Bankers’ Counsel Poll: Volcker Rule compliance

Author: Danielle Myles | Published: 21 May 2015
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The Volcker rule is coming. European and North American bank counsel speak anonymously – and candidly – about how they plan to comply with its covered fund provisions

European and Canadian mutual funds are facing an unlikely enemy. Five US regulators charged with reining in banks' reckless proprietary trading have, unwittingly, devised a framework that threatens to bring some foreign fund industries to their knees.

While the extraterritorial reach of US laws is not new, this drastic outcome under the Volcker Rule – which takes effect next month – has not received the air time it deserves. Yet it's a pressing matter, and one of the most striking findings from IFLR's Bankers' Counsel Poll on European and North American banks' compliance with the rule's covered fund prohibition.

Respondents are from financial institutions that are the target of lawmakers who, as part of the Dodd-Frank Act, agreed: 'A banking entity shall not engage in proprietary trading, or acquire or retain any equity, partnership, or other ownership interest in or sponsor a hedge fund or a private equity fund'. But the implementing rule has cast a wide net, capturing Ucits [Undertakings for Collective Investment in Transferable Securities] and Canadian mutual funds within the 'banking entity' definition.

The crux of the problem, is that the term includes 'affiliates' of US insured depository institutions (and their holding company) and foreign banks with US operations; a relationship established by 25% ownership or another form of control. Canadian banks sponsor, appoint the trustees and control the investment managers of around 44% of the country's mutual funds. The vast majority of Ucits have a similar set-up.

For bulge brackets, the Volcker Rule places a huge strain on their business. For mutual funds, it makes their business unsustainable. "The European fund business cannot really exist on these rules, as every fund that a European bank issues…is a banking entity," says a European bank counsel.

In a matter of weeks, these funds must comply with the full swathe of Volcker Rule obligations. It makes the business model economically unviable; they simply can't afford to be classified as banking entities. And if US regulators don't respond to banks' lobbying on the point, it could mark the death knell for the fund structure.

"This is the number one thing we need an answer to. And not just any answer, but a good answer," says a non-US bank counsel. "Basically every single mutual fund that we offer outside of the US is in that position. We have hundreds that will be considered banking entities if the regulators do not fix the problem."

The other major message from respondents' candid discussion with IFLR is one of optimism. Trading terminal provider Bloomberg is spearheading a market-wide solution to banks' secondary trading issues (see boxout overleaf). Before buying or investing in a security they didn't structure, banks must determine whether it is or isn't a covered fund, to ensure they won't flout the Volcker Rule. As an unaffiliated issuer, any such decision would be based on third party attestations and documentation drafted before the vague 'covered fund' criteria was devised. IFLR exclusively reveals detail of the covered fund tag based on frank discussions with respondents and Bloomberg.

July 21 2015 is a watershed moment for global financial regulation. After five years of working tirelessly to structure compliance systems, lobbying regulators for change and designing industry solutions, financial entities around the world must comply with the Volcker Rule. Here's how they plan to do it.

Funds as banking entities

Seventy five percent of respondents are suffering under the so-called deemed banking entity issue. And of those not affected, half have avoided the problem altogether by not sponsoring any non-US mutual funds, while the other half have already restructured their funds' management.

The US mutual fund model sidesteps the issue. "They don't have the same control considerations because, even though they are structured in a similar way, they confer more rights to remove the decision-maker," explains a foreign bank counsel. "As those rights are in place in the US, they [the banks] are not deemed to be controlling those funds."

1. Have any Ucits or other non-US mutual funds that your institution sponsors been determined to be 'banking entities’ by virtue of affiliations or common control? 2. How many covered funds is the institution deemed to control, which may therefore be considered 'banking entities’ themselves subject to Volcker?

Foreign banks and their industry representatives – the Institute of International (IIB) and Securities Industry and Financial Markets Association (Sifma) – are still lobbying the regulators on this point, and have seen some recent success.

They have met with regulators in Washington DC and explained how the control aspect of the affiliate test captures the bulk of their publicly offered funds. They also explained that because the Volcker Rule prohibitions are designed for bank-like entities, they won't work for a typical fund.

