Fed. Rule Could Make Wells Fargo Drop Norwest Equity

A draft rule just approved by the Federal Deposit Insurance Corporation prohibits U.S. banks from owning private equity funds.

Federal regulators unveiled new banking rules that could reportedly prohibit Wells Fargo & Company from holding on to its major private equity arm-Minneapolis-based Norwest Equity Partners.

According to the Star Tribune, the draft “Volcker Rule”-approved Tuesday by the Federal Deposit Insurance Corporation-prohibits U.S. banks from owning private equity funds. However, the 298-page proposed rule has some exemptions that could provide Wells Fargo some options rather than forcing it to spin off Norwest.

Norwest is reportedly a $4.6 billion private equity group that's the largest one in the Twin Cities-and it employs about 40.

The Volcker Rule is part of the Wall Street reform act, and it isn't expected to take effect until July 2012, at which point it might look very different than it does now, according to the Star Tribune. Other federal regulators still have to okay it.

The Minneapolis newspaper reported that the rule limits two things. First, it restricts banks from making certain financial bets for their own gain instead of for their customers-like using bank funds to trade in stocks or other contracts to make money on short-term price movements. Most of the nation's largest banks have already closed these “proprietary trading” desks, according to the Star Tribune. Second, the rule restricts bank involvement with hedge funds or private equity funds.

Wells Fargo told the Star Tribune that “virtually all” of its proprietary trading is done on behalf of customer investments rather than for its own benefit. But the company indicated that it won't comment beyond that until the Volcker Rule is finalized.

Norwest Equity Partners was reportedly founded in the early 1960s and invests in midsize companies. Roundy's Supermarkets, language software company Rosetta Stone, and specialty chemicals distributor Univar are part of its portfolio.

Wells Fargo is based in San Francisco but has major operations in Minnesota and is among the state's 10 largest employers.

To read more in the Star Tribune about the Volcker Rule and what it might mean for Wells Fargo, click here.