1025-00007 · Quorum Insurance Holdings · Regulatory & Compliance

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MEMORANDUM

PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT

TO: Douglas Carmichael, Partner, Calderwood & Harkness LLP Francesca Morano, Partner, Calderwood & Harkness LLP

FROM: Yuki Nakamura, Associate, Calderwood & Harkness LLP

DATE: July 22, 2022

RE: Volcker Rule Considerations — Quorum Receivables Funding 2022-1 LLC, $500,000,000 Insurance Premium Finance Asset-Backed Notes

Matter No.: 1025-00007

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I. Executive Summary

This memorandum analyzes the implications of the Volcker Rule — Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-203), codified as Section 13 of the Bank Holding Company Act of 1956 (12 U.S.C. § 1851), and the implementing regulations adopted jointly by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and the Commodity Futures Trading Commission at 12 C.F.R. Part 248 and the related parallel agency rules — for the proposed issuance of $500,000,000 in aggregate principal amount of asset-backed notes by Quorum Receivables Funding 2022-1 LLC ("QRF 2022-1" or the "Issuer"), backed by a pool of insurance premium finance receivables originated by Quorum Premium Finance LLC ("QPF").

This analysis is driven by two primary questions:

1. Whether QRF 2022-1 constitutes a "covered fund" under the Volcker Rule, which would restrict banking entity investment in, and sponsorship of, the Issuer; and

2. Whether the transaction qualifies for any available exclusion from the covered fund definition, most notably the "loan securitization" exclusion set forth in the implementing regulations as amended in 2020.

Summary Conclusion. Based on the analysis set forth herein, it is our view that QRF 2022-1 should qualify for the loan securitization exclusion from the covered fund definition under the Volcker Rule, and should independently fall outside the covered fund definition by virtue of its reliance on Rule 3a-7 under the Investment Company Act of 1940 (the "1940 Act") rather than Section 3(c)(1) or Section 3(c)(7) of the 1940 Act. Accordingly, banking entity investors should be able to acquire and hold the Class A Notes ($375,000,000 aggregate principal amount, preliminary ratings of AAA(cr) from Brindoval Ratings Inc. and Aaa(p) from Pinnacle Rating Services LLC), the Class B Notes ($75,000,000 aggregate principal amount, preliminary ratings of A(cr) and A1(p)), and the Class C Notes ($35,000,000 aggregate principal amount, preliminary ratings of BBB(cr) and Baa2(p)) without encountering Volcker Rule impediments with respect to the covered fund provisions, subject to the structural conditions and recommendations described herein.

The significance of this analysis cannot be overstated from a marketability perspective. Many of the prospective investors in the ABS tranches — and particularly in the senior Class A Notes — are banking entities or affiliates thereof, including commercial banks, savings associations, and their broker-dealer and asset management affiliates. Volcker Rule compliance is a threshold marketability requirement for the offering, and we anticipate that the Offering Memorandum will need to address these considerations directly to facilitate distribution of the Notes to the banking entity investor base.

We note that this analysis is being prepared for Calderwood & Harkness's use in its capacity as counsel to the Issuer and the Sponsor. Ridgeline Capital Markets LLC, serving as structuring agent and sole lead bookrunner (Julian Weatherstone, Managing Director, and Rebecca Tran, Director), and its counsel Calloway & Brandt LLP (Harrison Collier, Partner, and Megan O'Shaughnessy, Counsel) will be independently advising their respective clients on Volcker Rule compliance matters. Our conclusions should not be relied upon by any party other than our clients, and each investor must make its own independent determination regarding its compliance with the Volcker Rule and applicable law.

II. Background on the Transaction

A. Parties and Structure

The proposed securitization involves a multi-tier structure consistent with customary practice for asset-backed securities offerings in the insurance premium finance sector. The principal parties and their roles are summarized below.

Sponsor/Parent. Quorum Insurance Holdings Corp. ("QIH" or the "Sponsor") is a Delaware corporation that is publicly traded on the New York Stock Exchange under the ticker symbol QIHC, with its principal executive offices located at 400 Atlantic Street, Suite 2200, Stamford, Connecticut 06901. QIH is a diversified insurance services and financial technology company that, through its subsidiaries, engages in insurance premium financing, program administration, and related activities. QIH's senior management team relevant to this transaction includes Marcus Devereaux, Chief Executive Officer; Priya Raghavan, Chief Financial Officer; Nolan Whitford, General Counsel; and Sandra Ling-Hwang, Treasurer. QIH is not a banking entity, an insured depository institution, a bank holding company, or an affiliate of any such entity. This fact is significant to the Volcker Rule analysis, as discussed below.

Originator/Seller/Servicer. Quorum Premium Finance LLC ("QPF") is a Delaware limited liability company and a wholly owned subsidiary of QIH. QPF is the entity that originates and services insurance premium finance loans to commercial policyholders across all 50 states. QPF maintains a total receivables portfolio of approximately $2.1 billion as of the most recently available reporting date, making it one of the larger participants in the U.S. commercial insurance premium finance market. QPF will serve as the originator and seller of the receivables to be securitized and will act as the servicer of the receivables pool following the closing of the transaction.

Depositor/Intermediate SPV. Quorum Receivables Holding LLC ("QRH") is a Delaware limited liability company organized as a bankruptcy-remote special purpose entity. QPF is the sole member of QRH. QRH is governed by a limited liability company agreement that includes customary separateness covenants, limitations on activities, and requirements for an independent manager. Eleanor M. Vasquez, a principal of Fortbridge Corporate Services LLC, serves as the independent manager of QRH. QRH functions as the depositor in the securitization structure, acquiring the receivables from QPF and transferring them to the Issuer.

Issuer. Quorum Receivables Funding 2022-1 LLC ("QRF 2022-1" or the "Issuer") is a Delaware limited liability company organized as a bankruptcy-remote special purpose entity. QRH is the sole member of QRF 2022-1. Timothy R. Callan, also a principal of Fortbridge Corporate Services LLC, serves as the independent manager of QRF 2022-1. The Issuer's sole purpose is to acquire and hold insurance premium finance receivables transferred to it by QRH and to issue notes backed by such receivables. The Issuer has no employees, no operating history independent of the securitization, and no authority to engage in any business activity other than as described in its limited liability company agreement and the transaction documents.

Indenture Trustee/Paying Agent. Calvoneth Trust Company, N.A. is a national banking association that will serve as the indenture trustee and paying agent under the Indenture pursuant to which the Notes will be issued. Calvoneth Trust's Corporate Trust Office is located at 600 Travis Street, Suite 5800, Houston, Texas 77002. Gerald K. Fontaine, Senior Trust Officer, is the primary relationship manager for this engagement. As discussed in Section VII.C below, Calvoneth Trust is a banking entity by virtue of its status as a national banking association; however, its role in the transaction is purely fiduciary and administrative and does not raise Volcker Rule concerns.

Back-Up Servicer/Liquidity Provider. Northvane Bank, N.A. will serve as back-up servicer and will provide a $25,000,000 liquidity facility to the Issuer. Like Calvoneth Trust, Northvane Bank is a national banking association and therefore a banking entity. Its participation in the transaction is addressed in Section VII.C below.

Offering Format. The Notes will be offered and sold in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Rule 144A and Regulation S. The Notes will not be registered with the Securities and Exchange Commission.

B. Capital Structure

The Notes will be issued in three classes, with overcollateralization providing additional credit enhancement. The capital structure is summarized in the table below:

The preliminary ratings have been assigned by Brindoval Ratings Inc. ("Brindoval") and Pinnacle Rating Services LLC ("Pinnacle"), each of which is a nationally recognized statistical rating organization ("NRSRO") registered with the SEC. The overcollateralization amount of $15,000,000 (3.0% of the total capital structure) will be retained by the Sponsor through QRH. This retained interest serves both as credit enhancement for the rated Notes and as a component of the Sponsor's compliance with the credit risk retention requirements under Regulation RR (17 C.F.R. Part 246), as discussed in a separate memorandum being prepared by Carlos Espinoza.

Total credit enhancement for the Class A Notes is 25.0%, consisting of subordination from the Class B Notes (15.0%), the Class C Notes (7.0%), and overcollateralization (3.0%). Total credit enhancement for the Class B Notes is 10.0%, consisting of subordination from the Class C Notes and overcollateralization. Total credit enhancement for the Class C Notes is 3.0%, consisting solely of overcollateralization.

C. Underlying Assets

The assets backing the Notes consist of insurance premium finance receivables originated by QPF in the ordinary course of its business. Insurance premium finance receivables arise when a commercial policyholder elects to finance, rather than pay upfront, the premiums due on one or more insurance policies. QPF advances the premium to the insurance carrier or agent on behalf of the policyholder and receives from the policyholder a promissory note or premium finance agreement evidencing the obligation to repay the financed amount, plus interest, in installments over the term of the financing. Each receivable is secured by an assignment of the policyholder's right to receive a refund of unearned premiums from the insurance carrier in the event of policy cancellation, providing a built-in collateral mechanism that is unique to the insurance premium finance asset class.