Poll respondents say that the regulators have, over the past few months, started to listen and have asked Sifma to draft an interpretive clarification which could be incorporated into the Federal Reserve's 13 FAQs on the Volcker Rule. One respondent believes the industry body will suggest narrowing the affiliate definition by removing the control test, leaving only the 25% ownership test. Sifma didn't respond to IFLR's request for comment on this point.

Some poll respondents are confident. Foreign public funds' exclusion from the covered fund definition (see poll question 8) suggests their categorisation as banking entities is unintended. The point being made by banks is, they say, following the spirit of the law.

"There are regulators that think it solved all our problems, but it absolutely did not"

The deemed banking entity point was included in Sifma's and many non-US banks' extension requests filed in January (question 10). It seems no one received a formal response from the regulators, but some bank counsel believe no news is good news. "They haven't granted us more time, but they also haven't indicated that we are expected to take any action," says one.

Some received verbal confirmation that the regulators were putting together a clarification for the whole industry. As such, one respondent claims that, as far as she is aware, the only restructuring done by banks is as contingency planning. But 12.5% of poll respondents have followed the rule as it stands today, and responded by modifying their funds' charters.

"We've changed the organisational governance to be comfortable that they wouldn't [be banking entities]. Basically the management and control of the adviser have independent management, so it's not deemed to be an affiliate," explains a US bank counsel.

A related issue is covered funds being deemed banking entities. While mutual funds escape the 'covered fund' definition, similar foreign structures don't. If, in addition, they are classed as affiliates of their sponsor bank, they will be deemed banking entities.

The majority of respondents have not encountered this problem, and 25% have not given it full consideration. For those that have identified a handful of such funds, they are restructuring them to avoid the classification come July.

Bloomberg terminal tag identifies 'covered funds’

Along with the banking entity definition, respondents' biggest compliance headache involves secondary trading. But they are hopeful that a 'covered fund' tag identifier being developed by Bloomberg for securities traded on its terminals presents a market-wide solution to the problem.

Starting June 1, the tag will attach to instruments traded on Bloomberg Professional that are classified as covered funds under the incoming rule, Bloomberg's global head of regulatory and accounting products Ilaria Vigano confirms with IFLR. "The identifier tag will deliver a wide variety of data sets, including an indicative flag called 'covered funds yes', 'covered funds no' or 'needs legal review'," says Vigano.

While banks can monitor and control their interests in structures they develop themselves, investing in third party funds is more difficult. As an unaffiliated issuer, they can't validate a registration status. Instead they must determine whether something is or isn't prohibited based on third party attestations and documentation drafted before the vague 'covered fund' criteria was devised.

One US bank counsel says the secondary market issue is creating much more heartache than any of the origination pieces. Even for some foreign banks that are suffering under the banking entity problem, secondary trading is a bigger concern.

"On the deemed banking entity point, there is nothing in the rule that says we would be restricted in trading; it is just the absence of clarity that has got the industry so upset," says one non-US bank counsel. "Whereas with secondary trading there is a positive requirement. It is pretty clear that we have to identify and capture that in the tier 1 test."

"The secondary market issue is creating much more heartache than any of the origination pieces"

They are buoyed by the market-wide solution spearheaded by Bloomberg: a label similar to an ISIN or CUSIP that attaches to securities traded on the popular trading terminal will indicate what is and isn't a covered bond.

The tag will indicate that the security has been reviewed against the covered fund definition and, based on that analysis, either is or isn't treated as a covered fund. So before executing a trade, the bank can confirm that it will not fall foul of the rules.

Vigano says the product provides data feeds for clients to feed into their databases. "The data will also appear on a Bloomberg Professional service screen that will be permissioned to clients that subscribe to the premium service," she adds.

The product will require banks selling securities via the terminal to inform Bloomberg whether it is a covered fund. Bloomberg must also determine whether the legacy instruments being traded today are or aren't covered funds; IFLR understands some US banks and law firms have helped devise criteria on which Bloomberg will base its internal validations.

The idea has been discussed since late last year, but it started to gain momentum in February when the Federal Reserve failed to grant the industrywide relief sought by Sifma on the issue. There will be a "not insignificant subscription fee" according to one bank counsel, who adds that Bloomberg is guarding the data very closely.

Many banks are still deciding whether to sign up to it.


Bloomberg's Vigano confirms that the issuer will be responsible for the tag. Issues around liability, and who would be responsible if something went wrong, have been raised by counsel as a potential challenge faced by any tag.

