On July 16, 2015, a much-anticipated new Volcker Rule Frequently Asked Question (“FAQ”) was issued regarding the potential “banking entity” status of US registered investment companies (“RICs”) and foreign public funds (“FPFs”) during their respective seeding periods.
The FAQ broadly exempts RICs and FPFs from being treated as banking entities during their seeding periods, provided that there is no evidence that the RIC or FPF is being used to evade the Volcker Rule restrictions. Thus, neither category of funds would be subject to the Volcker Rule proprietary trading or covered fund investment restrictions during the seeding period.
The FAQ acknowledges that a RIC or FPF seeding period may in some cases be three years from the date that the fund begins making investments. The FAQ also indicates that no application would be required in order “to determine the length of the seeding period.” We interpret this to mean that a banking entity sponsor of a RIC or FPF is permitted to retain a seed investment in excess of 25 percent of the fund’s voting shares for at least three years without having the seeded fund treated as a banking entity and without seeking any form of regulatory approval. Prior to issuance of the FAQ, most market participants had interpreted the final regulations implementing the Volcker Rule as requiring an application to the Federal Reserve Board in order to extend the seeding period beyond one year.
Moreover, while not entirely clear, the language of the FAQ may leave open the possibility that a greater than 25 percent seed investment could persist beyond three years, depending on the circumstances.
Overall, the FAQ is a very positive development that should go a long way toward addressing the concerns of many RIC and FPF sponsors as the Volcker Rule’s July 21, 2015, conformance deadline approaches, although many other key Volcker Rule issues and requests for relief remain unaddressed.
The seeding FAQ is available on the Federal Reserve Board’s website at: http://www.federalreserve.gov/bankinforeg/volcker-rule/faq.htm#16