In a letter to the SEC and other regulators, the American Securitization Forum urged the Commission and other financial regulators to clarify that there is a securitization exclusion from the Dodd-Frank Volcker Rule to allow banking entities and financial companies to participate in certain securitization relationships and activities without falling within the scope of the Rule and more broadly the Volcker Rule, as codified in Sec. 619 recognizes that securitization relationships and activities are not be prohibited activities under Section 13(a)(2) of the Bank Holding Company Act and that the definition of "hedge fund and private equity fund" contain appropriate limitations to implement these modifications
In defining permissible securitization relationships, the Forum said that the securitization exclusion must allow firms to engage, both directly and indirectly, through affiliates and securitization vehicles which they sponsor, in traditional and sound securitization activities.
The Volcker Rule prohibits a banking entity from acquiring or retaining any ownership interest in or sponsoring a hedge fund or a private equity fund." A "hedge fund" or "private equity fund" is defined very broadly in the Volcker Rule to be "a company or other entity that would be an investment company under the Investment Company Act but for Section 3(c)(1) or 3(c)(7) of the 1940 Act, or such similar funds as the appropriate Federal banking agencies, the SEC, and the CFTC may determine.
The Fourm feared that,taken literally, and without giving effect to the exceptions contained in the Volcker Rule, these two provisions could be read to restrict a firm from engaging in any securitization transaction with an issuer fund in which that firm has any equity interest or a sponsorship role if that fund relies on the private placement exemptions of Section 3(c)(1) or 3(c)(7). The Forum noted that many securitization issuers currently rely on one of those exemptions.
In its letter to the SEC, the Forum was confident that Congress did not intend this result. Indeed, in the Volcker Rule drafters provided compelling evidence that such application was not intended by providing that the Volcker Rule is not to be construed to limit or restrict the ability of banking entities or financial companies to sell or securitize loans. Congress thus made clear that even though some securitization issuers would otherwise fall within the definition of "hedge fund and private equity fund", those issuers and their sponsors were not meant to be included in the prohibited activities, maintained the Forum.