Another potential challenge counsel raise is timing. Some say that Bloomberg, the consultancy firm – believed to be KPMG – and banks devising the tags had hoped it would launch mid-May. When that time passed, some were concerned that it would not be online by July 21, when the Volcker conformance period ends.

"Most of these [securities] probably aren't covered funds, but some of them could be. So everyone [was] taking a risk-based approach to bridge the gap between now and July 21, without going too crazy knowing that there is a solution on the horizon at some point in the future," says one US counsel. However if the product is live by June 1, this will no longer be an issue.

Another difficulty is the reliability of the categorisation of legacy instruments. A covered fund includes, inter alia, funds that rely on sections 3(c)(1) or 3(c)(7) as exemptions from the Investment Company Act. "The challenge is that the documents for a lot of the older deals don't get into different types of [Volcker] exceptions or 3(c)(1) or 3(c)(7); it just wasn't on anyone's radar so no one felt the need to define those aspects," says one counsel. "So when you ask the question 'could it rely on something other than 3(c)(1) or 3(c)(7)', the answer could very well be 'maybe'. So that's the hardest thing."

Nevertheless, respondents note that most of the industry is using these terminals, so if these issues are addressed, it would be an industry solution. It begs the question whether the next industry concern should be a lack of secondary market appetite for any securitisations backed by bonds.

KPMG did not respond to IFLR's request for comment.

Identifying covered funds

All respondents have done a thorough review of fund-like structures to determine which would be classified as covered funds. After taking into account the rule's exceptions, half have identified more than 50 covered funds; some, drastically more. "By 'more than 50' do you mean thousands or millions?" one respondent jokes.

While the poll statistics are interesting, respondents' comments reveal differences in how banks conducted their review and the hurdles they faced in tallying up their numbers.

Some business lines were easier to review than others. According to one Europe-based counsel of a US bank, securitisations required more action than thought. "We all know what they [covered funds] look and smell like. It's just a question of going through the analysis on each deal, and that's what we are doing. For each new and existing deal, we are going through the covered fund analysis."

Yet the general feedback is that a 'covered fund' definition that, essentially, includes anything that looks or acts like an equity or hedge fund has created difficulties.

3. Has the entity done a review of all passive investment vehicles to determine whether any would be subsumed within the covered fund definition?
4. How many covered fund entities have been identified?

Identifying structures that aren't part of the bank's routine client-facing business, but may have been acquired by its head-office, have proved problematic. Covered funds have also cropped up in unexpected situations; one respondent gives the example of a bond out of Africa which was relying on an Investment Company Act exemption noted in the Volcker Rule.

That the definition can catch structures so far removed from the provision's underlying premise sets a high bar for compliance officers.

"As a former regulator I can empathise with what they are trying to do," says one US counsel. "But some of these vehicles and passive investments don't announce themselves as having relied on 3(c)1 and 3(c)7, and maybe should have," adds the respondent.

In this situation, someone needs to make a judgement call. "If the position is that they might have to rely on one of those 40 Act exemptions, then it is just internally determining what we are comfortable with," says a US bank counsel. "I'll assert my opinion, and it's a matter of whether the company is comfortable with that."

Banks have tried a triage approach, where they bucket assets depending on how likely they are to be covered funds, and then pay greater attention to those that are clearly prohibited. Some respondents asked for relief on this point, but the regulators did not oblige. "If you are 95% not expecting something to be a covered fund, having to go through 20,000 structures to identify 50 seems like a large exercise," explains one. It's exactly this type of security that the Bloomberg tag will help with in the secondary market.

The issue is exacerbated in the context of a review. If an internal lawyer struggles to define and classify some structures, how can they expect someone outside of the legal team to understand? "The problem is that if you ask someone if their business has covered funds they will say 'no', without even having told them what a covered fund is," says one respondent. They tried to address this by asking questions about the way the assets were collected and organised, rather than their structure.

Another respondent asked the bank's finance and statutory reporting groups to see if there were any ownership registrations in the types of vehicles flagged as possible covered funds. "So we aren't going to the business to see if they have registered investment vehicles or funds with US agencies pursuant to the Volcker Rule, instead we are going to corporate head office areas where we might also have holdings and which we wouldn't normally come across as part of the Volcker analysis."

