Dissenting Statement of Commissioner Dan M. Berkovitz Regarding Volcker Covered Funds Proposal

January 30, 2020

Let’s start by calling the Volcker Covered Fund Proposal (“Proposal”) what it is: a regulatory rollback.[1]  Virtually every change in the Proposal creates a new exclusion from the rules, or eliminates or reduces existing requirements.  The changes to the regulations run counter to the statutory purpose of prohibiting banks from owning hedge funds and private equity funds.  The Proposal fails to analyze or discuss the risks inherent in the banking activities it would permit.  It presents a thin veneer of a rationale for many of the changes that were precipitated by complaints from the banking industry.  The agencies should be making reasoned decisions to improve the effectiveness of the regulations for the purposes mandated by Congress, not implementing industry-driven rollbacks.  I therefore dissent.

The general purpose of the Volcker Rule is to eliminate excessive risk taking by banks that enjoy the benefits of U.S. taxpayer support while still preserving their ability to undertake banking activities that serve the public interest.[2]  The covered fund provisions are intended to prevent banking entities from circumventing the proprietary trading prohibition in the Volcker rule through covered fund investments and limit bank involvement in covered funds so that the banks are not expected to bail out the funds if they lose money.[3]

While a few of the proposed changes are consistent with this statutory purpose because they correct unintended consequences from the original regulation, the Proposal goes much further than reasonably necessary and appears to create substantial loopholes without effectively analyzing the potential risks.  There is no quantitative analysis of those risks.  The rationales provided to support these rollbacks are qualitative, legalistic, and summary in nature.  They purport to provide “clarity,” allow banks to “diversify” investments, or improve bank competitiveness—none of which advance the goals articulated by Congress.

I am concerned that the proposed changes, along with the other regulatory reductions implemented in the proprietary trading provisions of the Volcker regulations in November 2019,[4] may together substantially reduce the safety measures instituted in the Dodd-Frank Act.  Are the large banks that are subject to Volcker profitable?  Definitely.  Are the banks less competitive as compared to their international competitors? No.[5]  Do we need to give them more rein to take on more risk?  A case for that has not been made.  I fear that we are putting the United States taxpayer at risk of once again bailing out the banks when we as regulators fail to take a reasoned, thoughtful approach; one that seeks to reach an appropriate balance of free markets with regulatory guard rails for risk-taking.  After all, the banks that are subject to the Volcker regulations are insured by the FDIC and/or have access to Federal Reserve Bank support.  We should have a say in the risks they take when the U.S. taxpayer is standing behind them.

Specific Changes of Concern

Much of the Proposal addresses regulations that will not impact, or will have only indirect impacts on, the CFTC’s core mandate to regulate the derivatives markets.  Nonetheless, I cannot vote in favor of proposed regulations that are presented to this agency for review that broadly fail to follow congressional intent—limiting risky behavior by banks connected with hedge funds and private equity funds.

The Proposal states:  “The proposed rule is intended to improve and streamline the covered fund provisions and provide clarity to banking entities so that they can offer financial services and engage in other permissible activities in a manner that is consistent with the requirements of section 13 of the BHC Act.”[6]  This benign façade masks the true purpose and effect of the Proposal, which is a regulatory rollback.  It adds five new, substantive exclusions from covered funds regulation;[7] expands three existing and significant exclusions; reduces what constitutes “ownership” in a covered fund in numerous ways; and significantly reduces limitations on banking relationships with covered funds.

The Volcker covered fund provisions could benefit from tailored revisions to fix some unintended consequences.  The so called “super 23A” provisions restrict regular bank clearing activities for certain covered funds for which an affiliate provides services, such as investment management.  Clearing services are not risk-taking activities.  As another example, the existing regulations inadvertently convert some foreign covered funds into banking entities subject to the entire rule set when the statute intended to exclude those activities if they take place outside the United States.  The Proposal would properly address these issues.  Unfortunately, it also goes much further in proposing regulatory reductions without careful consideration of the risks involved.

