On December 10, 2013, the federal financial agencies approved joint final regulations (the “Final Regulation”) implementing section 619 of the Dodd-Frank Act, commonly referred to as the Volcker Rule. Section 619 added a new section 13 to the Bank Holding Company Act of 1956, which generally prohibits any banking entity from engaging in proprietary trading and acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with, a hedge fund or a private equity fund. Banks and other lending institutions (“Lenders”) commonly provide loan facilities to private equity funds (“Funds”) that are secured by, or otherwise look to repayment from, the uncalled capital commitments of the Fund’s limited partner investors (each a “Subscription Facility” or a “Facility”). In the typical Facility, the Lender does not directly sponsor, invest in or manage its Fund borrower, but rather only provides extensions of credit. Lenders frequently inquire to ensure their Facilities are in compliance with the Final Regulation. This Legal Update clarifies why most Facility structures will not run afoul of the Final Regulation’s prohibition against acquiring or retaining an ownership interest
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