Some respondents' banks had already done an assessment of passive investment vehicles as part of a previous project, which they relied upon rather than instituting another wholesale review.

Foreign funds

Despite the deemed banking entity issue, US regulators overseeing the Volcker Rule did attempt to carve out those funds from the scope of the covered funds definition. The foreign public fund exception relates to issuers organised overseas that sell ownership interests to non-US retail investors predominantly through non-US public offerings. It is designed to put the likes of Ucits and Canadian mutual funds on equal footing with US mutual funds which fall outside the 'covered funds' definition as they are regulated under the Investment Company Act (ICA).

This aspect of the rule is well received by the market. One respondent says that dual-share class fund offered to both institutional and retail investors are presenting problems. But nearly two thirds believe the exception is adequately drafted and addresses their needs. Some have restructured funds offered to sophisticated investors to take advantage. "We had a subset of funds that we decided wouldn't satisfy that requirement. So we revisited the reason why the European regulator had asked for that label and limit, and we addressed the concerns in a different way so that we could satisfy that prong," says a US bank counsel

5. Does the publicly offered covered fund exception address the institution’s Ucits and other non-US mutual funds?
6. Does the institution intend to rely on the SOTUS exemption for its covered fund compliance?
7. Does the institution intend to establish 'parallel’ offshore funds in which no US persons will be permitted to participate?

A quarter of respondents want further regulatory clarification on the 'predominantly offered to non-US persons' prong of the exception. One says the retail investor aspect is "pretty decent", but could also do with some clarification.

But as a whole, the exception is proving of great benefit to the market; including as leverage in discussions with regulators on the deemed banking entity issue. "The correlation between the definitions of covered funds and banking entities leads one to question if treating Ucits and other foreign funds like banking entities really serves the purpose of the Volcker Rule," says one European counsel.

Since the covered funds prohibition was enacted in 2010, foreign banking entities have complained that its extraterritorial reach risked capturing their activities that had a remote connection to the US.

The regulatory response to this was SOTUS – the solely outside the US exemption. This waives the prohibition so long as the foreign bank is not located in the US or controlled by a US entity, the sponsoring or investing occurs overseas, and the covered fund is sold via an offering that does not target US residents.

Until recently, a lack of clarity around this last prong – known as the marketing restriction – had effectively limited SOTUS's use to sponsorship. A foreign bank looking to invest in a third party SOTUS fund would need to ensure it had never been offered in the US.

A FAQ clarification in February 2015 solved this problem by confirming that the marketing restriction only applied to the foreign bank seeking to rely on SOTUS.

Respondents from foreign banks agree the clarification is extremely helpful, and 62.5% of those polled intend to rely on the exemption.

"If you had of asked me this question before February I would have voted 'no'. It was not usable as you would have to go to a third party and get them to swear on a stack of bibles that they had never sold it into the US," says one. "But now we just have to know our own actions and then we can rely on it." Some respondents say that at the start of the year, they were having to divest. Others were trying to get third party funds to reveal if they took US investors or not: "That was proving to be a very difficult exercise."

One non-US bank counsel is reluctant to provide regulators with too much positive feedback. "The February clarification helped a lot, but it didn't solve all our problems. I think there are regulators that think it did solve all our problems, but it absolutely did not as it didn't solve the banking entity issue."

While US banks can't rely on SOTUS for their own sponsorship and investment, some are benefitting indirectly from the February clarification by structuring deals for foreign banks.

Before the regulators stepped in, a group of 15 law firms had devised a market-wide initiative to help foreign banks overcome the shortcomings of the SOTUS exemption. In May 2014 they issued a consensus interpretation letter confirming that a foreign bank could invest in so-called parallel funds set up by non-bank sponsors.

This involves a covered fund set up in the US and marketed to US investors, and a SOTUS fund, with both making the same investments. If a foreign banking entity can convince a sponsor to structure certain funds this way, they can still gain exposure to the underlying assets by investing in the SOTUS fund.

Three quarters of respondents do not intend to set up parallel funds. Some of these are US banks which never could have benefitted from the structure, but for the foreign bank respondents, it's because of the recent clarification. "We may have planned to rely on these as we couldn't rely on SOTUS. But now with the FAQ, I don't imagine we will be using that at all," says one.