The initial receivables pool, as of the statistical cut-off date of June 30, 2022, has the following characteristics:

• Aggregate pool balance: $612,000,000

• Number of receivables: Approximately 82,400

• Average individual loan balance: Approximately $7,427

• Weighted average annual percentage rate (APR): 7.85%

• Weighted average original term: 9.2 months

• Weighted average remaining term: 5.7 months

• Historical three-year average net loss rate (2019–2021): 0.42%

• 60+ day delinquency rate at cut-off: 0.87%

All receivables in the initial pool are secured by assignments of unearned premium refund rights with respect to the financed insurance policies, providing a recovery mechanism in the event of borrower default. The insurance premium finance asset class has historically exhibited low credit losses, reflecting both the secured nature of the receivables and the strong incentive for commercial policyholders to maintain their insurance coverage. The 0.42% three-year average net loss rate and the 0.87% delinquency rate at cut-off are consistent with industry norms for commercial insurance premium finance portfolios.

The transaction features a 24-month revolving period from the closing date, during which collections on the receivables pool may be used to acquire additional eligible receivables from QPF, subject to eligibility criteria and concentration limits. Following the revolving period, the transaction will enter a 12-month amortization period during which principal collections will be applied to reduce the outstanding balance of the Notes in accordance with the sequential payment waterfall. The legal final maturity of all classes of Notes is 42 months from the closing date. The sequential payment waterfall provides that, during the amortization period, all principal collections are applied first to the Class A Notes until paid in full, then to the Class B Notes until paid in full, and then to the Class C Notes until paid in full.

III. Overview of the Volcker Rule

A. Statutory Framework

Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-203, enacted July 21, 2010) added Section 13 to the Bank Holding Company Act of 1956, codified at 12 U.S.C. § 1851. The provision, colloquially known as the "Volcker Rule" after former Federal Reserve Chairman Paul Volcker, who advocated for its adoption, became effective on July 21, 2012. The final implementing regulations were jointly adopted by five federal agencies — the Office of the Comptroller of the Currency ("OCC"), the Board of Governors of the Federal Reserve System (the "Federal Reserve"), the Federal Deposit Insurance Corporation ("FDIC"), the Securities and Exchange Commission ("SEC"), and the Commodity Futures Trading Commission ("CFTC") — and became effective on April 1, 2014, following an extended notice-and-comment rulemaking process. The compliance deadline was phased in through a series of conformance period extensions, with full compliance required by July 21, 2017 for most banking entities.

The Volcker Rule imposes two principal prohibitions on "banking entities":

1. Proprietary Trading Prohibition. A banking entity is generally prohibited from engaging in proprietary trading — defined as engaging as principal for the trading account of the banking entity in any purchase or sale of one or more financial instruments. The proprietary trading prohibition is subject to a number of exemptions, including exemptions for market-making activities, underwriting activities, hedging, and trading in U.S. government obligations and certain other government securities.

2. Covered Fund Prohibition. A banking entity is generally prohibited from acquiring or retaining an "ownership interest" in, serving as sponsor to, or having certain covered transactions with, a "covered fund." This prohibition is the primary focus of the present memorandum.

The term "banking entity" is defined broadly under the Volcker Rule to include: (i) any insured depository institution (as defined in Section 3 of the Federal Deposit Insurance Act); (ii) any company that controls an insured depository institution; (iii) any company that is treated as a bank holding company for purposes of Section 8 of the International Banking Act of 1978; and (iv) any affiliate or subsidiary of any of the foregoing. This expansive definition captures the largest financial institutions in the United States, including commercial banks, savings associations, bank holding companies, financial holding companies, their broker-dealer subsidiaries, their asset management affiliates, and foreign banking organizations operating in the United States.

The relevance of the Volcker Rule to the ABS market, and to this transaction in particular, stems from the fact that many institutional investors in asset-backed securities are banking entities or affiliates of banking entities. If QRF 2022-1 were determined to be a "covered fund" under the Volcker Rule, banking entities would generally be prohibited from acquiring or retaining an "ownership interest" in the Issuer, which would dramatically limit the pool of eligible investors and materially impair the marketability of the Notes. It is therefore essential to establish, with a high degree of confidence, that QRF 2022-1 either is not a covered fund or that the Notes are not "ownership interests" — or, ideally, both.

B. Covered Fund Definition

The term "covered fund" is the linchpin of the Volcker Rule's fund-related prohibitions. Under the implementing regulations, a "covered fund" includes, among other things, any entity that would be an "investment company" as defined in Section 3(a) of the Investment Company Act of 1940 (the "1940 Act") but for the exclusion provided by Section 3(c)(1) or Section 3(c)(7) of the 1940 Act. Section 3(c)(1) excludes from the definition of investment company any issuer whose outstanding securities are beneficially owned by not more than 100 persons. Section 3(c)(7) excludes any issuer whose outstanding securities are owned exclusively by "qualified purchasers" as defined in the 1940 Act. These are the two exclusions most commonly relied upon by private investment funds (hedge funds and private equity funds), and the Volcker Rule was designed, in significant part, to capture such vehicles.

The covered fund definition also includes certain commodity pools and certain foreign funds that meet criteria analogous to those described above, although those categories are not relevant to the present analysis.

The key analytical question for any ABS issuer is whether the issuer relies on Section 3(c)(1) or Section 3(c)(7) of the 1940 Act for its exclusion from investment company registration. If the issuer instead relies on a different exclusion — such as Section 3(c)(5) (which excludes certain entities primarily engaged in purchasing or otherwise acquiring certain financial assets) or the exemption provided by Rule 3a-7 under the 1940 Act (which provides an exemption for issuers of "structured financings," including asset-backed securities meeting certain conditions) — the issuer would not fall within the covered fund definition at all. This is because the covered fund definition is triggered specifically and exclusively by reliance on Section 3(c)(1) or Section 3(c)(7), and not by reliance on other exclusions or exemptions from 1940 Act registration.

Moreover, even if an issuer could theoretically be characterized as relying on Section 3(c)(1) or Section 3(c)(7), the implementing regulations provide several specific exclusions from the covered fund definition for certain types of entities that, while they may technically rely on those 1940 Act sections, are not the types of private investment funds that the Volcker Rule was intended to restrict. The most relevant of these exclusions for ABS issuers is the "loan securitization" exclusion, discussed in detail in Section V below.

C. 2020 Regulatory Amendments

In June 2020, the five implementing agencies finalized significant amendments to the Volcker Rule regulations, commonly referred to as the "2020 Amendments" or the "Volcker Rule 2.0" amendments (85 Fed. Reg. 46422 (July 31, 2020)). The 2020 Amendments represented the culmination of a multi-year review process undertaken at the direction of Congress (pursuant to the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, Pub. L. 115-174) and the agencies' own regulatory simplification initiatives.

The 2020 Amendments significantly revised and simplified the covered fund provisions of the Volcker Rule implementing regulations. Among the most notable changes relevant to the present analysis:

• Broadened Exclusions from the Covered Fund Definition. The 2020 Amendments expanded the scope of several existing exclusions from the covered fund definition and added entirely new exclusions, including exclusions for qualifying asset-backed commercial paper conduits, qualifying covered bonds, and other specified vehicle types.

• Clarified and Expanded the Loan Securitization Exclusion. The 2020 Amendments broadened the definition of "loan" for purposes of the loan securitization exclusion to include "any loan, lease, extension of credit, or secured or unsecured receivable," thereby resolving prior uncertainty about whether certain types of receivables (including insurance premium finance receivables) qualified as "loans" for purposes of the exclusion.

• Simplified Compliance Requirements. The 2020 Amendments streamlined certain documentation and compliance requirements, reducing the operational burden on banking entities seeking to invest in securitization vehicles.

The analysis set forth in this memorandum reflects the Volcker Rule implementing regulations as amended through the 2020 Amendments. All regulatory citations herein are to the Federal Reserve's regulations at 12 C.F.R. Part 248, with the understanding that the OCC (12 C.F.R. Part 44), FDIC (12 C.F.R. Part 351), SEC (17 C.F.R. Part 255), and CFTC (17 C.F.R. Part 75) adopted parallel provisions.

IV. Covered Fund Analysis — QRF 2022-1

A. Investment Company Act Exclusion Relied Upon

The threshold question in determining whether QRF 2022-1 is a "covered fund" under the Volcker Rule is identifying the basis upon which QRF 2022-1 relies for its exclusion from the definition of "investment company" under the 1940 Act. As noted above, the covered fund definition captures only those entities that rely on Section 3(c)(1) or Section 3(c)(7) of the 1940 Act. If QRF 2022-1 relies on a different exclusion or exemption, it falls entirely outside the covered fund definition.

QRF 2022-1 is structured as a bankruptcy-remote special purpose entity whose sole activity is acquiring and holding insurance premium finance receivables transferred to it by QRH and issuing notes secured by those receivables and the related collections. QRF 2022-1 has no employees, engages in no active business operations, and exercises no investment discretion. Its activities are limited to the passive holding of the receivables, the collection of payments thereon (through QPF as servicer), and the application of such collections to payments on the Notes in accordance with the payment waterfall set forth in the Indenture.

Rule 3a-7. QRF 2022-1 is expected to rely primarily on the exemption from the definition of "investment company" provided by Rule 3a-7 promulgated under the 1940 Act (17 C.F.R. § 270.3a-7). Rule 3a-7 provides an exemption for any issuer that:

(a) is engaged in the business of purchasing, or otherwise acquiring, and holding "eligible assets" (defined to include receivables, loans, and other financial assets);

(b) issues fixed-income securities (or other securities with specified characteristics) in one or more classes or series, at least one of which is rated in one of the four highest rating categories by at least one NRSRO;

(d) appoints an independent trustee or agent to make certain determinations regarding the enforcement of rights in the underlying assets on behalf of holders of the issued securities; and

(e) satisfies certain other conditions regarding the character and quality of the eligible assets and the rights of the security holders.