I will discuss three particular provisions to illustrate my concerns.  First, the Proposal would exclude “venture capital funds” from the covered funds definition with some minor limitations that are not based on the risks involved.  The Proposal acknowledges that, as stated in the final release for the current Volcker regulations, venture capital funds are private equity funds.  The Proposal states that the venture capital fund exclusion is based in part on several statements by members of Congress regarding venture capital funds.  However, a close reading of the four statements cited in the Proposal shows that three of the four do not call for a complete exclusion of venture capital funds.  Congress could have excluded venture capital funds if that were the intent.  It did not.

The justification for the broad venture capital fund exclusion is flimsy.  The Proposal asserts the exclusion could “promote and protect the safety and soundness of banking entities and the financial stability of the United States” by allowing banks to “diversify their permissible investment activities.”[8]  Unfortunately, virtually no analysis or information is provided as to whether such “diversification” is in fact a good thing.  Allowing banks to invest in anything and everything would greatly increase diversification, but that absurd approach would not likely protect the safety and soundness of banks or our financial system.

A simple Google search reveals data indicating that venture capital investments historically have been high risk.  One study found that about 75% of venture capital-backed firms in the United States did not return capital to investors.[9]  A 2013 article in the Harvard Business Review noted that “VC funds haven’t significantly outperformed the public markets since the late 1990s, and since 1997 less cash has been returned to VC investors than they have invested.”[10]  The author goes on to note that “[v]enture capital investments are generally perceived as high-risk and high-reward. The data in our report reveal that although investors in VC take on high fees, illiquidity, and risk, they rarely reap the reward of high returns.”  Although venture capital performs an important function in providing capital to new technologies, and has been critical in boosting our economy and global competitiveness, I do not think we should be permitting such investments by banks backed by U.S. taxpayers without analyzing the risks involved.

The Proposal would add another new exclusion from covered fund regulation for “customer facilitation vehicles.”  This exclusion is concerning because it is not well defined and could potentially become an end run around the Volcker rule.  In effect, a bank could be the counterparty for the instruments in the vehicle sold to customers and thereby take on substantial risks permitted as a result of the exclusion.  These risks are not addressed in the Proposal.

The Proposal states that such funds or “vehicles” would be used to facilitate customer needs.  The brief example given is of accommodating a bank customer that wants to purchase structured notes issued through a vehicle, not the bank, “for certain legal, counterparty risk management, or accounting reasons specific to the customer.”[11]  However, unlike the “credit fund exclusion,” which limits the assets that may be held in such funds, the Proposal has no restrictions as to what instruments can be in the vehicle and whether the banking entity can be the counterparty for those instruments.  A portfolio of complex derivatives or synthetic “investments” could be placed in the vehicle with the bank taking the other side of the trades.

Furthermore, the Proposal acknowledges that the so called “customer facilitation” vehicles can in fact be ginned up by the banks themselves and that “marketing” the vehicles to the customers is not restricted.  In effect, a bank could now create a fund of investments that it wants to hold, put the underlying instruments into a “vehicle” and then market the other side of the investments to customers in the form of security ownership in the vehicle.  This exclusion has the potential to create a large loophole for creative bankers to exploit.

Finally, there is a special exclusion created for billionaires: the new “Family Wealth Management Vehicles” exclusion.  This provision would exclude so called “family offices” from Volcker covered funds regulation.  Unlike the prior two examples, this exclusion is not likely to materially increase undesirable risk taking by banks.[12]  Rather, it is concerning because it allows banks and wealth vehicles to avoid Volcker compliance.  In my view, wealth vehicles for ultra-wealthy individuals do not need special regulatory relief.

As I noted recently in a statement opposing family office exemptions from several CFTC rules, family offices are not used by ordinary families who may have a modest degree of wealth.  Rather, the extraordinarily wealthy—including hedge fund operators, bankers, and super wealthy entrepreneurs—create these organizations to preserve, grow, and pass on their wealth to their descendants.[13]  According to the Global Family Office Report 2019, “[t]he average family wealth of those surveyed for this report stands at USD 1.2 billion, while the average family office has USD 917 million in [assets under management].”[14]  The aggregate amount of wealth managed by family offices is staggering.  By one estimate, the total assets under management by family offices is over $4 trillion, and the number of family offices has grown ten-fold in the last decade.[15]  A recent Forbes article noted that “[f]amily offices are now capable of making transactions that were traditionally reserved for big companies or private-equity firms and therefore are becoming a disruptive force in the market-place.”[16]

Furthermore, there are indications that family offices for U.S. persons may be located in offshore tax havens to avoid paying U.S. taxes.[17]  Financial regulators should not provide special and favorable regulatory treatment to benefit those who seek to avoid paying their fair share of U.S. taxes.


