In a letter to the SEC and other federal financial regulators, the hedge fund industry said that the regulations implementing Section 619 of Dodd-Frank should not impede two important intermediary functions of banks and brokerage firms: market making and distribution platforms for customers to invest in third-party private funds. In the view of the Managed Funds Association, Congress did not intend for the Volcker Rule ban on proprietary trading and sponsoring hedge funds to include market making activity and third-party fund distribution. Hedge funds and private equity funds rely on market makers to provide the liquidity that allows trading activities. Banks and brokers must also be permitted to engage in hedging activities through a flexible application of the Volcker Rule.
The distribution platforms allowing investment in third-party funds are set up through a pooled investment vehicle established by the bank or brokerage firm that will invest substanially all of its assets in the third-party fund. This distribution platform is important to independent private funds, as well as to bank customers who can invest in a third-party fund without putting the bank's money at risk, noted the MFA, although Dodd-Frank envisions that the bank may invest a de minimis amount of money as seed capital when it sets up the feeder fund. Aside from this de minimis amount, the risks associated by this type of feeder fund are borne entirely by the investors in the feeder fund.