Paul Stevens, the president of the Investment Company Institute and a top lobbyist for the mutual fund industry, told the House Financial Services Committee that the Volcker Rule may become problematic for the mutual fund industry.
“This could have the effect of essentially barring banking entities from sponsoring the most highly regulated type of investment vehicle [mutual funds] and, thereby, limiting investment options for investors,” Stevens said, according to MarketWatch. “Chief among our concerns is the fact that the proposal could treat many [mutual funds] as hedge funds—a result that contradicts the plain language that Congress passed.”
The Volcker Rule, which prohibits banks from engaging in proprietary trading, contains a provision requiring big banks to reduce their holdings in private equity and hedge funds to three percent within one year.
Bank-owned investment subsidiaries normally provide initial start-up capital for mutual funds established by the firms. In the period following the launch of a new mutual fund, the bank may own all or almost all shares of the fund, MarketWatch reports.
If mutual funds were included under the Volcker Rule, however, the investment subsidiaries and the bank would have difficulty establishing a mutual fund because the bank and affiliate would be unable to share the same name with the mutual fund, creating a major branding problem.
The bank subsidiary would also be forced to divest a majority of its interest in the fund, down to three percent, within one year of its launch, a goal that may be impossible to achieve for some institutions. Some mutual fund operations could be pulled into the Volcker Rule because they own a small bank, forcing them to divest the banking unit to avoid disruption of their central mutual fund interests, according to MarketWatch.
International regulators in Canada, the U.K. and Japan have also voiced concerns about their ability to sell their bonds.