TITLE: French Banking Law // VOLCKER Rule Analysis
Guidelines for the reading of the selected funds.
Weekly analysis of the 13 November 2021: Independance et Expansion SICAV – Europe Small A CAP
The analysis will be made thanks to EURONEXT FUNDS360. This fund has been selected for its orientation in the European small and mid-cap companies and its performance.
1) Overall performance on the 10/11/2021:
Historical performance of the fund: +44,83% since the beginning of the year.
The purpose of this analysis is to determine if this fund shall be or not considered as a leveraged UCI (Undertakings for Collective Investments).
If a fund is considered as a leveraged UCI, an eligible guarantee must be established by the banking entity for any transaction.
2) Fund overview:
Type of UCI: UCITS
“The Fund is registered on the official list of undertakings for collective investment monitored by the Luxembourg Financial Sector Supervisory Authority (the “CSSF”) in accordance with Section I of the Luxembourg Law of 17 December 2010 regarding undertakings for collective investment (the “2010 Law”).”
Legal form: Luxembourg OEIC
Type of investment policy:
« The Europe Sub-Fund invests in shares in small- and mid-cap European companies, selected in particular for their reliable valuation and high returns. »
This fund is an Equity Fund, focused on European small and Mid-cap companies.
APPLICABLE LAW: Luxembourg
Profile of investors:
« The accumulation Share Class intended for investors other than Institutional Investors (“Class A (C)”); the minimum subscription amount is one unit. »
This fund is open to both retail and institutional investors.
Level of investment in other UCIs:
“the overall proportion of assets that the UCITS (or the other UCIs whose acquisition is planned) may invest in units of other UCITS or UCIs in accordance with their management rules or their incorporation documents does not exceed 10%;”
This fund shall not invest more than 40% in any leveraged UCI (10%).
“The overall risk of each sub-fund will be determined according to the commitment approach, in accordance with CSSF Circular 11/512.”
The total fund exposure is regulated by the UCITS Regulation. Therefore, the global exposure of the SICAV shall not exceed 300% of the net asset value.
Asset Manager : Independance et Expansion AM S.à r.l.
To be considered as a leveraged UCI, a fund shall:
- Have a global exposure of more than 3 times the NAV
- Invest in more than 40% in others leveraged UCI
Regarding the investment policy and the characteristics described, this fund shall not be considered as a leveraged UCI.
Therefore, global exposure shall not be above 300% of the total assets.
Therefore, any financial institution that would make an operation with this fund shall not need to set an eligible guarantee.
4) Volcker Rule Analysis
4.1) Introduction to the Volcker Rule
“Section 13 of the Bank Holding Company Act of 1956, as amended (the “Volcker Rule”), introduced in the Dodd-Frank Act, 3 generally “prohibits any banking entity from engaging in proprietary trading or from acquiring or retaining an ownership interest in, sponsoring or having certain relationships with a hedge fund or private equity fund, subject to certain exemptions”
The Volcker rule targets a covered fund, which includes an issuer that would be an investment company, but for the exclusions contained in Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act of 1940, as amended (the “1940 Act”).
Description of section 3©(1) and 3©(7) of the US investment company act of 1940 :
After the description of the Volcker Rule, let’s determine if the fund Independance et Expansion SICAV – Europe Small A CAP
shall be considered as a covered fund or not.
4.2) Exclusions of Volcker Rule
To determine if a fund is a covered fund, let’s look about the exclusions of the law:
- Foreign public funds
- Wholly-owned subsidiaries
- Joint ventures
- Acquisition vehicles
- Securitization related vehicles
- Funds regulated under the 1940 Act
- Other excluded entities
In addition, permitted activities and market-making are allowed:
“The prohibition against proprietary trading does not apply to permitted underwriting activities and market making-related activities. (…) To engage in either permitted activity, a banking entity must comply with three overall conditions:
- the banking entity must maintain an internal compliance program required by Subpart D (and discussed below) to ensure that the banking entity complies with the conditions permitting the activity;
- the compensation arrangements of people involved in these activities must not be designed to reward or incentivize prohibited proprietary trading; and
- the banking entity must be licensed or registered to engage in the permitted activity.
In addition, the following specific conditions apply.
- Underwriting: “Underwriting activities are permitted only if the trading desk’s underwriting position is related to a “distribution” of securities for which the banking entity is acting as underwriter.”
- Market-making: “Market making-related activities are permitted only if the relevant trading desk routinely stands ready to purchase and sell one or more types of financial instruments related to its financial exposure and is willing and available to quote, purchase or sell those types of financial instruments for its own account in commercially reasonable amounts and throughout market cycles on a basis appropriate for the liquidity, maturity and depth of the market for the relevant types of financial instruments”
- Permitted risk-mitigating hedging activities: “The prohibition on proprietary trading does not apply to certain risk-mitigating hedging activities.”
The Volcker 2.0 “(…) add four new exclusions to the definition of “covered fund” — credit funds, venture capital funds, family wealth management vehicles and customer facilitation vehicles — thereby exempting them from the scope of the Volcker Rule.”
4.3) Volcker Rule analysis
Before checking any exclusion or exemption, we must determine is the fund can be sold or not to any U.S. person: “Shares in the Fund have not been registered in accordance with the legal provisions of the United States of America regarding transferable securities, and therefore cannot be offered in the United States, or in any of the territories, possessions or regions subject to the jurisdiction of the United States.”
As mentioned above, the fund is open to retail investors.
Based on the extract from the prospectus, we can determine that:
– The fund is a Non-US issuer
– It is sold outside of the US
– the subscription is not permitted for US investors
– the fund be authorized to offer and sell ownership interests, and such interests be offered and sold, through one or more public offerings (See Type of Eligible investors).
We could conclude that this fund shall not be considered as a Covered Fund as described in the 1940 Investment Company Act.
While other exclusions may apply, Independance et Expansion SICAV – Europe Small A CAP shall not be considered as a Covered Fund, relying on the exclusion from the Investment Company Act of 1940: Foreign Public Fund.
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