QRF 2022-1 satisfies each of these conditions. The Notes carry preliminary ratings from two NRSROs — Brindoval Ratings Inc. (AAA(cr), A(cr), BBB(cr)) and Pinnacle Rating Services LLC (Aaa(p), A1(p), Baa2(p)) — with the Class A Notes and Class B Notes each rated in the highest or second-highest rating category and all rated classes rated in one of the four highest rating categories. The receivables consist of self-liquidating financial assets (insurance premium finance loans) that are eligible assets under Rule 3a-7. QRF 2022-1's activities are strictly limited to holding receivables and issuing notes, with no authority to engage in any other business. Calvoneth Trust Company, N.A. will serve as the independent indenture trustee. These characteristics firmly support reliance on Rule 3a-7.

Revolving Period Considerations. One potential complication merits discussion. Rule 3a-7, by its terms, contemplates an issuer that holds a "fixed pool" of eligible assets. QRF 2022-1 features a 24-month revolving period during which collections on the receivables may be reinvested in additional eligible receivables originated by QPF, subject to strict eligibility criteria and concentration limits (single obligor concentration ≤ 0.75% of pool balance, single state concentration ≤ 20% of pool balance, single insurance carrier concentration ≤ 15% of pool balance). This revolving feature raises the question of whether QRF 2022-1's pool can be characterized as "fixed" within the meaning of Rule 3a-7.

However, SEC staff guidance and well-established market practice have accepted revolving pool structures under Rule 3a-7, provided that the pool is subject to defined eligibility criteria and concentration limits that constrain the character and quality of the assets that may be added during the revolving period. See, e.g., Staff of the Division of Investment Management, SEC, Protecting Investors: A Half Century of Investment Company Regulation (1992) at 118–19 (discussing revolving trust structures); see also numerous no-action letters and market practice in credit card receivables, auto loan, and premium finance securitizations. The eligibility criteria applicable to the QRF 2022-1 receivables pool — including requirements that all receivables be originated by QPF in the ordinary course of business, denominated in U.S. dollars, secured by unearned premium refund rights, with an original term of 12 months or less, owed by U.S. commercial policyholder obligors, not in default at the time of acquisition, and compliant with all applicable usury and licensing laws — are robust and consistent with the type of criteria that the SEC staff and market participants have accepted as sufficient to support Rule 3a-7 reliance in the context of a revolving pool.

Section 3(c)(5)(A). As an alternative or additional basis, QRF 2022-1 may also be able to rely on the exclusion from the definition of "investment company" provided by Section 3(c)(5)(A) of the 1940 Act, which excludes any entity that is "primarily engaged in … purchasing or otherwise acquiring notes, drafts, acceptances, open accounts receivable, and other obligations representing part or all of the sales price of merchandise, insurance, and services." Insurance premium finance receivables — which represent the obligation of commercial policyholders to repay amounts advanced to finance insurance premiums — may fall within the scope of this exclusion. While the applicability of Section 3(c)(5)(A) to insurance premium finance receivables has not been definitively resolved by SEC rulemaking or judicial interpretation, it provides a supplemental basis for exclusion from 1940 Act registration.

Key Point. Neither Rule 3a-7 nor Section 3(c)(5) is a basis for the covered fund definition under the Volcker Rule. The covered fund definition is triggered only by reliance on Section 3(c)(1) or Section 3(c)(7). Because QRF 2022-1 relies on Rule 3a-7 (and potentially Section 3(c)(5)) — and does not rely on Section 3(c)(1) or Section 3(c)(7) — QRF 2022-1 does not fall within the covered fund definition. This is the primary basis for our conclusion that QRF 2022-1 is not a covered fund.

Recommendation. We strongly recommend that the transaction documents, including the Limited Liability Company Agreement of QRF 2022-1, the Indenture, and the Offering Memorandum, include an express statement that QRF 2022-1 does not rely on Section 3(c)(1) or Section 3(c)(7) of the 1940 Act for its exclusion from investment company registration, and instead relies on Rule 3a-7 under the 1940 Act (and, as applicable, Section 3(c)(5) of the 1940 Act). This affirmative statement will provide banking entity investors with certainty regarding the Volcker Rule treatment of their investment and is consistent with standard market practice in ABS offerings.

B. Even If QRF 2022-1 Were a Covered Fund — Available Exclusions

Even in the unlikely event that QRF 2022-1 were determined to rely (or to be deemed to rely) on Section 3(c)(1) or Section 3(c)(7) of the 1940 Act — for example, if a banking entity's compliance function were to take a conservative position on the Rule 3a-7 analysis — several exclusions from the covered fund definition would independently be available. The most significant of these is the loan securitization exclusion, which is analyzed in detail in Section V below.

The availability of the loan securitization exclusion as an independent, alternative basis for exclusion from the covered fund definition provides an additional layer of comfort for banking entity investors and their compliance personnel. It ensures that, regardless of the particular 1940 Act exclusion upon which QRF 2022-1 relies, the Volcker Rule's covered fund restrictions do not apply to the Issuer.

V. The Loan Securitization Exclusion

A. Regulatory Basis

The implementing regulations, as amended by the 2020 Amendments, provide a specific exclusion from the covered fund definition for "loan securitizations." Under this exclusion, an issuing entity is not a covered fund if it is established for the purpose of holding only "loans" and certain other permissible assets and issuing asset-backed securities supported by such assets. The exclusion is codified at 12 C.F.R. § 248.10(c)(8) in the Federal Reserve's implementing regulations, with parallel provisions in the rules of the OCC (12 C.F.R. § 44.10(c)(8)), the FDIC (12 C.F.R. § 351.10(c)(8)), the SEC (17 C.F.R. § 255.10(c)(8)), and the CFTC (17 C.F.R. § 75.10(c)(8)).

The loan securitization exclusion was included in the original implementing regulations adopted in 2014 and was significantly expanded and clarified by the 2020 Amendments. The purpose of the exclusion is to ensure that traditional loan securitization vehicles — which are financing mechanisms for pools of loans and receivables rather than investment vehicles managed for profit — are not inadvertently swept into the covered fund definition and subjected to restrictions that were designed for hedge funds and private equity funds.

B. Definition of "Loan"

The definition of "loan" is critical to the application of the loan securitization exclusion. Under the 2020 Amendments, the term "loan" is defined expansively to include "any loan, lease, extension of credit, or secured or unsecured receivable." This broad formulation was adopted by the agencies in direct response to comments from market participants and industry groups who argued that the original, narrower definition of "loan" created unnecessary uncertainty for securitizations of certain types of receivables.

Insurance premium finance receivables of the type originated by QPF are extensions of credit to commercial policyholders for the purpose of financing insurance premiums. In a typical transaction, QPF advances the premium amount to the insurance carrier or its agent on behalf of the policyholder and enters into a premium finance agreement (or receives a promissory note) under which the policyholder is obligated to repay the advanced amount, plus interest, in periodic installments. Each receivable is secured by the policyholder's assignment to QPF of the right to receive a refund of unearned premiums from the insurance carrier in the event of policy cancellation — a feature that provides built-in collateral and enhances recovery rates in the event of borrower default.

The QPF receivables that will comprise the QRF 2022-1 pool are short-term loans to commercial policyholders, with a weighted average original term of 9.2 months and a weighted average APR of 7.85%. They are extensions of credit secured by unearned premium refund rights. As such, they squarely fit within the definition of "loan" for purposes of the Volcker Rule's loan securitization exclusion, whether characterized as "loans," "extensions of credit," or "secured receivables."

It is equally important to confirm that the receivables are not any of the asset types that are excluded from the loan definition. The receivables are not securities, derivatives, or commodity forward contracts. They are bilateral credit arrangements between QPF and its commercial policyholder customers, documented by premium finance agreements that create debtor-creditor relationships. There is no secondary trading market for individual premium finance receivables, and they do not possess the characteristics of securities or derivative instruments.

C. Conditions for the Loan Securitization Exclusion

To qualify for the loan securitization exclusion, the issuing entity must satisfy several conditions prescribed by the implementing regulations. We analyze each of these conditions as applied to QRF 2022-1 below.

Condition 1: Purpose of the Issuing Entity. The issuing entity must be established for the purpose of holding loans and certain permissible assets. QRF 2022-1 was organized as a Delaware limited liability company for the sole purpose of acquiring and holding insurance premium finance receivables and issuing notes backed by such receivables. Its limited liability company agreement restricts its activities to this purpose, and it has no authority to engage in any other business. This condition is satisfied.

