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Clarification of the Marketing Restriction under the Volcker Rule "SOTUS" Covered Fund Exemption

On February 27, 2015, the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and the Commodity Futures Trading Commission (the "Agencies") issued a new FAQ to clarify that the marketing restriction under the Volcker Rule "solely outside of the United States" ("SOTUS") covered fund exemption applies only to the activities of a non-US banking entity seeking to rely on the SOTUS exemption, but not more generally to the activities of any unaffiliated person offering for sale or selling interests in a covered fund.

The marketing restriction, which provides that no ownership interest in a foreign banking entity's SOTUS covered fund may be offered for sale or sold to a resident of the United States, is one of the conditions a non-US banking entity must comply with in seeking to rely on the SOTUS covered fund exemption. The Agencies' final rule specifies that the marketing restriction is met if an offering of fund ownership interests does not target US residents. It was previously unclear, however, whether the marketing restriction applied to the activities of the non-US banking entity or to the covered fund as a whole. The Agencies clarified that it does not so apply. The Agencies explained that their view is "consistent with limiting the extraterritorial application of [the Volcker Rule] to foreign banking entities while seeking to ensure that the risks of covered fund investments by foreign banking entities occur and remain solely outside of the United States."

The Agencies' FAQ provides that the marketing restriction applies only to a non-US banking entity "in connection with its own activities with respect to the covered fund rather than the activities of unaffiliated third parties." The clarification permits a non-US banking entity to rely on the SOTUS covered fund exemption to invest in a covered fund offered by an unaffiliated third party without regard to whether the unaffiliated third party complies with the marketing restriction. Where the non-US banking entity is the sponsor, or serves, directly or indirectly, as an investment manager, investment adviser, commodity pool operator or commodity trading adviser to the covered fund, the non-US banking entity will be considered to be participating directly in the offer or sale of ownership interests in the covered fund and may rely on the SOTUS fund exemption only if all offers and sales of ownership interests in the covered fund meet the marketing restriction of not targeting US residents.


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