Private equity firms worried about the scope of a rule restricting banks from investing in private equity and hedge funds received assurances that the rule does not pertain to bank pension plans.
On Tuesday, five US regulatory agencies were expected to release an agreed final version of the rule, named after Federal Reserve Chairman Paul Volcker who championed its implementation.
The Volcker Rule restricts banks from trading off their own accounts as well as limiting their investments in private investment funds to no more than 3 percent of any one fund’s capital. During a comment period, the industry raised concerns that the rule’s proposed language was vague enough to capture major bank pension plans.
Legal sources say the final rule means bank pension plans will no longer have to negotiate careful language that outlines an exit strategy in the event they’re forced to sell their private fund commitments as part of Volcker Rule compliance.
“Private equity investment opportunities have just become more attractive for bank pension plans now that this negotiation hurdle has been removed,” said Bruce Ettelson, a private funds lawyer with law firm Kirkland & Ellis, who saw a copy of the rule before its final release.
For two years, regulators have struggled to shape the final rule, which banks expected to be complete in mid-2012. During this time period, private fund advisors closely tracked its development, worried about its ultimate impact on one of their key sources of capital.
In addition to bank pension plans, the private equity industry was concerned that the rule’s territorial reach would extend to non-US banks that have a US office and want to invest in non-US funds.
The final rule does not contain any explicit language permitting this, said Kirkland financial services lawyer Edwin Del Hierro. However, commentary language accompanying the final rule suggests that “regulators will allow non-US banks to invest in funds that do not solicit any US investors.”
Absent from the final rule was any language explicitly clarifying whether venture capital funds are captured by its scope. However, legal sources say the commentary makes clear that venture capital vehicles are intended to be covered by the rule.
Regulators may also push out the compliance date for the Volcker Rule to July 2015, allowing banks an additional year to sell off their private equity assets. Banks including Goldman Sachs and Morgan Stanley have already begun paring down their private equity portfolios.
“With an additional year, banks don’t need to scramble to address filing for extensions. Instead, they can focus on developing an appropriate compliance strategy,” said Del Hierro.