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Topic III: Sec. 619(d)(4).  De Minimis Exception To the Volcker Rule

Plain Meaning Of The Rule To Which A De Minimis Investment Is Excepted

Among the most expansive and controversial sections of the Dodd-Frank Act is section 619, also known as “The Volcker Rule”.  Although the rule does affect certain non-bank financial companies supervised by the Federal Reserve System Board of Governors, it broadly applies to “banking entities” (an expansive definition with international scope), or any affiliate or subsidiary of such entity.  The Volcker Rule is therefore a far-reaching section in that it either restricts or regulates a number of major activities for virtually every major commercial and investment bank in the world.

Foremost among these restrictions are the ban of proprietary trading and the restrictions on certain activities between banking entities and hedge funds or private equity funds.  The “de minimis” exception, however, does not apply to the Volcker Rule’s proprietary trading ban, but to another major restriction created by the rule: the limitations on investing with hedge funds or private equity funds.  The Volcker Rule essentially prohibits a banking entity from acquiring or retaining any equity, partnership or other ownership interest in or “sponsoring” a hedge fund or private equity fund.  Although section 619(h)(2) collectively defines hedge funds and private equity funds in the same way (as an issuer that would be an investment company [defined by the Investment Company Act of 1940] or such similar funds as the appropriate Federal banking agencies, the SEC and the Commodity Futures Trading Commission [CFTC] may, by rule, determine), hedge funds and private equity funds, in reality, differ in many ways.  

Despite the inherent differences between these two types of funds, section 619(h)(5) defines “sponsoring” either type of fund the same way: “sponsoring” means to serve as a general partner, managing member, or trustee of a fund; in any manner to select or control, or to have employees, officers, or directors, or agents who constitute a majority of the directors, trustees, or management of a fund; or to share with a fund, for corporate marketing, promotional, or other purposes, the same name or a variation of the same name.