In a letter to the SEC and the federal banking agencies, the securities industry urged the regulators when implementing Dodd-Frank's Volcker Rule to exempt from the definition of hedge fund and private equity fund issuers that originate, buy, sell or securitize loans or assets based on loans. Doing so would be consistent with the rule of construction that Congress set forth in the Volcker Rule, said SIFMA, which provides that nothing in rule should be construed to limit or restrict the ability of a banking entity or nonbank financial company supervised by the FED to sell or securitize loans in a manner otherwise permitted by law. According to SIFMA, the inclusion of this provision authorizing the SEC and banking agencies to carve out loan-related securitization vehicles from the reach of the Volcker Rule, evidences Congress’s recognition of the critical role that securitization plays in the lending markets.
SIFMA also said that there should be an exemption from the definition of hedge fund and private equity fund for credit funds that are predominantly engaged in originating or purchasing loans and other extensions of credit in primary debt originations, activities that are at the core of banking entity-permissible activities. Credit funds lend money on a long-term basis, supporting liquidity and stable credit, strengthening the overall economy and promoting job creation by providing credit to companies that cannot access public markets. SIFMA also recommend that the SEC and the banking agencies exempt from the definition of hedge fund and private equity fund regulated foreign investment companies, such as UCITS in the European Union, that resemble SEC-registered investment companies rather than traditional hedge funds or private equity funds.
The Volcker Rule generally prohibits any banking entity from taking or retaining any ownership interest in or sponsoring a “hedge fund” or “private equity fund,” subject to certain exemptions. SIFMA has also asked the regulators to ensure that the rules for bank proprietary trading and for sponsoring hedge funds are bifurcate. SIFMA urges the SEC and the banking agencies to keep in mind that the purpose of the Volcker Rule is to prevent banking entities from establishing or maintaining investments in or relationships with hedge funds and private equity funds only if they have been deemed inappropriate. A principal goal of the Volcker Rule is to eliminate the temptation of banking entities to bail out investors in sponsored funds, which otherwise might contribute to a banking entity’s losses during a financial crisis.
The exemptions to the general prohibitions also reflect a decision to balance these considerations with the recognition
that appropriate asset management services such as bona fide trust, fiduciary and investment advisory services, traditional lending activities and other corporate or investment activities should not be prohibited. In SIFMA. view, implementation of the Volcker Rule in a manner that unduly restricts these services and activities would have a detrimental effect on the availability of capital and credit to American businesses, job creation and the recovering economy. SIFMA urged that the Volcker Rule
be implemented in a way that restricts certain relationships with hedge funds or private equity funds without triggering the sort of adverse economic consequences that Congress sought to avoid.