Yet some claim that parallel offshore funds still have a role (see page 35 for sponsor firm MoFo's response), but no poll respondents are sure they will use the structure. At best, 25% are still considering their position.

Volcker: back to basics

Section 619 of the Dodd-Frank Act is one of the US's most controversial post-crisis financial reforms. Starting July 21, banks must comply with the provision, better known as the Volcker Rule, after former Federal Reserve chairman Paul Volcker who championed its enactment.

Of its two limbs, the ban on banks' proprietary trading has gained the most attention. But it is now clear that the so-called covered fund restriction is just as problematic – particularly for non-US banks. This prohibits a banking entity, as principal, from acquiring or retaining an ownership interest in, or sponsoring, a covered fund.

A banking entity is a US-insured depository institution, any company that controls an insured depository institution, foreign banks that have US operations, along with any of their affiliates.

Something is classified as a covered fund if it falls into one of three categories, which can be broadly described as:

  • collective investment vehicles that would be an investment company under US law, but for the exemption contained in sections 3(c)(1) or 3(c)(7) of the Investment Company Act;
  • commodity pools; and
  • foreign funds sponsored by US banking entities that would rely on sections 3(c)(1) or 3(c)(7) of the Investment Company Act if they were registered in the US.

The general prohibition is subject to a litany of exceptions and exemptions. The most important exceptions include US mutual funds, covered bonds and securitisations that invest solely in loans, and foreign public funds (although these may still be classed as banking entities in their own right).

Under the exemptions, a banking entity can own up to three percent of a covered fund, and engage in market making and underwriting of covered funds (so long as it abides by Volcker's proprietary trading ban). However, a bank's aggregate investment in covered funds cannot exceed three percent of its tier 1 capital. Foreign banking entities can invest in and sponsor a covered fund solely outside of the US (the SOTUS exemption).

As part of Dodd-Frank, the Volcker Rule was enacted in July 2010. The five US authorities charged with overseeing Volcker issued their proposed rule in November 2011, and final rule in December 2013. That became effective April 2014, but the conformance period was extended until July 21 2015.

Securitisation and covered bonds

As many US securitisations rely on sections 3(c)(7) or 3(c)(7) the ICA to avoid registration, they fall within the covered fund definition. This increases regulatory pressure on what's already a highly scrutinised industry, given its status as a scapegoat for the financial crisis. Covered bonds, particularly those backed by predominantly non-mortgage assets, could also be subsumed within the definition.

Half of poll respondents are actively reliant on securitising their assets or issuing covered bonds as part of their funding. One says its structured notes business is also creating issues as, before looking at the exceptions, it is considered a covered fund.

Regulators did create a safe harbour for asset-backed securities (ABS) that invest solely in loans. Upon asking about the usability of this and any other ABS-related exception, the response is mixed.

8. Was the institution actively reliant on securitisations and/or covered bond issuances?
9. Do the covered bond and securitisation exceptions adequately address the institution’s needs?

For some it is a non-issue: either they don't engage in securitisation or covered bond issuances, or they are foreign banks that issue only overseas and so will rely on SOTUS. For one US bank, this was only a minor part of its Volcker enquiry as its structures fall clearly within the exception.

Respondents are happy with the covered bond exception, however securitisations are proving more problematic.

The general response has been to remove bond buckets from structures sold in the US, so they can rely on the loan-backed exception. For those issued out of London, SOTUS creates more options. "There has been talk among the different banks on the best way to move forward in that space," says a European bank counsel. "For the ones we have done recently that still do have some bonds, ownership interests aren't being offered in the US."

For vehicles issuing notes in the US, there is the option of relying on another ICA exemption – primarily section 3(c)(5). At least two respondents are restructuring their securitisation vehicles to rely on this or another ICA exemption, to take them out of the scope of Volcker by July.

The bank tackling its structured notes business is close to a solution that would bring it into conformance with the rule. But even speaking anonymously, its respondent was not willing to elaborate.

While these poll questions are directed at banks acting as originators, from the interviews it's clear that securitisation restrictions are also impacting banks structuring deals for unaffiliated issuers. Not only is it making their services more expensive, they also need more information from borrowers to make sure that their relationship – no matter how short term – does not fall foul of the multifaceted covered fund prohibition.

