Section 23A and Super 23A can create additional complications for lenders in the fund finance market. Intended to protect the stability of financial institutions by restricting transactions with affiliates, Section 23A and Super 23A can limit the relationship between financial institutions, funds, and investors party to a financing transaction. However, if financial institutions are aware of the limitations imposed by Section 23A and Super 23A and properly address covered transaction concerns, they can find ways to complete the desired transaction while also complying with applicable regulations.
Background
With the proliferation of different types of private investment funds—including private equity funds, venture capital funds, and real estate funds—financial institutions have increasingly invested in or provided advisory services to investors in such funds. There has also been a significant increase in lending to these funds by those same financial institutions. Consequently, financial institutions must understand the various affiliate transaction restrictions to avoid unintended violations of applicable rules and regulations. Two such regulations include Section 23A1 (and its implementing regulation, Regulation W) and Super 23A2 (a part of the Volcker Rule).
Section 23A limits a bank’s ability to enter into “covered transactions,” which include making a loan to an affiliate or issuing a guarantee or letter of credit on behalf of an affiliate. Super 23A prohibits banks and their nonbank affiliates from engaging in covered transactions with a covered fund they own, sponsor, manage, or advise, with certain exceptions.
Common Scenarios in which Section 23A and Super 23A Restricts Affiliate Transactions
Covered transactions can arise in a variety of situations. Some common situations include:
- If an affiliate of the lending financial institution is an investor in the fund. If a financial institution advances a loan to a fund unrelated to that financial institution, but an affiliate of the financial institution is...