Condition 2: Permissible Assets. The issuing entity may hold only loans and certain other categories of permissible assets. The regulations enumerate the following categories of permissible assets:

(i) The loans themselves — here, the insurance premium finance receivables constituting the pool;

(ii) Rights or assets directly arising from the loans — including QPF's security interests in the unearned premium refund rights assigned by the policyholders, as well as any late fees, prepayment charges, or other amounts payable under the premium finance agreements;

(iii) Servicing assets — including rights under the Servicing Agreement between QRF 2022-1 and QPF;

(iv) Cash and cash equivalents — including amounts on deposit in the collection account, the payment account, the reserve account, and the liquidity reserve account, each of which is maintained at Calvoneth Trust Company, N.A.;

(v) Interest rate or currency derivatives — if entered into solely for hedging purposes. No interest rate or currency derivatives are currently contemplated for QRF 2022-1; and

(vi) Certain other specified asset types — including certain contractual rights relating to the servicing of the loans and rights under credit support or liquidity arrangements.

QRF 2022-1's assets consist exclusively of: (a) the insurance premium finance receivables; (b) the related security interests in unearned premium refund rights; (c) collections on the receivables held in trust accounts; (d) rights under the Servicing Agreement with QPF; and (e) rights under the $25,000,000 liquidity facility provided by Northvane Bank, N.A. All of these assets fall within the categories of permissible assets enumerated in the regulations. QRF 2022-1 does not hold, and is not permitted by its governing documents to hold, any assets outside of these permissible categories. This condition is satisfied.

Condition 3: Prohibition on Impermissible Assets. The issuing entity may not hold assets that are "securities" (other than ABS interests issued by the entity itself or cash equivalents qualifying as permitted investments), "derivatives" (other than hedging derivatives), or "commodity forward contracts" as non-de minimis holdings. As discussed above, QRF 2022-1's assets consist solely of receivables, related rights, cash, and contractual rights under the servicing and liquidity arrangements — none of which are securities, derivatives, or commodity forward contracts. This condition is satisfied.

Condition 4: Characteristics of ABS Interests. The ABS interests (Notes) issued by QRF 2022-1 may not provide holders with certain features characteristic of equity securities, including:

(a) voting rights beyond limited protective voting rights on matters directly affecting the interests of noteholders;

(b) the right to participate in the profits or gains of the issuing entity beyond the receipt of stated interest and principal;

(c) the ability to select, remove, or replace the investment manager, general partner, managing member, or equivalent controlling person of the issuing entity; or

(d) the right to receive the underlying assets of the issuing entity upon its dissolution, other than in satisfaction of outstanding debt obligations.

The Class A, B, and C Notes are fixed-income debt instruments with SOFR-based floating rate coupons, sequential amortization, stated maturities, and a priority payment waterfall. Noteholders are entitled to receive interest at the applicable coupon rate and repayment of principal in accordance with the payment waterfall. They do not participate in the profits or residual value of QRF 2022-1 beyond their stated interest and principal — any residual amounts flow to QRH as the holder of the equity/retained interest. The Indenture provides limited voting rights to noteholders solely for protective purposes, such as consenting to amendments of the payment waterfall or voting on the acceleration of the Notes upon the occurrence of events of default. Noteholders do not have the right to select, appoint, remove, or replace the servicer (QPF), the administrator (QIH), or the independent managers (Mr. Callan and Ms. Vasquez) in the ordinary course — the right to direct the trustee to replace the servicer arises only upon the occurrence of a servicer event of default, which is a protective right consistent with standard debt documentation and is expressly permitted under the regulations. This condition is satisfied.

D. Application to QRF 2022-1

Based on the foregoing analysis, QRF 2022-1 satisfies all conditions for the loan securitization exclusion from the covered fund definition under the Volcker Rule:

1. The receivables pool consists entirely of insurance premium finance loans, each of which is a "loan" under the expanded definition adopted in the 2020 Amendments.

2. QRF 2022-1 holds no securities, derivatives, or commodity forward contracts outside the permitted categories of assets.

3. The Notes are structured as debt instruments with no equity-like features — no profit participation, no ability to select or remove managers, and limited protective voting rights only.

4. The revolving period feature does not disqualify the vehicle from the loan securitization exclusion. The 2020 Amendments do not require a static pool for purposes of this exclusion, and revolving pools of loans are commonplace in securitization structures that rely on the loan securitization exclusion, including credit card receivables master trusts, auto loan warehouse facilities, and other revolving receivables vehicles.

Conclusion. QRF 2022-1 satisfies all conditions for the loan securitization exclusion from the covered fund definition under 12 C.F.R. § 248.10(c)(8). Even if QRF 2022-1 were deemed to rely on Section 3(c)(1) or Section 3(c)(7) of the 1940 Act (which, as discussed in Section IV.A, it does not), the loan securitization exclusion would independently exclude QRF 2022-1 from the covered fund definition.

VI. Ownership Interest Analysis

A. Definition of "Ownership Interest"

Even if an entity is a covered fund under the Volcker Rule, the Rule's prohibitions are triggered only when a banking entity acquires or retains an "ownership interest" in the covered fund. The term "ownership interest" is defined in the implementing regulations (12 C.F.R. § 248.10(d)(6)) to include any equity, partnership, or other similar interest in the covered fund, regardless of how the interest is designated or labeled. The regulations identify several specific indicia of an ownership interest, including:

(a) the right to participate in the selection or removal of a general partner, managing member, investment manager, investment adviser, or commodity trading advisor of the covered fund (excluding the right to participate in such selection or removal as a result of a default, event of default, or acceleration event);

(b) the right to receive a share of the income, gains, or profits of the covered fund;

(c) the right to receive the underlying assets of the covered fund after all other interests have been redeemed or repaid (i.e., a residual or equity interest);

(d) the right to receive all or a portion of excess spread (i.e., the positive difference between the income earned on the assets of the covered fund and the amounts owed to the holders of other outstanding interests);

(e) the right to receive a variable rate of return based on the performance of the covered fund's assets, rather than a fixed interest rate; or

(f) any synthetic right to obtain any of the foregoing.

A debt instrument that does not carry any of the foregoing rights or characteristics is NOT an ownership interest under the Volcker Rule. This distinction between debt and equity is fundamental to the Volcker Rule's operation in the structured finance context and provides an important independent basis for banking entity participation in ABS transactions.

B. Application to the Notes

The Class A Notes, Class B Notes, and Class C Notes issued by QRF 2022-1 are debt instruments with the following characteristics:

• Stated maturity: 42 months (legal final) from the closing date.

• Interest rate: SOFR-based floating rate coupon at the applicable spread (SOFR + 125 bps for Class A, SOFR + 210 bps for Class B, SOFR + 375 bps for Class C).

• Payment waterfall: Principal and interest paid in accordance with a sequential priority waterfall, with Class A Notes receiving priority of payment over Class B and Class C Notes.

• No profit participation: Noteholders are entitled to receive their stated interest and principal, but do not participate in the profits, gains, or residual value of QRF 2022-1.

• No right to select or remove managers: Noteholders do not have the right to participate in the selection or removal of the independent managers (Timothy R. Callan and Eleanor M. Vasquez, appointed by Fortbridge Corporate Services LLC), the servicer (QPF), or the administrator (QIH). The limited right of noteholders to direct the indenture trustee to replace the servicer upon the occurrence of a servicer event of default is a protective right that is expressly excluded from the definition of ownership interest under the implementing regulations.

• No right to underlying assets: Noteholders are not entitled to receive the underlying receivables upon dissolution of QRF 2022-1. Rather, upon the maturity, acceleration, or winding down of the vehicle, assets are liquidated and proceeds are distributed in accordance with the payment waterfall — noteholders receive only their outstanding principal and accrued interest, and any residual amounts flow to QRH as the equity holder.

• Limited voting rights: The Indenture (execution draft v4, dated October 12, 2022) provides limited voting rights to noteholders solely for protective purposes. These include the right to consent to certain amendments to the Indenture or the payment waterfall that would adversely affect noteholder interests, and the right to direct the indenture trustee to accelerate the Notes upon the occurrence and continuance of events of default. These limited protective voting rights are consistent with standard indenture provisions for asset-backed debt securities and do not constitute the type of management participation or control rights that would characterize an ownership interest.

Conclusion. The Class A, B, and C Notes are not "ownership interests" under the Volcker Rule. They are debt instruments that provide holders with the right to receive fixed (SOFR-based floating rate) interest and scheduled principal payments, without any right to participate in profits, select or remove managers, receive residual assets, or exercise control over the Issuer's operations. This conclusion provides an independent basis — separate from and in addition to the conclusion that QRF 2022-1 is not a covered fund — for banking entities to acquire and hold the Notes without restriction under the Volcker Rule's covered fund provisions.

C. Retained Interest / Overcollateralization

In contrast to the Notes, the $15,000,000 retained interest (overcollateralization, 3.0% of the total capital structure) constitutes an "ownership interest" under the Volcker Rule. The retained interest represents the residual or equity interest in QRF 2022-1 — it is entitled to receive excess spread and residual cash flows after all obligations on the Notes have been satisfied. As such, it exhibits the classic indicia of an ownership interest, including the right to receive a share of the income and gains of the vehicle and the right to receive the underlying assets (or their value) after all other interests have been redeemed or repaid.

This retained interest will be held by QRH (the depositor), and indirectly by QPF (the originator and sole member of QRH) and QIH (the sponsor and sole member of QPF). Critically, QIH is not a banking entity. QIH is an insurance and financial technology company; it is not an insured depository institution, it does not control an insured depository institution, it is not treated as a bank holding company, and it is not an affiliate or subsidiary of any such entity. Accordingly, QIH's retention of the equity interest in QRF 2022-1 does not implicate the Volcker Rule's prohibition on banking entity ownership of covered fund interests.

