By one interpretation, the Volcker rule could be seen as a ‘remarkable extension of US regulatory jurisdiction’ over foreign banks, according to a client memo from law firm Morrison Foerster.
The rule, which severely restricts US banks from investing in alternative investment funds, also applies to foreign banks with even minimal operations in the US. That significantly widens the scope of which banks are subject to the rule, said Jeff Berman of law firm Clifford Chance. “Almost any bank of international consequence has a US branch. Some minimum US presence is seen as necessary, for dollar access if nothing else.”
Congress drafted the provision to prevent foreign banks from gaining an unfair marketing advantage over US banks. However, the rule’s critics say its language is too inclusive and includes even “passive investments” that prohibit foreign banks from sponsoring or investing in any non-US fund with US investors. Industry sources said it would be near impossible for foreign banks to identify the national identity of every LP in a fund to avoid violating the rule’s provisions.
Why on earth should it make any difference whether a foreign bank and a US person are passive investors in the same fund?
“Why on earth should it make any difference whether a foreign bank and a US person are passive investors in the same fund? It has nothing to do with unfair competitive advantage or any other imaginable problems the Volcker rule may have been designed to address,” said Berman. “It won’t do a thing to help US banks protect their home turf from foreign banks that have fewer restrictions, but it will do plenty to hurt non-bank fund managers by limiting the audience for their funds and forcing them to choose, in effect, between having bank investors and having US investors.”
The threat of this overreach doesn’t stop there. Some sovereign entities are treated as bank holding companies as a result of certain US holdings, meaning they too face the rule’s onerous restrictions. This could be a major worry for mangers with investors such as the state-owned China Investment Corporation in their funds.