Volcker Rule to hit non-US fund sales

The law as it stands will impact Asia-based mutual funds in unforeseen ways, warns trade body ICI Global.
Volcker Rule to hit non-US fund sales

In its present form, the Volcker Rule will have a wide-ranging but unplanned impact on the sale of mutual funds outside the US, which Asia-based firms should be more aware of, says ICI Global.

The London-based investment industry body – currently on a visit to Asia – is working with the US authorities to try to resolve the issue, says Dan Waters, managing director of ICI Global in London.

The Volcker Rule was introduced with the aim of preventing banks from engaging in excessively risky trading activities, such as hedge funds or other off-balance-sheet collective structures. The US authorities decided that mutual funds should be exempt from the rule, given that they are highly regulated in the US and not leveraged.

The problem, says Waters, is that the exemption refers only to US-approved mutual funds. Hence banks would be prohibited from using their own name in the fund branding for every other structure in the world other than US mutual funds – from Sicavs to Ucits to nationally approved funds elsewhere.

Effectively, banks anywhere in the world with links to the US through related companies or dealings or US persons (such as investors) get caught, he says. The branding ban would apply to any bank that has foreign mutual funds wherever they are sold.

The rule would also effectively prohibit, or greatly hamper, the common practice of firms using seed capital to support the launch of new fund products, notes Waters.

As a result, the American authorities last year drafted territorial limitations that they thought would truly exempt foreign mutual funds from the rule, but these were so narrowly defined as to be inoperable for firms outside the US, he says. Hence, as the law stands, any entity outside America will get caught in any case.

Therefore, either there needs to be a full carve-out for foreign mutual funds or the authorities must drastically revise the definitions of non-US individuals and institutions, says Waters.                   

“We don’t think [the catching of foreign mutual funds by the rule] was intended,” he notes, adding that as a result ICI Global is looking to help US authorities amend the law. “The challenge is how they write it.”

Commentators have asked if the rule can be re-proposed, but thus far the US authorities have said only that they will extend compliance to the rule by two years, to July 2014. “This development is welcome," says Waters, “as it will definitely take a while to implement the required changes.”

In developing its position on the Volcker Rule, ICI Global has seen it as crucial to engage with members on a working level. Hence it has been speaking to operational staff, below the level of CEO, to get a feel for how certain rules, if enacted, would affect them on a day-to-day basis.

These are the kind of arguments that have a major influence on regulators, notes Waters. “They show that they perhaps haven’t fully understood the sector of business that they’re addressing.”

Paul Schott Stevens, president and CEO of the Washington, DC-based Investment Company Institute (ICI, which helped form ICI Global), adds: “The Volcker Rule is a very complex piece of rule-making, and it’s only dawned on various players over time what it means for them.”

ICI Global was launched in October with a view to becoming a global voice for the funds industry on regulation. On this visit to Asia, its third to the region, it is focusing on building relationships with China- and Hong Kong-based fund managers. ICI Global presented its objectives yesterday to Chinese fund firms in Hong Kong, such as Bosera, China Asset Management and HuaAn Funds.

The trade body has more than 25 international asset managers as members, including Nikko Asset Management, the first home-grown Asian firm to sign up.

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