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 The final version of the Volcker rule, required by the 2010
Dodd-Frank Wall Street reform law, strives to draw a much clearer
line for what qualifies as a hedge fund or private equity fund.
Regulators decided to exempt certain funds after Wall Street
complained that an earlier draft would have applied to an
unnecessarily broad swath of the industry, including many commodity
pools, foreign registered mutual funds, securitized loans and
corporate structures such as joint ventures.
"There were some successful efforts to deal with some unintended
overreaching aspects of the proposed regulation," said Mark Nuccio,
an attorney at Ropes & Gray in Boston.
The final version adopted by five regulatory agencies on Tuesday
excludes publicly offered foreign funds, insurance company accounts,
certain corporate vehicles, loan securitizations and a broader array
of commodity pools.
"Regulators appear to have heard our concerns," said Paul Schott
Stevens, the chief executive of the Investment Company Institute, an
industry group.
Ken Spain, the vice president of public affairs for the Private
Equity Growth Capital Council, also said he was optimistic about the
rule.
"On first review, it appears that the regulators have addressed a
series of important changes," he said.
The Volcker rule is among the most controversial provisions of
Dodd-Frank. The measure seeks to limit the type of Wall Street
risk-taking that helped land banks in trouble during the 2007-2009
financial crisis.
While much bank angst has been directed at the restrictions on
proprietary trades for banks' own profits, the rule also prohibits
banks from owning more than 3 percent of any individual hedge fund
or private equity fund. It also bans banks from investing more than
3 percent of their total equity capital in private funds.
As regulators struggled for years to finalize the complex rule, some
banks have been proactive in complying with the reform.
JPMorgan said in June it was spinning off its last remaining private
equity business, One Equity Partners. Morgan Stanley in 2011 spun
off most of its ownership in the $4.5 billion hedge fund FrontPoint
Partners.
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Experts said other firms were waiting to see if the final version
would be scaled back before dumping other businesses.
One regulatory insider noted that the original version of the
Volcker rule was so broad possibly in part because lawmakers did not
consult with investment management experts at the U.S. Securities
and Exchange Commission while writing Dodd-Frank.
Robert Plaze, a former deputy director of the SEC's investment
management division, said the agency didn't even originally realize
the full extent of their fund-related responsibilities under the
Volcker rule until after Dodd-Frank became law.
Also, when the original Volcker proposal was drafted, the SEC
"didn't have much data on the types or number of hedge funds or
private equity funds" that would be covered, he added.
Not every entity that hoped for exemptions got them. Venture capital
funds, credit funds, cash management vehicles and cash collateral
pools were included as "covered funds."
Until now, venture capital funds were largely spared from many of
the other regulatory burdens that hedge funds and private equity
funds face today. But the political view of venture capitalists as
job creators, which protected them while Dodd-Frank was being
written, may have faded, said Bruce Ettelson, a partner with
Kirkland & Ellis.
"People are less concerned about the job creation element in 2013
than they were previously," he said.
(Reporting by Sarah N. Lynch, with
additional reporting by Ross Kerber in Boston and Dan Wilchins in
New York; editing by Phil Berlowitz)
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