The retention of the equity interest by QIH also serves the separate regulatory objective of credit risk retention under Section 941 of the Dodd-Frank Act and the implementing regulations at 17 C.F.R. Part 246 (Regulation RR). The risk retention requirements applicable to this transaction are being addressed in a separate memorandum dated August 1, 2022, prepared by Carlos Espinoza of this firm. We note that the retained interest structure has been designed to achieve compliance with both the Volcker Rule (by ensuring that the equity interest is not held by a banking entity) and the risk retention requirements (by ensuring that QIH, as sponsor, retains an economic interest in the credit risk of the securitized assets in the required amount and form).

VII. Permissible Activities for Banking Entity Investors

A. Acquiring Notes as Non-Ownership Interests in a Non-Covered Fund

The primary pathway for banking entity investment in the Notes is straightforward and does not require reliance on any Volcker Rule exemption. As established in the preceding sections:

1. QRF 2022-1 is not a covered fund under the Volcker Rule, because (a) it relies on Rule 3a-7 of the 1940 Act (not Section 3(c)(1) or 3(c)(7)) for its exclusion from investment company registration, and (b) independently, it qualifies for the loan securitization exclusion from the covered fund definition.

2. The Notes are not ownership interests under the Volcker Rule, because they are debt instruments that do not carry profit participation rights, management control rights, residual rights, or other indicia of equity ownership.

Because QRF 2022-1 is not a covered fund, and because the Notes are not ownership interests, the Volcker Rule's covered fund provisions simply do not apply to banking entity investments in the Notes. Banking entities may freely acquire and hold the Notes — whether through their investment portfolios, asset management businesses, or other capacities — without any Volcker Rule impediment arising from the covered fund provisions. This is the expected pathway for banking entity investors in the Class A, B, and C Notes, and it is the conclusion that will be reflected in the Offering Memorandum.

B. Underwriting and Market-Making Exemptions (if Applicable)

For completeness, we note that even if the Notes were ownership interests in a covered fund (which they are not), the Volcker Rule provides exemptions from the covered fund prohibitions for certain underwriting and market-making activities conducted by banking entities. Specifically, a banking entity may acquire or retain an ownership interest in a covered fund in connection with bona fide underwriting activities, provided that:

(i) the banking entity's underwriting position is designed not to exceed the reasonably expected near-term demand of investors ("RENTD");

(ii) the banking entity has established an internal compliance program that includes reasonably designed written policies and procedures, internal controls, and independent testing;

(iii) the underwriting activities are designed to generate revenues primarily from fees, commissions, or spreads and not from appreciation in the value of the covered fund interests; and

(iv) the banking entity complies with applicable capital, reporting, and other requirements.

Ridgeline Capital Markets LLC is serving as the sole placement agent and lead bookrunner for the offering. We have not yet confirmed whether Ridgeline is, or is affiliated with, a banking entity for Volcker Rule purposes. If Ridgeline is or is affiliated with a banking entity, it would be able to rely on the underwriting exemption for its placement activities in the offering, subject to compliance with the conditions described above. Ridgeline's counsel, Calloway & Brandt LLP, will independently advise Ridgeline on these matters.

Similarly, the Volcker Rule provides an exemption for market-making activities, which could permit a banking entity to acquire and hold covered fund interests in connection with providing ongoing secondary market liquidity in the Notes following the initial offering. This exemption is subject to conditions analogous to those applicable to the underwriting exemption.

These exemptions are noted for the sake of completeness. They are not expected to be the primary basis for Ridgeline's or any investor's participation in the offering, given the strong conclusions that QRF 2022-1 is not a covered fund and that the Notes are not ownership interests.

C. Proprietary Trading Considerations

The Volcker Rule's proprietary trading prohibition restricts banking entities from engaging in short-term trading of securities and other financial instruments for their own trading account. This prohibition is separate from, and in addition to, the covered fund provisions discussed above. It is important to note that the proprietary trading prohibition may apply even when the covered fund provisions do not.

However, ABS notes held by a banking entity for investment purposes — rather than for short-term trading — are generally not subject to the proprietary trading ban. The implementing regulations define "trading account" by reference to short-term trading intent, and securities acquired and held for longer-term investment purposes are excluded from the trading account. The Notes, which have a legal final maturity of 42 months from the closing date and are designed to be held as investment-grade, yield-bearing assets in banking entity investment portfolios, are the type of securities that banking entities typically acquire on an investment (rather than trading) basis. Accordingly, the acquisition of the Notes by banking entities for their investment portfolios is not expected to implicate the proprietary trading ban.

Furthermore, the implementing regulations provide exemptions from the proprietary trading prohibition for bona fide market-making and underwriting activities, which would be available to Ridgeline and any other banking entity engaged in distributing the Notes to investors or making a secondary market in the Notes following the initial offering.

Finally, we note the participation of two banking entities in the transaction in administrative and fiduciary capacities. Calvoneth Trust Company, N.A., as indenture trustee and paying agent, is a national banking association and therefore a banking entity under the Volcker Rule. Its role is purely fiduciary — it holds the receivables and collections on behalf of the noteholders, distributes payments in accordance with the waterfall, and performs other ministerial and trustee functions as directed by the Indenture. Calvoneth Trust does not acquire any ownership interest in QRF 2022-1 and does not engage in any proprietary trading in the Notes. Similarly, Northvane Bank, N.A., as back-up servicer and provider of the $25,000,000 liquidity facility, is a national banking association. Its liquidity facility is a lending arrangement (an extension of credit to QRF 2022-1), not an investment in the Notes or an ownership interest in the Issuer. Neither Calvoneth Trust's nor Northvane Bank's participation raises Volcker Rule concerns.

VIII. Offering Memorandum Disclosure Recommendations

The Preliminary Offering Memorandum (currently v3, dated October 12, 2022) should include a dedicated section addressing Volcker Rule considerations for the benefit of prospective investors, particularly banking entity investors. We recommend that this section include the following elements:

1. Non-Covered Fund Statement. A clear, affirmative statement that QRF 2022-1 is not a "covered fund" as defined in the regulations implementing Section 13 of the Bank Holding Company Act of 1956 (the Volcker Rule).

2. 1940 Act Reliance Specification. A statement specifying that QRF 2022-1 relies on the exemption from the definition of "investment company" provided by Rule 3a-7 under the Investment Company Act of 1940 (and, as applicable, the exclusion provided by Section 3(c)(5) of the 1940 Act). The disclosure should further state that QRF 2022-1 does not rely on Section 3(c)(1) or Section 3(c)(7) of the 1940 Act for its exclusion from investment company registration.

3. Non-Ownership Interest Statement. A statement that the Notes constitute debt instruments and do not constitute "ownership interests" as defined in the Volcker Rule implementing regulations, and that the acquisition and holding of the Notes by banking entities does not implicate the Volcker Rule's prohibitions on the ownership of covered fund interests.

4. Loan Securitization Exclusion Statement. A statement that the loan securitization exclusion from the covered fund definition, as set forth in 12 C.F.R. § 248.10(c)(8) and the parallel provisions of the other agencies' implementing regulations, is available as an independent basis for the exclusion of QRF 2022-1 from the covered fund definition.

5. Investor Responsibility Risk Factor. A standard risk factor, customary in 144A offerings of asset-backed securities, to the effect that each prospective investor that is, or is affiliated with, a banking entity should make its own determination regarding its Volcker Rule compliance status and should consult with its own legal counsel regarding the applicability of the Volcker Rule to its particular circumstances. The risk factor should further state that none of QRF 2022-1, QIH, QPF, Calderwood & Harkness LLP, Ridgeline Capital Markets LLC, or Calloway & Brandt LLP makes any representation or warranty regarding any investor's compliance with the Volcker Rule, and that no assurance can be given that any particular investor's acquisition or holding of the Notes is permissible under the Volcker Rule or any other applicable law.

6. Regulatory Change Caveat. A statement noting that the Volcker Rule and its implementing regulations are complex and have been subject to significant rulemaking activity, regulatory guidance, and evolving interpretations since their initial adoption. The disclosure should note that the Volcker Rule remains subject to further rulemaking, guidance, and interpretation by the five implementing agencies, and that banking entity investors should monitor regulatory developments that may affect the analysis described in the Offering Memorandum.

We recommend coordinating the drafting of the Volcker Rule disclosure section with Calloway & Brandt LLP (Harrison Collier, Partner, and Megan O'Shaughnessy, Counsel), which is serving as underwriter's counsel, to ensure consistency between the Offering Memorandum disclosure and any representations or undertakings provided by Ridgeline Capital Markets LLC in the placement agreement or other transaction documents.

IX. Structural Recommendations

Based on the foregoing analysis, we recommend the following structural measures to ensure that QRF 2022-1's Volcker Rule position is robust and well-documented:

1. LLC Agreement Representation. The Limited Liability Company Agreement of QRF 2022-1 should include an express representation and covenant that QRF 2022-1 does not rely, and will not rely, on Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act of 1940 for its exclusion from the definition of "investment company" under the 1940 Act. This representation should be a condition to the issuance of the Notes and should be included among the ongoing covenants of the Issuer.

