TITLE: French Banking Law // VOLCKER Rule Analysis
Guidelines for the reading of the selected funds.
Weekly analysis of the 08 January 2022: ODEY INVESTMENTS FUNDS PLC – BROOK EUROPEAN FOCUS FUND EUR I
The analysis will be made thanks to EURONEXT FUNDS360. This fund has been selected for its orientation in the European companies and its performance.
1) Overall performance on the 05/01/2022:
Historical performance of the fund: +32,07% over the last 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 Company was incorporated on July 22, 2011 under the laws of Ireland as an open-ended umbrella type investment company with variable capital and limited liability and with segregated liability between Sub-Funds and has been authorised by the Central Bank pursuant to the UCITS Regulations.”
Legal form: IRISH OEIC
Type of investment policy:
« The investment objective of the Sub-Fund is to generate long term capital growth through investing in equities of European companies in developed European equity markets. »
This fund is an Equity Fund, focused on European Equity.
APPLICABLE LAW: Ireland
ISIN : IE00BWZMLG78
Profile of investors:
This fund is open to both retail and institutional investors.
Level of investment in other UCIs:
“The Sub-Fund may invest up to 10%, in aggregate, of its net assets in UCITS and/or alternative investment funds (including exchange traded funds) where such investment is considered by the Investment Manager either as an investment in its own right or as a means of taking an exposure to an asset class consistent with the Sub-Fund’s investment policy.”
This fund shall not invest more than 40% in any leveraged UCI (10%).
« The global exposure relating to FDI must not exceed a Sub-Fund’s total Net Asset Value.”
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 : Odey Asset Management LLP
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 ODEY INVESTMENTS FUNDS PLC – BROOK EUROPEAN FOCUS FUND EUR I
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: “The Shares will be offered and sold outside of the United States to non-U.S. Persons in accordance with Regulation S promulgated under the Securities Act and will be offered and sold for investment purposes only in the United States and to U.S. Persons in reliance upon the exemption from registration provided by Section 4(a)(2) thereof and/or Regulation D promulgated thereunder.”
As mentioned above, the fund is open to both retail and institutional 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, ODEY INVESTMENTS FUNDS PLC – BROOK EUROPEAN FOCUS FUND EUR I
shall not be considered as a Covered Fund, relying on the exclusion from the Investment Company Act of 1940: Foreign Public Fund.
https://www.amf-france.org › Epargne-et-prestataires › OPCVM
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