On Feb. 27, 2015, the Commodity Futures Trading Commission, Federal Deposit Insurance Corporation, Board of Governors of the Federal Reserve System, Office of the Comptroller of the Currency, and Securities and Exchange Commission (collectively, the “Agencies”) published a new FAQ on the Agencies’ rule promulgated under Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which is commonly referred to as the “Volcker Rule.”[1] The new FAQ now makes clear that the Volcker Rule does not necessarily prohibit non-U.S. banking entities from investing in third-party managed hedge funds and private equity funds, even where the ownership interests of such funds are marketed and sold to U.S. investors.[2]

The Volcker Rule contains an exemption that permits eligible non-U.S. banking entities[3] to hold ownership interests in “covered funds,” so long as such activity occurs “solely outside the United States.” This exemption, commonly known as the “SOTUS exemption” requires, among other conditions, that “no ownership interest in the covered fund is offered for sale or sold to a resident of the United States.”[4] However, the FAQ makes clear that this requirement does not prevent a third-party manager from offering or selling the fund’s interests to U.S. investors, so long as the banking entity is not involved in such marketing or sales activity. In other words, eligible non-U.S. banking entities will still be able to invest in third-party funds regardless of whether those funds also have U.S. investors, so long as they do not participate in marketing the fund.[5]

To avail themselves of the SOTUS exemption, eligible non-U.S. banking entities will still have to ensure that:

  • The banking entity (or office thereof) holding the investment, as principal, (and the banking entity (or office thereof) that has decision-making authority over the investment, if different) is not organized or located in the United States;
  • No relevant personnel of the banking entity with decision-making authority over the investment are located in the United States (excluding “back office” personnel);
  • The investment is not accounted for as principal, directly or indirectly, on a consolidated basis by a branch or affiliate organized or located in the United States; and
  • No financing for the investment is provided, directly or indirectly, by a branch or affiliate organized or located in the United States.