2. Indenture Review — Voting Rights. The Indenture should be carefully reviewed to confirm that the voting rights granted to noteholders are limited to protective provisions and do not confer any right to select, remove, or replace the servicer, manager, administrator, or any other person exercising control over QRF 2022-1, except in the context of a servicer event of default. The right of noteholders to direct the indenture trustee to terminate the servicer and appoint a successor upon the occurrence and continuance of a servicer event of default is a protective right that is expressly permitted under the Volcker Rule regulations and is consistent with the treatment of the Notes as debt (rather than ownership interests). Any broader voting or consent rights — for example, a right to remove and replace the servicer absent a default — could undermine the non-ownership-interest characterization and should be avoided.

3. Servicing Fee Confirmation. The servicing fee payable to QPF under the Servicing Agreement (currently set at 1.00% per annum on the outstanding pool balance) should be reviewed to confirm that it is reasonable and consistent with market terms for comparable premium finance receivables servicing arrangements. A servicing fee that is significantly above or below market rates could raise questions about whether the fee arrangement embeds a disguised profit participation or other equity-like feature. The 1.00% per annum servicing fee appears to be within the range of market norms for insurance premium finance receivables servicing, but this should be confirmed against comparable benchmarks.

4. Asset Characterization Confirmation. All assets held by QRF 2022-1 should be confirmed to be either "loans" (as defined in the Volcker Rule implementing regulations) or other permissible assets within the meaning of the loan securitization exclusion. In particular, the $25,000,000 liquidity facility provided by Northvane Bank, N.A. should be confirmed to be structured as a lending arrangement (i.e., a revolving credit facility or similar arrangement) rather than a security. The liquidity facility, as currently structured, provides for advances to QRF 2022-1 secured by the receivables and collections, with repayment in accordance with the payment waterfall. This is a lending arrangement, not a security, and its presence in the QRF 2022-1 asset pool does not implicate the restrictions on holding securities under the loan securitization exclusion.

5. Eligibility Criteria Consistency. The eligible receivables criteria set forth in the Receivables Purchase Agreement and the Indenture should be reviewed to ensure that all receivables acquired by QRF 2022-1 during the revolving period satisfy the definition of "loan" under the expanded Volcker Rule definition. The existing eligibility criteria — which require that each receivable be originated by QPF in the ordinary course of business, denominated in U.S. dollars, secured by unearned premium refund rights, with an original term of 12 months or less, owed by a U.S. commercial policyholder obligor, not in default a

