rule’s banking entity definition5 for any bank or bank holding company (“BHC”) with $10 billion or less in consolidated assets, so long as such banking entity’s total trading assets or liabilities do not exceed 5% of the banking entity’s total consolidated assets. This exemption would not only permit community banks to engage in Volcker-prohibited activities such as proprietary trading and investments in covered funds6 – though few community banks engaged in these activities at significant scale even before the Volcker Rule – but would also exempt such community banks from having to maintain Volcker Rule compliance programs.7 The community banks’ industry association has suggested that such compliance programs are an unnecessary and significant drain on bank resources.8
Co-branding by Funds and Their Advisers through Name Sharing
The Bill would also modify the current prohibition on banking entities “sponsoring” covered funds by sharing the same name or a variation of the same name with a covered fund for corporate, marketing, promotional or other purposes. The Bill would allow banking entities to share their names with covered funds, provided that:
- The banking entity in question is an investment adviser to the fund,
- The banking entity is not an insured depository institution, a company that controls an insured depository institution, or an entity treated as a BHC for purposes of the International Banking Act of 1978,
- The banking entity does not share the same name or a variation of the same name as any of the three categories of entity described in the bullet above, and
- The banking entity’s name does not include the word “bank.”
The impact of this change may be demonstrated through this illustration: a banking organization includes a subsidiary national bank, ABC, N.A., of a BHC, ABC Holdings. ABC Holdings has another subsidiary, outside the chain of ownership of ABC, N.A., that is an asset management firm called XYZ Capital Management. If the Bill becomes law, XYZ Capital Management may share all or part of its name with afund – say, XYZ Fund I – that relies on Section 3(c)(1) or (7) of the Investment Company Act, if XYZ Capital Management is an investment adviser to the fund. It is currently prohibited from doing so because XYZ Capital Management is a banking entity by virtue of being an affiliate of ABC Holdings and ABC, N.A., and because sharing a name with a covered fund constitutes prohibited “sponsorship” of that fund under the Volcker Rule.9
Expansion of 3(c)(1) Exemption: Not Volcker Rule Regulatory Relief for Certain Venture Capital Funds
The Bill would expand the scope of the exemption provided in Section 3(c)(1) of the Investment Company Act to allow certain small venture capital funds – those with no more than $10 million in aggregate capital contributions and uncalled committed capital – with no more than 250 investors (rather than the current 100) to rely on the exemption. Because this change would expand the scope of the Section 3(c)(1) exemption from the Investment Company Act, any fund using this exemption would be a covered fund under the Volcker Rule.
Only the smallest venture capital funds would be able to take advantage of a newly-expanded Section 3(c)(1), given the $10 million cap, but any venture capital fund that does so should consider the fact that reliance on Section 3(c)(1) would make the venture capital fund a covered fund pursuant to the Volcker Rule.