Financial Regulators Adopt Changes to Sections of the Volcker Rule

On June 25, 2020, the Federal Reserve Board approved an amendment to streamline the definition of the “covered funds” provision in the Volcker Rule, a regulation promulgated from the Dodd-Frank Wall Street Reform and Consumer Protection Act that limited financial institutions’ ability to conduct proprietary trading activities.

SAF supports the Federal Reserve, The Securities and Exchange Commission, the Office of the Comptroller of Currency, the Federal Deposit Insurance Corporation, and the Commodity Futures Trading Commission update to Section 13 of the Bank Holding Company Act, which eases compliance burdens and promotes capital formation for small businesses pursuing equity funding.

The final rule will:

  • Streamline the definition of “covered funds” to ease compliance burdens and costs
  • Exclude credit funds, venture capital funds, family wealth management vehicles, and customer facilitation funds from the definition.
  • Exclude qualifying foreign public funds that comply with domestic industry norms from the definition.

The Volcker Rule prohibits banks from investing on behalf of their clients through trading activity that profits from market movements, known as proprietary trading, rather than earning commissions obtained from facilitating client trades. The rule also barred banks, bank holding companies, and other federally insured deposit institutions from acquiring hedge funds or private equity institutions. The broad interpretation of the mandate from Dodd-Frank resulted in the prohibition of many investment vehicles that had little or nothing to do with a banking entity’s use of proprietary trading or the housing market financial crisis of 2008.

The recent reforms adopted by the five financial regulators were designed to clarify the ambiguity surrounding the definition of “covered funds.” Banks are now free to invest in such vehicles as venture capital funds, that were previously restricted. These changes will provide more equity funding and stronger private markets for early-stage start-ups and small businesses searching for venture capital investment. This amendment will reform a regulatory regime that has “been most disruptive to legitimate and beneficial business activities by bank activities not even tenuously responsible for the financial crisis that led to the conception of this rule,” as SEC Commissioner Roisman explained in his statement on the rule proposal in June.

Financial institutions play an important role in providing capital to many small businesses and entrepreneurs. The SEC’s Office of the Advocate for Small Business Capital Formation found in their 2019 Annual Report that a 10% increase in venture capital funding in a metropolitan area is associated with “a 2.6% increase in the number of small employers, a 2.9% increase in small business hiring, and a 3.9% increase in total payroll.”

SAF submitted comments to the leaders of several financial regulators in April supporting the amendment proposals to the “covered funds” provision of the Volcker Rule. We are pleased to see the adoption of these new amendments.