Parallel Fund Structures Under the Volcker Rule

Skadden, Arps, Slate, Meagher & Flom LLP

Heather Cruz Anastasia T. Rockas

Skadden was one of 15 law firms that participated in the development of a recently released consensus interpretation letter regarding the ability of non-U.S. banking entities to invest in certain parallel funds organized by non-bank sponsors. The parallel fund structure addressed in the letter includes (i) one or more “covered funds”1 offered to U.S. investors and (ii) one or more “foreign non-covered funds” or “SOTUS Funds”2 that invest together in underlying portfolio companies or other assets. The consensus view is that these parallel fund investments are permissible as long as (i) the parallel funds are separate legal entities and have separate investors and (ii) the offering documents include disclosure that the parallel foreign fund is only being offered to non-U.S. persons. The interpretations set forth in the letter are based on the final implementing rules under the Volcker Rule and the preamble thereto and are subject to revision based on subsequent rulemaking, written interpretations or guidance.

The letter can be viewed here.


1 With respect to investments by non-U.S. banking entities, a “covered fund” means (i) an issuer that relies on Section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940 or (ii) a commodity pool (as defined under the Commodity Exchange Act) for which either (i) the commodity pool operator has claimed an exemption under 17 CFR §4.7 or (ii) the commodity pool operator is registered, substantially all the participant units are owned by qualified eligible persons, and there has been no public offering to persons other than qualified eligible persons. Final Rules § _.10(b)(1).

2 A SOTUS fund is a covered fund that, among other things, has not sold any ownership interests pursuant to an offering that targets U.S. persons and, thus, is offered “solely outside the United States.” Final Rules §_.13(b)

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