Hedge Fund and Private Equity Fund Secured Loans and the Volcker Rule
Bryan G. Petkanics and Paul W. A. Severin Loeb & Loeb LLP
Loans secured by interests in hedge funds and, to a lesser extent, private equity funds have been a staple of many banks’ credit offerings for years. However, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-203, H.R. 4173) (Dodd-Frank) in general, and the part thereof known as ‘the Volcker Rule’ in particular, have raised a basic question: “Can a banking institution subject to the Volcker Rule (which is virtually every banking institution in the U.S.) continue to make and enforce hedge fund and private equity fund secured loans?”
On December 10, 2013, the various regulators with jurisdiction over the banking industry (the ‘Agencies’) finally adopted the Volcker Rule1, which is the portion of Dodd-Frank intended to prevent banks from engaging in proprietary trading in ‘covered funds’2. In addition to the ban on proprietary trading, the Volcker Rule severely restricts banks’ ownership in covered funds and certain transactions with affiliated covered funds.