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The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), signed into law on July 21, 2010, makes changes more sweeping than any since the Great Depression in the way the U.S. financial system is supervised and regulated. Among the most far-reaching of these reforms is the eponymous “Volcker Rule,” named for Paul Volcker, former chairman of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and current chairman of the President’s Economic Recovery Advisory Board. Subject to limited exceptions, the Volcker Rule prohibits banking organizations from engaging in proprietary trading and from sponsoring or investing in private equity and hedge funds.

Banking organizations — U.S. banks and bank holding companies, non-U.S. banks and their respective subsidiaries and affiliates — represent a substantial portion of the global investor base for private equity and hedge funds. Although banks and their affiliates sponsor a great many of their own private equity and hedge funds, they play an even more important role as “anchor” investors for funds sponsored by third parties, and have done much to encourage the development of an independent fund management sector. The Volcker Rule is likely to force U.S. banking organizations to sharply reduce their participation in private equity and hedge funds, however, whether as sponsors (subject to the de minimis exception discussed below) or as investors. This memorandum focuses on the extent to which the Volcker Rule may also affect the ability of non-U.S. banking organizations to invest in private equity and hedge funds — even where the fund investments are entirely outside of the United States.

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