A Europe-based respondent believes it could be more of a problem on his side of the Atlantic. "I don't think borrowers here are that familiar yet with some of the issues we are facing. We are requiring certain disclosure regarding covered funds, which I think is quite standard in the US. But in Europe some people aren't yet familiar with the ramifications of disclosure, and reps and warranties, we need."


The rule empowered the Federal Reserve to extend the conformance period for individual banks. Nearly two thirds of respondents took advantage of this, submitting their requests by the January 21 2015 filing deadline. Yet none of them – nor, it seems, any other applicant – received a formal response. Instead, most banks received a follow-up call.

This particular power of the Fed was craftily drafted such that banks could ask for more time – but not relief. Nevertheless, they and Sifma used it as an opportunity to drill down on the issues which even more time would not solve. The two most important were the deemed banking entity and secondary trading issues. In the conversations that followed, regulators made clear they did not want to address either of those two issues.

"I personally view it as they are in a corner and they don't know how to approach it," says one respondent. "I almost view the application as a matter of protocol."

10. Has the institution sought an extension in respect of its compliance date for its covered funds activities?
11. Has the institution attempted to quantify the costs of putting in place Volcker-compliant policies, procedures and systems?

Indeed, of those that didn't apply for an extension, one thought it fruitless and decided to use their resources more efficiently. Another believed they were already "in reasonably good shape".

Others decided against it because they had already got what they wanted. On December 18, the Fed announced a blanket extension of the conformance period until July 2016 for covered funds in place before 2014. The regulator also said it is likely to grant a similar year-long extension once that first extension expires. "Obviously the aspirational goal is to be zero percent ownership by 2017," says a US counsel. For such banks, the legacy extension is more than adequate. For others, it falls short. "It helps but it doesn't help enough," says a respondent from a non-US bank that owns funds to hedge against products they have sold. "Some have built in optionality which means we must buy and sell funds to hedge the product. If we aren't allowed to do that, we can't risk manage our products with our clients, and we will have a lot more risk than we need to."

For question 11, the response statistics (50/50) belie the situation. Though most respondents aren't involved in tracking expenses, they believe someone outside of legal is. Placing monetary limits on the exercise, however, is useless. "It's not like compliance is optional, so there is no point having a budget," says a US bank counsel.

Those that haven't attempted to calculate in advance were put off by the number of unknowns and variables that could impact any estimate. For those that have, they've most struggled with the business changes. "It is easy enough to pull together IT, legal and consulting costs as they are all external. But when trying to attempt to quantify some of the costs internally, including in changes to business direction for any new funds that we have created, it is a bit harder," says a European counsel.

And the bigger the bank the more difficult. "The frustrating part about the internal compliance programme is how to keep covered funds out," says one bulge bracket counsel.

"When you have a merger coming through, the vehicle must be carefully created so that it doesn't inadvertently become a covered fund – it's evaluating the close cases and getting that information funnelled to the right place that is creating issues."

The lack of certainty that still surrounds the rule is creating some internal tensions. All banks need to get their compliance programmes approved by their boards. But, as one respondent notes, directors don't like approving things when the legal team's best answer is 'we don't know exactly what we will have to do, as the rule is still unclear.'

Irrespective of whether estimates, budgets or tallies are being put in place, it is clear that the final expense will be exorbitant. It's a point eloquently made by a European counsel.

"It is a crazy thing to be spending so much time and money on, as everything is already being structured differently. So in the next three to five years, all those investments will have run-off and no longer exist."

It might come at a big price, but the idea of a post-Volcker world might just be the silver lining to a very large, dark cloud that has long-loomed over the global financial industry.


IFLR's Bankers' Counsel Poll was compiled with the help of the poll's sponsor firm – Morrison & Foerster.

With input and insight from partners Anna Pinedo and Oliver Ireland, poll questions were devised and targeted to best address the issues faced by North American and European banks in complying with the covered fund prohibition under the Volcker Rule.

Using recommendations of in-house counsel from the editorial team and Morrison & Foerster, the poll was distributed to counsel at the largest investment banks across the two continents. Responses were obtained from a representative cross-section of those banks. All respondents are counsel at institutions classified as 'banking entities' under, and therefore are subject to, the Volcker Rule.

The poll provides banks with an anonymous forum to learn how their peers are coping with the Volcker Rule's restrictions on banks' involvement with covered funds. To ease the concerns of the participants, anonymity was guaranteed to all respondents. To that end IFLR will not name the banks that agreed to interviews.