MEMORANDUM
PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT
TO: Douglas Carmichael, Partner, Calderwood & Harkness LLP Francesca Morano, Partner, Calderwood & Harkness LLP
FROM: Yuki Nakamura, Associate, Calderwood & Harkness LLP
DATE: July 22, 2022
RE: Volcker Rule Considerations — Quorum Receivables Funding 2022-1 LLC, $500,000,000 Insurance Premium Finance Asset-Backed Notes
Matter No.: 1025-00007
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I. Executive Summary
This memorandum analyzes the implications of the Volcker Rule — Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-203), codified as Section 13 of the Bank Holding Company Act of 1956 (12 U.S.C. § 1851), and the implementing regulations adopted jointly by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and the Commodity Futures Trading Commission at 12 C.F.R. Part 248 and the related parallel agency rules — for the proposed issuance of $500,000,000 in aggregate principal amount of asset-backed notes by Quorum Receivables Funding 2022-1 LLC ("QRF 2022-1" or the "Issuer"), backed by a pool of insurance premium finance receivables originated by Quorum Premium Finance LLC ("QPF").
This analysis is driven by two primary questions:
1. Whether QRF 2022-1 constitutes a "covered fund" under the Volcker Rule, which would restrict banking entity investment in, and sponsorship of, the Issuer; and
2. Whether the transaction qualifies for any available exclusion from the covered fund definition, most notably the "loan securitization" exclusion set forth in the implementing regulations as amended in 2020.
Summary Conclusion. Based on the analysis set forth herein, it is our view that QRF 2022-1 should qualify for the loan securitization exclusion from the covered fund definition under the Volcker Rule, and should independently fall outside the covered fund definition by virtue of its reliance on Rule 3a-7 under the Investment Company Act of 1940 (the "1940 Act") rather than Section 3(c)(1) or Section 3(c)(7) of the 1940 Act. Accordingly, banking entity investors should be able to acquire and hold the Class A Notes ($375,000,000 aggregate principal amount, preliminary ratings of AAA(cr) from Brindoval Ratings Inc. and Aaa(p) from Pinnacle Rating Services LLC), the Class B Notes ($75,000,000 aggregate principal amount, preliminary ratings of A(cr) and A1(p)), and the Class C Notes ($35,000,000 aggregate principal amount, preliminary ratings of BBB(cr) and Baa2(p)) without encountering Volcker Rule impediments with respect to the covered fund provisions, subject to the structural conditions and recommendations described herein.
The significance of this analysis cannot be overstated from a marketability perspective. Many of the prospective investors in the ABS tranches — and particularly in the senior Class A Notes — are banking entities or affiliates thereof, including commercial banks, savings associations, and their broker-dealer and asset management affiliates. Volcker Rule compliance is a threshold marketability requirement for the offering, and we anticipate that the Offering Memorandum will need to address these considerations directly to facilitate distribution of the Notes to the banking entity investor base.
We note that this analysis is being prepared for Calderwood & Harkness's use in its capacity as counsel to the Issuer and the Sponsor. Ridgeline Capital Markets LLC, serving as structuring agent and sole lead bookrunner (Julian Weatherstone, Managing Director, and Rebecca Tran, Director), and its counsel Calloway & Brandt LLP (Harrison Collier, Partner, and Megan O'Shaughnessy, Counsel) will be independently advising their respective clients on Volcker Rule compliance matters. Our conclusions should not be relied upon by any party other than our clients, and each investor must make its own independent determination regarding its compliance with the Volcker Rule and applicable law.
II. Background on the Transaction
A. Parties and Structure
The proposed securitization involves a multi-tier structure consistent with customary practice for asset-backed securities offerings in the insurance premium finance sector. The principal parties and their roles are summarized below.
Sponsor/Parent. Quorum Insurance Holdings Corp. ("QIH" or the "Sponsor") is a Delaware corporation that is publicly traded on the New York Stock Exchange under the ticker symbol QIHC, with its principal executive offices located at 400 Atlantic Street, Suite 2200, Stamford, Connecticut 06901. QIH is a diversified insurance services and financial technology company that, through its subsidiaries, engages in insurance premium financing, program administration, and related activities. QIH's senior management team relevant to this transaction includes Marcus Devereaux, Chief Executive Officer; Priya Raghavan, Chief Financial Officer; Nolan Whitford, General Counsel; and Sandra Ling-Hwang, Treasurer. QIH is not a banking entity, an insured depository institution, a bank holding company, or an affiliate of any such entity. This fact is significant to the Volcker Rule analysis, as discussed below.
Originator/Seller/Servicer. Quorum Premium Finance LLC ("QPF") is a Delaware limited liability company and a wholly owned subsidiary of QIH. QPF is the entity that originates and services insurance premium finance loans to commercial policyholders across all 50 states. QPF maintains a total receivables portfolio of approximately $2.1 billion as of the most recently available reporting date, making it one of the larger participants in the U.S. commercial insurance premium finance market. QPF will serve as the originator and seller of the receivables to be securitized and will act as the servicer of the receivables pool following the closing of the transaction.
Depositor/Intermediate SPV. Quorum Receivables Holding LLC ("QRH") is a Delaware limited liability company organized as a bankruptcy-remote special purpose entity. QPF is the sole member of QRH. QRH is governed by a limited liability company agreement that includes customary separateness covenants, limitations on activities, and requirements for an independent manager. Eleanor M. Vasquez, a principal of Fortbridge Corporate Services LLC, serves as the independent manager of QRH. QRH functions as the depositor in the securitization structure, acquiring the receivables from QPF and transferring them to the Issuer.
Issuer. Quorum Receivables Funding 2022-1 LLC ("QRF 2022-1" or the "Issuer") is a Delaware limited liability company organized as a bankruptcy-remote special purpose entity. QRH is the sole member of QRF 2022-1. Timothy R. Callan, also a principal of Fortbridge Corporate Services LLC, serves as the independent manager of QRF 2022-1. The Issuer's sole purpose is to acquire and hold insurance premium finance receivables transferred to it by QRH and to issue notes backed by such receivables. The Issuer has no employees, no operating history independent of the securitization, and no authority to engage in any business activity other than as described in its limited liability company agreement and the transaction documents.
Indenture Trustee/Paying Agent. Calvoneth Trust Company, N.A. is a national banking association that will serve as the indenture trustee and paying agent under the Indenture pursuant to which the Notes will be issued. Calvoneth Trust's Corporate Trust Office is located at 600 Travis Street, Suite 5800, Houston, Texas 77002. Gerald K. Fontaine, Senior Trust Officer, is the primary relationship manager for this engagement. As discussed in Section VII.C below, Calvoneth Trust is a banking entity by virtue of its status as a national banking association; however, its role in the transaction is purely fiduciary and administrative and does not raise Volcker Rule concerns.
Back-Up Servicer/Liquidity Provider. Northvane Bank, N.A. will serve as back-up servicer and will provide a $25,000,000 liquidity facility to the Issuer. Like Calvoneth Trust, Northvane Bank is a national banking association and therefore a banking entity. Its participation in the transaction is addressed in Section VII.C below.
Offering Format. The Notes will be offered and sold in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Rule 144A and Regulation S. The Notes will not be registered with the Securities and Exchange Commission.
B. Capital Structure
The Notes will be issued in three classes, with overcollateralization providing additional credit enhancement. The capital structure is summarized in the table below:
The preliminary ratings have been assigned by Brindoval Ratings Inc. ("Brindoval") and Pinnacle Rating Services LLC ("Pinnacle"), each of which is a nationally recognized statistical rating organization ("NRSRO") registered with the SEC. The overcollateralization amount of $15,000,000 (3.0% of the total capital structure) will be retained by the Sponsor through QRH. This retained interest serves both as credit enhancement for the rated Notes and as a component of the Sponsor's compliance with the credit risk retention requirements under Regulation RR (17 C.F.R. Part 246), as discussed in a separate memorandum being prepared by Carlos Espinoza.
Total credit enhancement for the Class A Notes is 25.0%, consisting of subordination from the Class B Notes (15.0%), the Class C Notes (7.0%), and overcollateralization (3.0%). Total credit enhancement for the Class B Notes is 10.0%, consisting of subordination from the Class C Notes and overcollateralization. Total credit enhancement for the Class C Notes is 3.0%, consisting solely of overcollateralization.
C. Underlying Assets
The assets backing the Notes consist of insurance premium finance receivables originated by QPF in the ordinary course of its business. Insurance premium finance receivables arise when a commercial policyholder elects to finance, rather than pay upfront, the premiums due on one or more insurance policies. QPF advances the premium to the insurance carrier or agent on behalf of the policyholder and receives from the policyholder a promissory note or premium finance agreement evidencing the obligation to repay the financed amount, plus interest, in installments over the term of the financing. Each receivable is secured by an assignment of the policyholder's right to receive a refund of unearned premiums from the insurance carrier in the event of policy cancellation, providing a built-in collateral mechanism that is unique to the insurance premium finance asset class.
The initial receivables pool, as of the statistical cut-off date of June 30, 2022, has the following characteristics:
• Aggregate pool balance: $612,000,000
• Number of receivables: Approximately 82,400
• Average individual loan balance: Approximately $7,427
• Weighted average annual percentage rate (APR): 7.85%
• Weighted average original term: 9.2 months
• Weighted average remaining term: 5.7 months
• Historical three-year average net loss rate (2019–2021): 0.42%
• 60+ day delinquency rate at cut-off: 0.87%
All receivables in the initial pool are secured by assignments of unearned premium refund rights with respect to the financed insurance policies, providing a recovery mechanism in the event of borrower default. The insurance premium finance asset class has historically exhibited low credit losses, reflecting both the secured nature of the receivables and the strong incentive for commercial policyholders to maintain their insurance coverage. The 0.42% three-year average net loss rate and the 0.87% delinquency rate at cut-off are consistent with industry norms for commercial insurance premium finance portfolios.
The transaction features a 24-month revolving period from the closing date, during which collections on the receivables pool may be used to acquire additional eligible receivables from QPF, subject to eligibility criteria and concentration limits. Following the revolving period, the transaction will enter a 12-month amortization period during which principal collections will be applied to reduce the outstanding balance of the Notes in accordance with the sequential payment waterfall. The legal final maturity of all classes of Notes is 42 months from the closing date. The sequential payment waterfall provides that, during the amortization period, all principal collections are applied first to the Class A Notes until paid in full, then to the Class B Notes until paid in full, and then to the Class C Notes until paid in full.
III. Overview of the Volcker Rule
A. Statutory Framework
Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-203, enacted July 21, 2010) added Section 13 to the Bank Holding Company Act of 1956, codified at 12 U.S.C. § 1851. The provision, colloquially known as the "Volcker Rule" after former Federal Reserve Chairman Paul Volcker, who advocated for its adoption, became effective on July 21, 2012. The final implementing regulations were jointly adopted by five federal agencies — the Office of the Comptroller of the Currency ("OCC"), the Board of Governors of the Federal Reserve System (the "Federal Reserve"), the Federal Deposit Insurance Corporation ("FDIC"), the Securities and Exchange Commission ("SEC"), and the Commodity Futures Trading Commission ("CFTC") — and became effective on April 1, 2014, following an extended notice-and-comment rulemaking process. The compliance deadline was phased in through a series of conformance period extensions, with full compliance required by July 21, 2017 for most banking entities.
The Volcker Rule imposes two principal prohibitions on "banking entities":
1. Proprietary Trading Prohibition. A banking entity is generally prohibited from engaging in proprietary trading — defined as engaging as principal for the trading account of the banking entity in any purchase or sale of one or more financial instruments. The proprietary trading prohibition is subject to a number of exemptions, including exemptions for market-making activities, underwriting activities, hedging, and trading in U.S. government obligations and certain other government securities.
2. Covered Fund Prohibition. A banking entity is generally prohibited from acquiring or retaining an "ownership interest" in, serving as sponsor to, or having certain covered transactions with, a "covered fund." This prohibition is the primary focus of the present memorandum.
The term "banking entity" is defined broadly under the Volcker Rule to include: (i) any insured depository institution (as defined in Section 3 of the Federal Deposit Insurance Act); (ii) any company that controls an insured depository institution; (iii) any company that is treated as a bank holding company for purposes of Section 8 of the International Banking Act of 1978; and (iv) any affiliate or subsidiary of any of the foregoing. This expansive definition captures the largest financial institutions in the United States, including commercial banks, savings associations, bank holding companies, financial holding companies, their broker-dealer subsidiaries, their asset management affiliates, and foreign banking organizations operating in the United States.
