TITLE: French Banking Law // VOLCKER Rule Analysis
Guidelines for the reading of the selected funds.
Weekly analysis of the 01 January 2022: DODGE & COX WORLDWIDE FUNDS PLC DODGE & COX WORLDWIDE FUNDS PLC – U.S. STOCK FUND EUR ACCUMULATING
The analysis will be made thanks to EURONEXT FUNDS360. This fund has been selected for its orientation in the US companies and its performance.
1) Overall performance on the 23/12/2021:
Historical performance of the fund: +41,10% 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 Company is an open-ended investment company with variable capital organised under the laws of Ireland as a public limited company pursuant to the Companies Acts and the UCITS Regulations.”
Legal form: IRISH OEIC
Type of investment policy:
« The Fund’s primary objective is to provide shareholders with an opportunity for long-term growth of principal and income. (…) The Fund seeks to achieve its objective by investing primarily in a diversified portfolio of U.S. equity securities »
This fund is an Equity Fund, focused on US Equity.
APPLICABLE LAW: Ireland
ISIN : IE00B50MWL50
Profile of investors:
SEE SCHEDULE V
This fund is open to both retail and institutional investors.
Level of investment in other UCIs:
“The CIS are prohibited from investing more than 10% of net assets in other open-ended CIS.”
This fund shall not invest more than 40% in any leveraged UCI (10%).
GLOBAL EXPOSURE:
« Position exposure to the underlying assets of FDI, including embedded FDI in transferable securities, money market instruments or CIS, when combined where relevant with positions resulting from direct investments, may not exceed the investment limits set out in Regulations 70 and 73 of the UCITS Regulations (…) It must be calculated using the commitment approach when appropriate or the maximum potential loss as a result of default by the issuer if more conservative. It must also be calculated by all UCITS, regardless of whether they use VaR for global exposure purposes.”
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 : Dodge & Cox
3) SUMMARY
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”).
Source :
http://www.iflr.com/pdfs/A-users-guide-to-the-Volcker-Rule.pdf
Description of section 3©(1) and 3©(7) of the US investment company act of 1940 :
https://www.strictlybusinesslawblog.com/2017/09/21/3c1-funds-vs-3c7-funds/
After the description of the Volcker Rule, let’s determine if the fund DODGE & COX WORLDWIDE FUNDS PLC DODGE & COX WORLDWIDE FUNDS PLC – U.S. STOCK FUND EUR ACCUMULATING
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.”
https://www.lexology.com/library/detail.aspx?g=9646f9cd-cb61-46c1-8515-cffaaf2fcb77
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 have not been and will not be registered for sale in the United States under the 1933 Act, and the Company has not been and
will not be registered under the 1940 Act. Accordingly, Shares may not be offered, sold, transferred, or delivered, directly or indirectly, in the United States or to any U.S. Person, except in compliance with the securities laws of the United States and of any state thereof in which such offer or sale is made.”
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, DODGE & COX WORLDWIDE FUNDS PLC DODGE & COX WORLDWIDE FUNDS PLC – U.S. STOCK FUND EUR ACCUMULATING
shall not be considered as a Covered Fund, relying on the exclusion from the Investment Company Act of 1940: Foreign Public Fund.
Sources :
https://www.morningstarfunds.ie/ie/funds/snapshot/snapshot.aspx?id=F00000M8KU&tab=4
https://www.journaldunet.fr/patrimoine/guide-des-finances-personnelles/1201825-sicav-definition/
https://epargne.ooreka.fr/astuce/voir/492561/code-isin
https://www.amf-france.org › Epargne-et-prestataires › OPCVM
DISCLAIMER :
« Les présentes analyses réalisées au nom de l’association Financial Shared Brains reste son entière propriété au visa de l’article L. 111-1 du Code de la propriété intellectuelle (CPI). Toute reproduction est soumise à l’autorisation préalable de l’association, sans quoi l’association se réserve le droit de porter plainte. La contrefaçon est un délit civil puni par l’octroi de dommages intérêts, mais c’est également une infraction pénale (article L335-2 du CPI) qui peut entraîner jusqu’à trois ans de prison et 300 000 euros d’amende. »
