What the Volcker Rule Changes Mean for Family Offices
It seems as if the Volcker Rule has been in the spotlight for as long as anyone can remember. Now, several much-anticipated revisions are shining that light even brighter.
Officially known as Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Volcker Rule was adopted on April 1, 2014. Its purpose was to curtail the risky investments and speculative activity by banks that contributed to the financial meltdown of 2008.
However, the rule’s complex compliance requirements have been difficult and costly for banks to implement. The requirements have also come under fire for lacking clarity, hindering investment opportunities, and being too restrictive.
This is set to change on October 1, 2020 when amendments to the “covered fund” provisions go into effect.
Uncovering covered funds
The amendments lift restrictions that had prohibited banks from investing in or sponsoring certain activities in hedge funds, private equity funds and family wealth management vehicles – known collectively as “covered funds.”
Easing the restrictions will enable banks to unlock potential investment opportunities, compete more aggressively, and offer a wider range of traditional banking and asset management services to customers.
The exclusion of family wealth management vehicles and other funds from the covered fund provisions is clearly a big win for banks. Asset managers stand to benefit as well. The exclusion of “qualifying venture capital funds” from “covered funds” removes the handcuffs that had prevented banks from providing capital and buy-side liquidity that asset managers need for the funds they manage.
But what about family offices? Will the amendments to the Volcker Rule have any impact on family office investments and banking relationships or are they just one giant ‘yawn?’
A lukewarm welcome but long-term upside
“This is not a major event for family offices, but it does enhance the playing field,” said Howard Geller, principal and founder of Hudson Peak Group, a consultancy that advises family office clients on financial and strategy issues. “The changes stand to increase competition among banks for family offices’ business, which will provide family offices with more options and may enable them to structure better terms going forward.”
The Volcker Rule amendments will theoretically bring more capital to the markets. With fewer barriers and greater latitude to invest, banks will seek out new opportunities and help to expand the universe of deals, making for a stronger marketplace over the long term. Geller sees family offices turning to banks as an additional channel to find and gain access to venture capital funds and private deals.
The amended rule also provides more flexibility regarding how a wealth management vehicle is structured. Banks can now get a toe-hold in the family office by participating as a non-trust entity, which permits them to acquire or retain up to an aggregate 0.5% interest in the family wealth vehicle under certain conditions.
“Having skin in the game is important,” said Geller. “Being part of an ‘ownership group’ offers banks access to the family and insight into how the family office operates. This in turn enables the bank to truly understand the family so it can tailor services to the specific needs of that family office client.”
Benefits all around
In the short term, family offices can expect more outreach as banks look to cross-sell services and deepen existing relationships. But it’s the longer-term benefits that are likely to be more substantial. Greater access to capital, more individualized services, better terms on deals and expanded investment opportunities are nothing to sneeze at. In other words, the Volcker Rule amendments can be a win-win for banks and family offices alike.
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