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Dissenting Statement Of CFTC Commissioner Dan M. Berkovitz Regarding Volcker Covered Funds Final Rule

Date 25/06/2020

The Volcker covered funds final release (“Covered Funds Rule”) adopts with only minor changes the rule amendments as proposed by the agencies in January of this year (“the Proposal”).  I voted against[1] the Proposal because the agencies had only superficially considered the additional risks that banks would incur under the loosened regulations.  Nothing in the Covered Funds Rule final release dispels this concern.  Therefore I dissent from the final release.

Congress enacted the original Volcker rule after the 2008 financial crisis to protect American taxpayers from again having to bailout banks that are insured by the FDIC or have access to Federal Reserve Bank financial support.  This goal was to be achieved by preventing the government-supported banks from undertaking risky proprietary trading activities and from owning hedge funds or private equity funds.  The new Covered Funds Rule, together with the rollbacks in the Volcker proprietary trading regulations adopted in 2019,[2] will undermine many of the risk-reducing benefits of the original Volcker rule.

The original Volcker covered funds regulations were not perfect.  The foreign public funds exception and the so called “super 23A” provisions governing activities banks can undertake with covered funds needed careful adjustments.  However, the Covered Funds Rule goes much, much further.  It creates broad new exclusions from the covered funds definition with inadequate analysis as to whether these activities were intended to be permitted under the statute or pose serious risk to the banks and the United States financial system.

I addressed some of these new exclusions in more detail in my dissenting statement on the Proposal.[3]  Of these, the new “venture capital funds” exclusion perhaps best illustrates the extent to which the Covered Funds Rule undermines the very purpose of the Volcker rule.  Venture capital serves an important function in our financial markets by providing needed capital to startup companies.  But venture capital investing is very risky.  One study found that about 75% of venture capital-backed firms in the United States did not return capital to investors.[4]  Another article on venture capital 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.”[5]  This is exactly the type of risky private equity fund[6] investing by government-supported banks that Congress intended the Volcker rule to curtail. 

In adopting the Covered Funds Rule, the agencies failed to analyze any data or other information that lays out the risks of venture capital investing.  The agencies simply exclude venture capital funds from Volcker regulation.  The Covered Funds Rule makes, at best, a weak case that venture capital investments promote and protect the safety and soundness of banking entities and the United States financial system by allowing banks to diversify investments.  The weakness of that assertion is clear when one considers that allowing any investments in hedge funds and private equity funds would do the same, and yet that risk taking activity is precisely what Congress prohibited.

The banking industry does not need to take on the additional risks permitted by the Covered Funds Rule to be successful.  U.S. banks have performed well in recent years.  Recent Global League Tables ranking global banks by amount of banking business activity shows that three or four U.S. banks are ranked among the top five banks in the world in almost every table, including the tables for foreign markets banking.[7]  While many factors impact banking success, the relative strength of U.S. banks internationally belies suggestions that the new laws and regulations adopted in the wake of the 2008 financial crisis are hurting the competitiveness of U.S. banks.  We should recognize, rather than undermine, the success of U.S. banks since the 2008 financial crisis and adoption of the Dodd-Frank Act in 2010. 

To date, U.S. banks also have performed well during the Covid-19 pandemic.  But our financial system continues to face many extraordinary risks from the effects of the pandemic.  In the middle of this latest shock to our financial system, we should not be rushing out a final rule that permits greater risk taking by banks.  Rather, we should take stock of the data available to us, and make carefully reasoned, incremental changes that are consistent with the Congressional intent for the Volcker rule.


[1] Dissenting Statement of Commissioner Dan M. Berkovitz Regarding Volcker Covered Funds Proposal (Jan. 30, 2020), available at: https://www.cftc.gov/PressRoom/SpeechesTestimony/berkovitzstatement013020.

[2] 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).

[3] Supra footnote 1.

[4] 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 https://www.wsj.com/articles/SB10000872396390443720204578004980476429190.

[5] Diane Mulcahy, Six Myths About Venture Capitalists, Harvard Business Review (May 2013), available at https://hbr.org/2013/05/six-myths-about-venture-capitalists

[6] Interestingly, while the Proposal acknowledged that venture capital funds are a subset of private equity funds for purposes of Volcker, in the preamble to the Covered Funds Rule, the agencies provide a tortured, speculative analysis of statutory construction trying to explain that Congress “may” have meant to exclude venture capital funds, despite no real evidence to that effect.  To the contrary, three of the four statements from members of Congress in the legislative record cited in the Covered Funds Rule clearly show that they assumed that venture capital funds are private equity funds under the Volcker rule.  See Covered Funds Rule, section IV.C.2.i. 

[7] See GlobalCapital.com, Global League Tables, available at https://www.globalcapital.com/data/all-league-tables.

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