Client Alerts

Tax Credit Investments Not Subject to Volcker Rule Prohibitions

By: Mary Forbes Lovett

About: Historic & New Markets Tax Credits

Section 619 (commonly referred to as the “Volcker Rule”) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) prohibits proprietary trading by banking entities. Originally, the proposed regulatory implementation of this broad rule appeared to create some unintended consequences as it relates to tax credit investments by banking entities. The final rule, Proprietary Trading and Certain Interests in and Relationships With Hedge Funds and Private Equity Funds (Regulation VV), effective April 1, 2014 (the “final rule”)1,  carves out certain public welfare investments to allow banking entities to continue to make certain tax credit investments as well as to sponsor such funds. The regulations promulgated under Dodd-Frank accomplish this by providing for a “carve-out”—an exception to the prohibition that applies to investments in public welfare funds, which include tax credit investments by banking entities and sponsorship of tax credit investments.

Understanding the carve out for tax credit investments

As part of the implementation of the Volcker Rule, the regulations provide that a “banking entity may not, as principal, directly or indirectly, acquire or retain any ownership interest in or sponsor a covered fund.” To clarify that certain tax credit investments are not subject to this prohibition, the regulators have excluded from the definition of “covered fund” any public welfare investment fund or Small Business Investment Company (“SBIC”).

A banking entity’s investment in tax credits is excluded from the definition of “covered fund” if the investment is in an issuer the business of which is:
  • To make investments that are either:
    • designed to promote the public welfare, including the welfare of low- and moderate-income communities of families (such as providing housing, services or jobs), or
    • qualified rehabilitation expenditures with respect to a qualified rehabilitated building or certified historic structure under federal or State historic tax credit programs; OR
  • A SBIC, qualified by the Small Business Administration (the “SBA”) and such entity’s license shall not have been revoked.

As a general matter, New Market Tax Credits, Low-Income Housing Tax Credits, Historic Tax Credits or Renewable Energy Tax Credits, all satisfy the above criteria for investment by a banking entity. Likewise, investment in a SBIC – a fund that invests in small businesses and devotes 25% of its capital to smaller businesses2 would also be allowed. We believe the final rule makes it clear that the various federal agencies have no intention of prohibiting these types of tax credit investments under the Volcker Rule for banking entities.

For more information, please contact Mary Forbes Lovett at Ulmer & Berne LLP. Our January 2014 client alert discussed the interim final rule permitting retention of banking entity investments in trust preferred securities and trust preferred securities CDOs.

[1]On January 31, 2014, the Office of Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Securities and Exchange Commission published in the Federal Register the final rule implementing Section 619, which is commonly referred to as the Volcker Rule, and which is available at The Volcker Rule contains certain prohibitions and restrictions on the ability of a banking entity and nonbank financial company supervised by the Board to engage in proprietary trading and have certain interests in, or relationships with, a hedge fund or private equity fund. This client alert discusses the exceptions to the prohibition as they relate to tax credit investments by banking entities.

[2] The SBA defines “small businesses” as having tangible net worth of less than $18 million and an average of $6 million in net income over the previous two years at the time of investment.  A business may also be deemed “small” using SBA’s N.A.I.C. code standards. “Smaller businesses” have tangible net worth of less than $6 million and an average of $2 million in net income over the previous two years at the time of investment.