In August 2019, the financial services regulators responsible for the Volcker Rule regulations (the Federal Reserve Board, the Securities and Exchange Commission, the Office of the Comptroller of the Currency and the Commodity Futures Trading Commission, collectively, the Agencies) issued final rules revising the proprietary trading restrictions the Volcker Rule places on certain banking entities (the 2019 Rule). See "How Will Latest Changes to Volcker Rule Affect Non-US Banks?" NYLJ (Sept. 9, 2019).

On Feb. 28, 2020, the Agencies published a Notice of Proposed Rulemaking (NPRM) proposing changes to the "covered funds" prong of the Volcker Rule. This month's column will touch on proposals focused on non-U.S. banks with U.S. banking operations.

Some Background

As most readers will know, one provision of the 2010 Dodd-Frank Wall Street Regulatory Reform and Consumer Protection Act (Dodd-Frank) is referred to as the "Volcker Rule" (§13 of the Bank Holding Company (BHC) Act). The Volcker Rule and its implementing regulations prohibit "banking entities" (generally, insured banks and their affiliates, and non-U.S. banks with U.S. banking operations) from engaging in proprietary trading or sponsoring or investing in private equity funds (covered funds). The covered funds subject to the Volcker Rule are funds that fall within the definition of "investment company" in the Investment Company Act, but that meet no exception from registration under that Act other than §3(c)(1) (100 or fewer investors, 250 or fewer investors in certain venture capital funds) or §3(c)(7) (consisting of "qualified purchasers" as defined) of the Act.

The Volcker Rule contains several exceptions to the covered funds restrictions, but the affected banking entities have been seeking revisions and more clarity with respect to what activities are permissible with respect to covered funds. Non-U.S. banks with U.S. banking operations ("non-U.S. banking entities") also wanted the Agencies to address certain issues unique to them.

The 2019 Rule

Even though the 2019 Rule focused on the proprietary trading prong of the Volcker Rule, it did address an important exception for non-U.S. banks: the "Solely Outside the United States" (SOTUS) exemption from the Volcker Rule's restrictions on both proprietary trading and covered funds. The SOTUS exemption allows non-U.S. banks to conduct certain activity outside the United States that otherwise could be subject to the Volcker Rule.