June 18, 2024

Covered Transactions and Considerations in Fund Finance


Executive Summary

Section 23A and Super 23A can create additional complications for lenders in the fund finance market. Intended to protect the stability of financial institutions by restricting transactions with affiliates, Section 23A and Super 23A can limit the relationship between financial institutions, funds, and investors party to a financing transaction. However, if financial institutions are aware of the limitations imposed by Section 23A and Super 23A and properly address covered transaction concerns, they can find ways to complete the desired transaction while also complying with applicable regulations.


With the proliferation of different types of private investment funds—including private equity funds, venture capital funds, and real estate funds—financial institutions have increasingly invested in or provided advisory services to investors in such funds. There has also been a significant increase in lending to these funds by those same financial institutions. Consequently, financial institutions must understand the various affiliate transaction restrictions to avoid unintended violations of applicable rules and regulations. Two such regulations include Section 23A1 (and its implementing regulation, Regulation W) and Super 23A2 (a part of the Volcker Rule).

Section 23A limits a bank’s ability to enter into “covered transactions,” which include making a loan to an affiliate or issuing a guarantee or letter of credit on behalf of an affiliate. Super 23A prohibits banks and their nonbank affiliates from engaging in covered transactions with a covered fund they own, sponsor, manage, or advise, with certain exceptions.

Common Scenarios in which Section 23A and Super 23A Restricts Affiliate Transactions

Covered transactions can arise in a variety of situations. Some common situations include:

  • If an affiliate of the lending financial institution is an investor in the fund. If a financial institution advances a loan to a fund unrelated to that financial institution, but an affiliate of the financial institution is an investor in the fund or a lender to the fund, the loan may be deemed to be a covered transaction to the extent that proceeds of the loan are used for the benefit of or transferred to the affiliated investor.
  • If the financial institution acts as an adviser in the transaction. Section 23A restricts transactions with entities for which the financial institution acts as an adviser, even if neither the financial institution nor any entity in its corporate structure receives proceeds from a loan.
  • If a financial institution provides a hedge, purchases a fund asset, or accepts securities issued by an affiliate. Covered transactions also may arise in connection with a financial institution providing a hedge (e.g., interest rate swap) to a fund, purchasing an asset from a fund (e.g., loan sale), or accepting securities issued by an affiliate as collateral for a loan to a fund.

Potential Solutions for Lenders

Lenders can ensure compliance with the affiliate transaction restrictions found in Section 23A and Super 23A by completing proper diligence of the fund and its investors. Assuming the transaction can move forward, lenders should:

  • Take care to ensure that an affiliate of the lender will not receive proceeds of the loan. If an investor in the fund is an affiliate of the lender, the standard use-of-proceeds covenant in the credit agreement should specify that loan proceeds will not be used for the return of capital to investors.
  • Ensure that an affiliate or investor advised by the lender does not receive any “benefits” of the transaction. For example, the affiliate or investor advised by the lender can be excluded from the borrowing base so that the loans extended under the facility do not benefit from the affiliate’s or applicable investor’s presence in the structure.
  • Segregate deposit accounts into which the affiliate deposits capital contributions from the deposit accounts into which the unaffiliated entities deposit capital contributions. The lender can then obtain a lien on the deposit account that is not used by the affiliate for depositing capital contributions.
  • Draft loan documentation to exclude the affiliated investor from any and all capital calls made at the direction or request of the lender.
  • Draft transfer provisions that prohibit any transfer that would result in any credit party (including borrowers or pledgors) being a “covered fund” under Super 23A. For a more detailed look at covered funds, please see US Agencies Finalize Revisions to Volcker Rule Covered Funds Provisions.

Takeaways for Lenders

Section 23A and Super 23A are added complications for financial institutions in the fund finance space. However, if financial institutions are willing to carefully consider the relationships between the fund, the investors, and the financial institution and create exceptions to the standard collateral and covenant package of a subscription credit facility, lenders will be able to properly address covered transaction concerns.


1 12 U.S.C. § 371c with regulatory implementation by the Federal Reserve Board in Regulation W which is found at 12 C.F.R. pt. 223.

2 12 U.S.C. § 1851 with regulatory implementation found at 12 C.F.R. pts. 44, 248, 351 and 17 C.F.R. pts. 75, 255.

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