We last wrote about how the Volcker rule’s ban on proprietary trading impacts the ability of banking entities to buy and sell certain cryptocurrencies. We now turn to how the other primary component of the Volcker rule – the limitation on investing in, or sponsoring, “covered funds” – may impact the ability of banking entities to make equity investments in certain financial technology (“FinTech”) companies. The covered fund prohibitions of the Volcker rule can be seen as an attempt to achieve indirectly what the proprietary trading ban achieves directly: where the proprietary trading provisions prohibit banking entities from engaging in certain trading activities on their own behalf, the covered funds provisions restrict the ability of banking entities to invest in entities that either trade securities themselves or act as private equity managers.
As discussed further in this client alert, the Volcker rule’s broad definition of “covered fund” has the potential to capture a range of entities other than traditional hedge funds or private equity funds. The question of whether certain FinTech companies may be inadvertent covered funds is a critical one, as a wide range of bank holding companies (“BHCs”) are reported to have made investments in such companies over the past several years.