Mutual Funds Could Get Swept Up By Volcker Rule, Lobbyist Warns

Dec 14 2012 | 10:45am ET

The Volcker Rule was designed to keep banks out of trouble—trouble called hedge funds, private equity and proprietary trading. But its impact may be greater than that.

The Investment Company Institute warned that mutual funds could be defined as hedge funds under the rule, which is expected to win final approval next year and which strictly limits the amount of money banks are allowed to invest in alternative investments, causing a major, painful and unplanned shakeup in the crucial $13 trillion industry.

If mutual funds are treated as hedge funds, it would all-but-prevent banks with investment units to seed new products and could force mutual fund firms that own small banks to sell them, ICI President Paul Stevens warned.

"This could have the effect of essentially barring banking entities from sponsoring the most highly-regulated type of investment vehicle and, thereby, limiting investment options for investors," Stevens told the House Financial Services Committee. "Chief among out concerns is the fact that the proposal could treat many [mutual funds] as hedge funds—a result that contradicts the plain language that Congress passed."

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