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Alternative Market Briefing

U.S. agencies define conditions under which non-U.S. banks can invest in third-party funds under the Volcker Rule

Tuesday, March 03, 2015

Komfie Manalo, Opalesque Asia:

Several government agencies, including 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 have issued a new FAQ on the Dodd-Frank Wall Street Reform and Consumer Protection Act, which is commonly referred to as the "Volcker Rule."

In an alert to its clients, international law firm Schulte Roth & Zabel said that 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.

The Volcker Rule contains an exemption that permits eligible non-U.S. banking entities to hold ownership interests in "covered funds," so long as such activity occurs "solely outside the United States" (SOTUS). 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."

"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,......................

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