Corporate & Securities Law

By Jim Hamilton

Treasury Circulates Draft Legislation Implementing Volcker Rules on Banks and Hedge Funds

The Treasury is circulating draft legislative language that would implement the Volcker rules to prohibit banks and bank holding companies from sponsoring and investing in hedge funds and private equity funds. The legislation would also prohibit banks and bank holding companies serving as investment managers or investment advisers to a hedge fund or private equity fund from providing custody, securities lending and other prime brokerage services to the fund. The draft would also prohibit banks and bank holding companies from engaging in proprietary trading.

The draft defines sponsoring a hedge fund to mean serving as a general partner, managing member, or trustee of a fund or selecting or controlling a majority of the directors, trustees or management of a fund or sharing with a fund, for corporate, marketing, promotional, or other purposes, the same name or a variation of the same name.

Proprietary trading is defined to mean purchasing or selling, or otherwise acquiring and disposing of, stocks, bonds, options, commodities, derivatives, or other financial instruments for the institution?s or company?s own trading book, and not on behalf of a customer, as part of market making activities, or otherwise in connection with or in facilitation of customer relationships, including related hedging activities.

With regard to the prohibition of bank involvement with hedge funds, the draft would except small business investment companies and investments designed primarily to promote the public welfare. Investments in small business investment companies and investments designed primarily to promote the public welfare may only be conducted pursuant to a separate statutory authorization and subject to any conditions otherwise prescribed by the appropriate federal banking agency.

Hedge funds and private equity funds are defined to mean entities exempt from SEC registration as investment companies pursuant to section 3(c)(1) or 3(c)(7) of the Investment Company Act, or such similar funds as determined by the appropriate federal banking agencies.

The draft also directs the Federal Reserve Board to adopt rules imposing additional capital requirements and specifying additional quantitative limits for nonbank financial companies under its supervision that engage in proprietary trading and sponsoring and investing in hedge funds and private equity funds. The rules will not apply to trading in obligations of the United States or any agency thereof, obligations or other instruments issued by the Government National Mortgage Association, the Federal National Mortgage Association, and the Federal Home Loan Mortgage Corporation, obligations of any State or of any political subdivision, investments in small business investment companies, and investments designed primarily to promote the public welfare.

Full post as published by Jim Hamilton's World of Securities Regulation on March 04, 2010 (boomark / email).