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Proposed Volcker Rule changes largely leave PE regs untouched

  • Volcker Rule changes to loosen rules around trading
  • Regulators seek input on definition of what funds should be covered
  • Few, if any, changes expected in Volcker Rule’s treatment of PE investments

Federal regulators are pursuing a plan to loosen some of the Volcker Rule’s constraints on proprietary trading, though they leave the treatment of private equity largely unchanged.

The Federal Reserve’s board approved proposed changes to the rule, named for former Federal Reserve Chairman Paul Volcker, at its meeting last week.

The Federal Deposit Insurance Corp, Office of the Comptroller of the Currency and Commodity Futures Trading Commission followed suit.

On Tuesday, the SEC became the fifth and final regulatory body to move forward with the proposed changes.

The Volcker Rule, which was fully implemented in 2013 as a component of the Dodd-Frank Wall Street Reform and Consumer Protection Act, eliminated proprietary trading desks and prohibited banks from investing in PE and hedge funds — which are officially regarded as “covered funds.”

Now, regulators are seeking public commentary about whether the investment restrictions related to covered funds should apply to private equity funds, hedge funds, or neither.

More specifically, regulators are wondering whether the current definition is too imprecise and unwieldy.

Regulators want to know whether agencies should “separately define ‘hedge fund’ and ‘private equity fund’ or define ‘covered fund’ as a ‘hedge fund’ or ‘private equity fund’? Would such an approach more effectively implement the statute? If so, how should the agencies define these terms and why?” according to a copy of the public-comment questions.

The presence of those questions should not be interpreted, however, as a sign that banks will soon come back to large-scale PE investments.

“We post a few questions and ask for comment on a few aspects of the definition of ‘covered fund’ in the recent Volcker rule proposal. However, the proposal does not propose a change to the definition of ‘covered fund,’” Federal Reserve spokesman Eric Kollig said in an email.

Two sources told Buyouts they believe the questions could lead to the exclusion of certain private credit or direct lending vehicles, which share many characteristics with traditional buyout funds.

That said, Julie Kunetka of Kirkland & Ellis said she was skeptical of any insinuation that regulators might make significant changes to how the Volcker Rule treats most private funds.

“I think on the proprietary trading side, the rules are designed to ease the compliance burden for the banks, but they retain the desire to prevent the behavior or activities that originally — or at least as outlined in the statutes — created the risk,” she said.

Except for the codification of marketing guidelines relevant to some to foreign entities investing in domestic PE funds, “there’s nothing in the proposed rule that expands banks’ ability to invest in private equity,” Kunetka said.

In addition to seeking input on the covered-fund definition, the Fed is also asking the public to weigh in on whether they should make exceptions for investment products that don’t cleanly fit the private equity or hedge fund model, such as family wealth management vehicles.

The American Investment Council last year sent a letter to the Federal Reserve, asking for more uniform regulations of long-term investment funds — venture capital funds were excluded from the Volcker Rule — in addition to mechanisms that would allow banking entities to invest in third-party private equity funds.

All five regulatory agencies are expected to hold a second round of votes to finalize the rule changes following the 60-day public comment period.

Action Item: To read the Federal Reserve’s Volcker Rule proposal, visit