The Volcker Rule and related regulations are complicated.  The regulations deserve careful, reasoned reassessment to maintain their effectiveness.  Unfortunately, the Proposal is neither reasoned nor careful.  It ignores the risk-reducing public policy for the Volcker rule and effectively acknowledges the fact that this rollback is driven by complaints from the very banks the rule is intended to make safer.  No effort is made to assess the risks that the Proposal will now allow banks to assume.  I cannot support the proposed changes to the Volcker rule because they do not conform to the statutory mandate for the rule and the Proposal does not carefully analyze the effect of the changes on the safety and soundness of our financial system.  I therefore dissent.


[1] “Rollback” is defined as “reduc[ing] (something, such as a commodity price) to or toward a previous level on a national scale.”

[2] See Statement of Sen. Dodd, 156 Cong. Rec. S6242 (July 26, 2010) (“The purpose of the Volcker rule is to eliminate excessive risk taking activities by banks and their affiliates while at the same time preserving safe, sound investment activities that serve the public interest.”).

[3] The classic example of this risk is the collapse of two Bear Stearns-sponsored hedge funds in 2007.  Bear Stearns provided loans intended to shore up two Cayman Islands hedge funds established by Bear Stearns.  Bear Stearns was not legally obligated to back the funds financially, but as a business matter, it felt compelled to support them because of its sponsorship of the funds. Those actions were part of a chain of events that eventually led to the fire sale of Bear Stearns to J.P. Morgan in March 2008.  To entice J.P. Morgan to buy a distressed Bear Stearns, the Federal Reserve System provided financial support for the purchase. See Reuters, Timeline: A dozen key dates in the demise of Bear Stearns (Mar. 17, 2008), available at

[4] Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships with, Hedge Funds and Private Equity Funds, 84 FR 61974 (Nov. 14, 2019).

[5] U.S. banks are the strongest in the world.  The recent Global League Tables ranking global banks by amount of banking business activity shows that three or four U.S. banks are in the top five banks in almost every category, including for banking business in foreign markets.  See, Global League Tables, available at

[6] Proposal, section II.

[7] While the Proposal lists four exclusions, the parallel investments permission is, in effect, an exclusion from regulation.

[8] Proposal, section III.C.2.

[9] Deborah Gage, The Venture Capital Secret: 3 out of 4 Start-Ups Fail, Wall Street Journal (Sept. 20, 2012), (citing research by Shikhar Ghosh, a senior lecturer at Harvard Business School), available at

[10] Diane Mulcahy, Six Myths About Venture Capitalists, Harvard Business Review (May 2013), available at

[11] Proposal, section III.C.4.

[12] The Proposal would only allow a de minimis investment in such vehicles by banking entities.

[13] Registration and Compliance Requirements for Commodity Pool Operators (CPOs) and Commodity Trading Advisors: Family Offices and Exempt CPOs, 84 FR 67355, 67369 (Dec. 10, 2019).  According to one guide to family offices:

[T]he modern concept of the family office developed in the 19th century.  In 1838, the family of financier and art collector J.P. Morgan founded the House of Morgan to manage the family assets.  In 1882, the Rockefellers founded their own family office, which is still in existence and provides services to other families. 

EY Family Office Guide, Pathway to successful family and wealth management, at 4, available at

[14] Campden Research and UBS, The Global Family Office Report 2019, at 10, available at

[15] Francois Botha, The Rise of the Family Office: Where Do They Go Beyond 2019?, Forbes (Dec. 17, 2018), available at

[16] Id (emphasis added).

[17] Kirby Rosplock, The Complete Family Office Handbook, A Guide for Affluent Families and the Advisors Who Serve Them, at 5 (Bloomberg Press 2014).