Private fund offerings to the wealthy are likely to shrink as a result of Volcker Rule guidelines approved Tuesday by the federal financial regulators, acording to some financial industry officials.
Volcker rules will make it hard for bankers to provide some private funds services that many high-net-worth customers rely upon, American Bankers Association spokesman Jeff Sigmund said.
The bankers groups’ stance was amplified by an attorney in the Washington. D.C., financial services unit of a law firm that has filed a number of challenges to the Dodd-Frank Act.
"There are products that banking entities create for high-net-worth investors that require the banks to hedge particular risks, such as structured notes, and it is possible that the availability of these and similar products could be restrained due to the costs of complying with the requirements for permissible risk-mitigating hedging in the final rule,” said Arthur Long of Gibson Dunn.
The framework of the Volcker Rule was put into Dodd-Frank three years ago at the behest of former Federal Reserve Chairman Paul Volcker to prevent substantial bank losses due to private funds.
While banks' involvment in private funds was not a cause of the financial crisis, Volcker and others worried it could lead to another meltdown.
Keith Fisher, a bank regulatory lawyer in the Washington, D.C. office of Ballard Spahr, said the Volcker guidelines will cut down on the variety of private placements banks offer to the wealthy but not eliminate them.
“There are a number of carve outs for certain types of funds that banks will be able to sponsor, including loan securitizations and public welfare funds,” the attorney said.
Banking industry analyst Bert Ely said the restrictions will have some effect on high-net-worth customers, but the greater impact will be on how banks serve corporate customers and how they manage their own balance sheet.
In addition to the banks, private funds could be impacted significantly by the Volcker Rule.
Their trade group, the Managed Funds Association, had no comment.
Investment Company Institute President and Chief Executive Officer Paul Schott Stevens said he is relieved the regulations do not affect the activities of mutual funds.
The compliance obligations start next April but won’t be fully implemented until the end of 2016.