Responses and comments were obtained via off-the-record telephone calls between March and May 2015. A select number provided written answers. While the more structured responses to the poll questions provided interesting statistics, a real sense of the concerns of in-house counsel emerged from their explanatory comments. The topics raised in those interviews formed the basis of the conclusions drawn out of the main body of IFLR's analysis.

The results and analysis will be submitted to the five US regulators overseeing the Volcker Rule.

IFLR's next Bankers' Counsel Poll, which will focus on IPO-related issues, will be published in September.

In association with:

The other side of the story

SOTUS, foreign mutual funds and vague definitions are at the heart of bank counsel’s candid discussion. On some issues, opinions differ

IFLR speaks with Morrison & Foerster's Oliver Ireland, who helped compile the poll questions, about the most pressing issues presented by the incoming covered fund prohibition under Volcker.

Are you surprised that the breadth and lack of clarity regarding the 'covered fund' definition has created difficulties in conducting reviews?

We are seeing this all over the place. Sorting out to what is and isn't a covered fund, what is a banking entity, and particularly how the Volcker Rule applies to foreign fund operations is very challenging.

So 50% of respondents have 50 or more of these things. And based on what we have seen, they won't be 50 of the same thing. There are variations in the structures, they are in different countries, the legal structures are a little different and they have different investors. And that potentially leads to different results under the Volcker Rule. So if you are looking at 50 funds that fall into six or seven classes, that's a complicated review process.

Do you agree with one respondent's comment that regulators may mistakenly believe that the February SOTUS FAQ clarification solves all non-US banks' covered fund problems?

It solves a class of problems by focussing on banking entities' marketing of the funds, rather than other people's marketing of the funds. I don't think that the regulators are so naïve that they think it solves all the problems. And I'm talking to regulators about fund issues on an ongoing basis that are not solved by that FAQ.

Do you think the marketing restriction FAQ clarification has effectively made redundant the parallel offshore funds solution devised by the US legal community?

No. I think there are still a class of situations where you may want to have a parallel offshore fund. So, the question is: is the fund covered in the US? And if the banking entity wants to sell to US and foreign customers, it puts the two funds together so it is covered across the board. The FAQ takes out the issue about third party marketing and downstream fund marketing, so it reduces the number of situations where this may arise. But I don't think that completely eliminates the problem. I think it makes it easier to structure a foreign fund, but I don't think it solves everything.

Some foreign banks are wanting guidance on whether Super 23A applies globally. What are your expectations regarding this?

The safer assumption is that it applies globally. Anyway, with questions like this, the issue is that we are running out of time. You may get some more clarification from the regulators, but I would be surprised if you get a lot more before July 21.

"I think there are still a class of situations where you may want to have a parallel offshore fund"

I go through this conversation all the time; explaining to foreign entities that this applies to them because they have US operations. If they want to get rid of their US operation, they can get out of it. But that is the business decision they will have to make. Is it fair? Probably not. But that is the reality. And I think most people understand that, but they aren't happy with it.

On the issue of Ucits and other non-US mutual funds being caught as 'banking entities', do you agree with some banks' approach of not seeking to comply until a formal response has been granted by the regulators?

That is not what we are advising people. We are telling people that you have to read and comply with the rule until you learn you don't have to or receive some different clarification. I don't know what the regulators will do as they move forward into enforcement of the rule. I think there will be a lot of problems out there.

And when we start talking about Ucits to foreign banks, the point needs to be made that Ucits aren't completely uniform. It's a name that a lot of people use for mutual funds, but as we drill down in relation to individual banks, the structures they use can be different. Also, whether or not the banking entity has an ownership interest may be different. So I don't think there is a one-size-fits-all solution for the Ucits. I think the banking entity issue is a problem, but I don't see regulators completely reversing their position.

Are there any other key messages from the results?

This is one of the most challenging regulatory requirements seen. It seems to be potentially working fundamental shifts in how people do business, and I think there are still a lot of unanswered questions. There are going to be a lot of people that make judgements that may or may not be consistent. It seems some banking entities are expecting clarification and think the banking entity definition will be cleared up. But it will take a while for the rule to sort itself out, and it will take a while after July 21.

IFLR spoke to Oliver Ireland on May 13




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