How does the Volcker Rule define "covered funds" under the Foreign Banking Organization (FBO) rule?

Explore the Volcker Rule's definition of "covered funds" and its implications for Foreign Banking Organizations under the FBO rule.

The Volcker Rule, implemented as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, restricts banks from engaging in proprietary trading and from owning or sponsoring certain types of investment funds, referred to as "covered funds."

Under the Foreign Banking Organization (FBO) rule, which is part of the Volcker Rule framework, "covered funds" are defined as:

  1. Funds organized and offered outside of the United States by a foreign banking organization (FBO) or its affiliates.

  2. Funds that are exempt from registration as an investment company under the Investment Company Act of 1940, primarily due to being sold outside the United States and without relying on certain exemptions or exclusions provided by the Act.

  3. Funds that would meet the definition of a "covered fund" but for being organized or offered outside of the United States.

The FBO rule is designed to address potential risks posed by foreign banking organizations operating in the United States and their involvement in proprietary trading and private fund activities. By including certain foreign funds under the definition of "covered funds," the Volcker Rule aims to prevent evasion of the rule's restrictions by foreign banking organizations and ensure consistent regulation of risky activities regardless of where they occur.

It's essential to note that the Volcker Rule and its associated regulations, including the FBO rule, are complex and subject to interpretation by regulatory agencies such as the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and the Commodity Futures Trading Commission. As such, banks and financial institutions subject to the Volcker Rule must carefully analyze their activities and investments to ensure compliance with the regulations and avoid potential penalties or enforcement actions.

Defining "Covered Funds" Within the Volcker Rule and Its Application to Foreign Banking Organizations.

Defining "Covered Funds" Under the Volcker Rule and Its Application to Foreign Banking Organizations

The Volcker Rule restricts banking entities from engaging in certain proprietary trading activities and from owning or sponsoring "covered funds." Understanding the definition of "covered funds" and their application to foreign banking organizations (FBOs) is crucial in today's financial environment.

What are "Covered Funds" under the Volcker Rule?

The Volcker Rule defines "covered funds" as:

  • Investment funds: These rely on Section 3(c)(1) or 3(c)(7) of the Investment Company Act, meaning they have more than 100 investors or qualified purchasers.
  • Commodity pools: These are defined under Section 1a(10) of the Commodity Exchange Act, typically involving investments in commodities or derivatives.
  • Certain foreign funds: These meet specific criteria, including relying on Sections 3(c)(1) or 3(c)(7) for US investors or satisfying other conditions related to control, management, and activities.

How Does the Volcker Rule Apply to Foreign Banking Organizations?

The Volcker Rule generally applies to US banking entities, but it also has implications for FBOs with US operations. Here's a breakdown:

  • Activities within the US: FBOs engaging in covered fund activities within the US are subject to the Volcker Rule. This includes owning, sponsoring, trading, or advising on covered funds.
  • Exemption for "solely outside the US" activities: FBOs can be exempt from the Volcker Rule for certain covered fund activities conducted solely outside the US. However, specific conditions and exemptions must be met, such as ensuring no US persons are involved and no US assets are used.
  • Navigating the complexities: Determining applicability and compliance can be complex for FBOs due to nuances in the regulations and potential cross-border activities. Consulting legal and compliance professionals is crucial.

Additional Points to Consider:

  • The definition of "covered funds" can evolve over time, so staying updated on regulatory changes is essential.
  • The application of the Volcker Rule to FBOs can vary depending on their specific activities and jurisdictions of operation.
  • Regulatory interpretations and enforcement practices can also impact the application of the rule.


Understanding the definition and application of "covered funds" under the Volcker Rule is critical for FBOs operating in the US or engaging in cross-border activities. Careful consideration of the regulations, exemptions, and potential implications is crucial for compliance and risk management.

Disclaimer: This information is provided for general informational purposes only and does not constitute legal advice. It is recommended to consult with a qualified legal professional for specific guidance regarding your situation.