Volcker Rule Update: Investments by Foreign Banking Entities in Private Equity Funds
On Friday, the Federal Reserve Board and other agencies with authority under the Volcker Rule issued guidance confirming that the marketing restriction under the so-called SOTUS (“solely outside of the United States”) exemption applies only to the activities of foreign banking entities, not to the activities of third parties generally. In short, this means that a foreign bank investing in a private equity fund pursuant to the SOTUS exemption may continue to rely on the exemption even if ownership interests in the fund are offered or sold to U.S. persons by an unaffiliated sponsor or another unaffiliated third party. This should generally allow foreign banks to invest directly in funds sponsored by private equity firms, without the need for separate offshore parallel funds. However, if a foreign bank participates in an offer or sale of fund interests to a U.S. person, it cannot rely on the SOTUS exemption.
The recent guidance represents a significant development for foreign banks and private equity sponsors.