Agencies Release Volcker Rule FAQ on Seeding Periods for Registered Investment Companies and Foreign Public Funds

The Agencies responsible for implementing the Volcker Rule today released a long-awaited FAQ addressing the ability of banking entities to seed U.S. registered investment companies (“RICs”) and foreign public funds (“FPFs”). Prior to the release of today’s FAQ, it was uncertain whether a RIC or FPF seeding vehicle could itself be deemed a “banking entity” subject to the Volcker Rule’s proprietary trading and covered fund investment prohibitions if the sponsoring banking entity owned a seed investment that exceeded 25% of the fund’s voting securities.

FAQ 16 describes the circumstances in which a seed investment would not cause a RIC or FPF to be deemed a banking entity, providing clarity requested by the industry while avoiding rigid time limits and burdensome application and approval requirements.

• Specifically, FAQ 16 provides: “Staff of the Agencies would not advise the Agencies to treat a RIC or FPF as a banking entity under the implementing rules solely on the basis that the RIC or FPF is established with a limited seeding period, absent other evidence that the RIC or FPF was being used to evade section 13 and the implementing rules.”
  
  
• The FAQ does not impose a hard three-year time limit on the seeding period, a possibility that had raised concerns at many banking organizations. The FAQ notes that a seeding period “may take some time, for example, three years, the maximum period of time expressly permitted for seeding a covered fund under the implementing rules.” While this likely suggests that there should be enhanced scrutiny of a seeding period that exceeded three years, the reliance on the Agencies’ supervisory and anti-evasion authority rather than a rigid rule should provide flexibility to address seeding periods based on particular facts and circumstances, including local jurisdiction requirements.
  
  
• The Agencies will not require banking organizations to submit applications to the Federal Reserve Board “to determine the length of the seeding period.” Many banking organizations, in the absence of clarity regarding seeding periods, have submitted applications requesting seeding periods of a specified length. Requiring such applications and related approvals on a routine basis to maintain seed investments would have created uncertainty for businesses as they launch new funds and imposed significant burdens on both banking organizations and Federal Reserve Board staff.
  
  
• The FAQ notes that the final implementing regulations require that a vehicle that is a covered fund (as opposed to a RIC or a FPF) during its seeding period and that is operated pursuant to a written plan to become a RIC must apply to the Board for an extension of the one-year seeding period initially granted to such covered funds.