The relevance of the Volcker Rule to the ABS market, and to this transaction in particular, stems from the fact that many institutional investors in asset-backed securities are banking entities or affiliates of banking entities. If QRF 2022-1 were determined to be a "covered fund" under the Volcker Rule, banking entities would generally be prohibited from acquiring or retaining an "ownership interest" in the Issuer, which would dramatically limit the pool of eligible investors and materially impair the marketability of the Notes. It is therefore essential to establish, with a high degree of confidence, that QRF 2022-1 either is not a covered fund or that the Notes are not "ownership interests" — or, ideally, both.
B. Covered Fund Definition
The term "covered fund" is the linchpin of the Volcker Rule's fund-related prohibitions. Under the implementing regulations, a "covered fund" includes, among other things, any entity that would be an "investment company" as defined in Section 3(a) of the Investment Company Act of 1940 (the "1940 Act") but for the exclusion provided by Section 3(c)(1) or Section 3(c)(7) of the 1940 Act. Section 3(c)(1) excludes from the definition of investment company any issuer whose outstanding securities are beneficially owned by not more than 100 persons. Section 3(c)(7) excludes any issuer whose outstanding securities are owned exclusively by "qualified purchasers" as defined in the 1940 Act. These are the two exclusions most commonly relied upon by private investment funds (hedge funds and private equity funds), and the Volcker Rule was designed, in significant part, to capture such vehicles.
The covered fund definition also includes certain commodity pools and certain foreign funds that meet criteria analogous to those described above, although those categories are not relevant to the present analysis.
The key analytical question for any ABS issuer is whether the issuer relies on Section 3(c)(1) or Section 3(c)(7) of the 1940 Act for its exclusion from investment company registration. If the issuer instead relies on a different exclusion — such as Section 3(c)(5) (which excludes certain entities primarily engaged in purchasing or otherwise acquiring certain financial assets) or the exemption provided by Rule 3a-7 under the 1940 Act (which provides an exemption for issuers of "structured financings," including asset-backed securities meeting certain conditions) — the issuer would not fall within the covered fund definition at all. This is because the covered fund definition is triggered specifically and exclusively by reliance on Section 3(c)(1) or Section 3(c)(7), and not by reliance on other exclusions or exemptions from 1940 Act registration.
Moreover, even if an issuer could theoretically be characterized as relying on Section 3(c)(1) or Section 3(c)(7), the implementing regulations provide several specific exclusions from the covered fund definition for certain types of entities that, while they may technically rely on those 1940 Act sections, are not the types of private investment funds that the Volcker Rule was intended to restrict. The most relevant of these exclusions for ABS issuers is the "loan securitization" exclusion, discussed in detail in Section V below.
C. 2020 Regulatory Amendments
In June 2020, the five implementing agencies finalized significant amendments to the Volcker Rule regulations, commonly referred to as the "2020 Amendments" or the "Volcker Rule 2.0" amendments (85 Fed. Reg. 46422 (July 31, 2020)). The 2020 Amendments represented the culmination of a multi-year review process undertaken at the direction of Congress (pursuant to the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, Pub. L. 115-174) and the agencies' own regulatory simplification initiatives.
The 2020 Amendments significantly revised and simplified the covered fund provisions of the Volcker Rule implementing regulations. Among the most notable changes relevant to the present analysis:
• Broadened Exclusions from the Covered Fund Definition. The 2020 Amendments expanded the scope of several existing exclusions from the covered fund definition and added entirely new exclusions, including exclusions for qualifying asset-backed commercial paper conduits, qualifying covered bonds, and other specified vehicle types.
• Clarified and Expanded the Loan Securitization Exclusion. The 2020 Amendments broadened the definition of "loan" for purposes of the loan securitization exclusion to include "any loan, lease, extension of credit, or secured or unsecured receivable," thereby resolving prior uncertainty about whether certain types of receivables (including insurance premium finance receivables) qualified as "loans" for purposes of the exclusion.
• Simplified Compliance Requirements. The 2020 Amendments streamlined certain documentation and compliance requirements, reducing the operational burden on banking entities seeking to invest in securitization vehicles.
The analysis set forth in this memorandum reflects the Volcker Rule implementing regulations as amended through the 2020 Amendments. All regulatory citations herein are to the Federal Reserve's regulations at 12 C.F.R. Part 248, with the understanding that the OCC (12 C.F.R. Part 44), FDIC (12 C.F.R. Part 351), SEC (17 C.F.R. Part 255), and CFTC (17 C.F.R. Part 75) adopted parallel provisions.
IV. Covered Fund Analysis — QRF 2022-1
A. Investment Company Act Exclusion Relied Upon
The threshold question in determining whether QRF 2022-1 is a "covered fund" under the Volcker Rule is identifying the basis upon which QRF 2022-1 relies for its exclusion from the definition of "investment company" under the 1940 Act. As noted above, the covered fund definition captures only those entities that rely on Section 3(c)(1) or Section 3(c)(7) of the 1940 Act. If QRF 2022-1 relies on a different exclusion or exemption, it falls entirely outside the covered fund definition.
QRF 2022-1 is structured as a bankruptcy-remote special purpose entity whose sole activity is acquiring and holding insurance premium finance receivables transferred to it by QRH and issuing notes secured by those receivables and the related collections. QRF 2022-1 has no employees, engages in no active business operations, and exercises no investment discretion. Its activities are limited to the passive holding of the receivables, the collection of payments thereon (through QPF as servicer), and the application of such collections to payments on the Notes in accordance with the payment waterfall set forth in the Indenture.
Rule 3a-7. QRF 2022-1 is expected to rely primarily on the exemption from the definition of "investment company" provided by Rule 3a-7 promulgated under the 1940 Act (17 C.F.R. § 270.3a-7). Rule 3a-7 provides an exemption for any issuer that:
(a) is engaged in the business of purchasing, or otherwise acquiring, and holding "eligible assets" (defined to include receivables, loans, and other financial assets);
(b) issues fixed-income securities (or other securities with specified characteristics) in one or more classes or series, at least one of which is rated in one of the four highest rating categories by at least one NRSRO;
(c) does not engage in any business other than the holding of eligible assets and the issuance of securities;
(d) appoints an independent trustee or agent to make certain determinations regarding the enforcement of rights in the underlying assets on behalf of holders of the issued securities; and
(e) satisfies certain other conditions regarding the character and quality of the eligible assets and the rights of the security holders.
QRF 2022-1 satisfies each of these conditions. The Notes carry preliminary ratings from two NRSROs — Brindoval Ratings Inc. (AAA(cr), A(cr), BBB(cr)) and Pinnacle Rating Services LLC (Aaa(p), A1(p), Baa2(p)) — with the Class A Notes and Class B Notes each rated in the highest or second-highest rating category and all rated classes rated in one of the four highest rating categories. The receivables consist of self-liquidating financial assets (insurance premium finance loans) that are eligible assets under Rule 3a-7. QRF 2022-1's activities are strictly limited to holding receivables and issuing notes, with no authority to engage in any other business. Calvoneth Trust Company, N.A. will serve as the independent indenture trustee. These characteristics firmly support reliance on Rule 3a-7.
Revolving Period Considerations. One potential complication merits discussion. Rule 3a-7, by its terms, contemplates an issuer that holds a "fixed pool" of eligible assets. QRF 2022-1 features a 24-month revolving period during which collections on the receivables may be reinvested in additional eligible receivables originated by QPF, subject to strict eligibility criteria and concentration limits (single obligor concentration ≤ 0.75% of pool balance, single state concentration ≤ 20% of pool balance, single insurance carrier concentration ≤ 15% of pool balance). This revolving feature raises the question of whether QRF 2022-1's pool can be characterized as "fixed" within the meaning of Rule 3a-7.
However, SEC staff guidance and well-established market practice have accepted revolving pool structures under Rule 3a-7, provided that the pool is subject to defined eligibility criteria and concentration limits that constrain the character and quality of the assets that may be added during the revolving period. See, e.g., Staff of the Division of Investment Management, SEC, Protecting Investors: A Half Century of Investment Company Regulation (1992) at 118–19 (discussing revolving trust structures); see also numerous no-action letters and market practice in credit card receivables, auto loan, and premium finance securitizations. The eligibility criteria applicable to the QRF 2022-1 receivables pool — including requirements that all receivables be originated by QPF in the ordinary course of business, denominated in U.S. dollars, secured by unearned premium refund rights, with an original term of 12 months or less, owed by U.S. commercial policyholder obligors, not in default at the time of acquisition, and compliant with all applicable usury and licensing laws — are robust and consistent with the type of criteria that the SEC staff and market participants have accepted as sufficient to support Rule 3a-7 reliance in the context of a revolving pool.
Section 3(c)(5)(A). As an alternative or additional basis, QRF 2022-1 may also be able to rely on the exclusion from the definition of "investment company" provided by Section 3(c)(5)(A) of the 1940 Act, which excludes any entity that is "primarily engaged in … purchasing or otherwise acquiring notes, drafts, acceptances, open accounts receivable, and other obligations representing part or all of the sales price of merchandise, insurance, and services." Insurance premium finance receivables — which represent the obligation of commercial policyholders to repay amounts advanced to finance insurance premiums — may fall within the scope of this exclusion. While the applicability of Section 3(c)(5)(A) to insurance premium finance receivables has not been definitively resolved by SEC rulemaking or judicial interpretation, it provides a supplemental basis for exclusion from 1940 Act registration.
Key Point. Neither Rule 3a-7 nor Section 3(c)(5) is a basis for the covered fund definition under the Volcker Rule. The covered fund definition is triggered only by reliance on Section 3(c)(1) or Section 3(c)(7). Because QRF 2022-1 relies on Rule 3a-7 (and potentially Section 3(c)(5)) — and does not rely on Section 3(c)(1) or Section 3(c)(7) — QRF 2022-1 does not fall within the covered fund definition. This is the primary basis for our conclusion that QRF 2022-1 is not a covered fund.
Recommendation. We strongly recommend that the transaction documents, including the Limited Liability Company Agreement of QRF 2022-1, the Indenture, and the Offering Memorandum, include an express statement that QRF 2022-1 does not rely on Section 3(c)(1) or Section 3(c)(7) of the 1940 Act for its exclusion from investment company registration, and instead relies on Rule 3a-7 under the 1940 Act (and, as applicable, Section 3(c)(5) of the 1940 Act). This affirmative statement will provide banking entity investors with certainty regarding the Volcker Rule treatment of their investment and is consistent with standard market practice in ABS offerings.
B. Even If QRF 2022-1 Were a Covered Fund — Available Exclusions
Even in the unlikely event that QRF 2022-1 were determined to rely (or to be deemed to rely) on Section 3(c)(1) or Section 3(c)(7) of the 1940 Act — for example, if a banking entity's compliance function were to take a conservative position on the Rule 3a-7 analysis — several exclusions from the covered fund definition would independently be available. The most significant of these is the loan securitization exclusion, which is analyzed in detail in Section V below.
The availability of the loan securitization exclusion as an independent, alternative basis for exclusion from the covered fund definition provides an additional layer of comfort for banking entity investors and their compliance personnel. It ensures that, regardless of the particular 1940 Act exclusion upon which QRF 2022-1 relies, the Volcker Rule's covered fund restrictions do not apply to the Issuer.
V. The Loan Securitization Exclusion
A. Regulatory Basis
The implementing regulations, as amended by the 2020 Amendments, provide a specific exclusion from the covered fund definition for "loan securitizations." Under this exclusion, an issuing entity is not a covered fund if it is established for the purpose of holding only "loans" and certain other permissible assets and issuing asset-backed securities supported by such assets. The exclusion is codified at 12 C.F.R. § 248.10(c)(8) in the Federal Reserve's implementing regulations, with parallel provisions in the rules of the OCC (12 C.F.R. § 44.10(c)(8)), the FDIC (12 C.F.R. § 351.10(c)(8)), the SEC (17 C.F.R. § 255.10(c)(8)), and the CFTC (17 C.F.R. § 75.10(c)(8)).
The loan securitization exclusion was included in the original implementing regulations adopted in 2014 and was significantly expanded and clarified by the 2020 Amendments. The purpose of the exclusion is to ensure that traditional loan securitization vehicles — which are financing mechanisms for pools of loans and receivables rather than investment vehicles managed for profit — are not inadvertently swept into the covered fund definition and subjected to restrictions that were designed for hedge funds and private equity funds.
B. Definition of "Loan"
The definition of "loan" is critical to the application of the loan securitization exclusion. Under the 2020 Amendments, the term "loan" is defined expansively to include "any loan, lease, extension of credit, or secured or unsecured receivable." This broad formulation was adopted by the agencies in direct response to comments from market participants and industry groups who argued that the original, narrower definition of "loan" created unnecessary uncertainty for securitizations of certain types of receivables.
Insurance premium finance receivables of the type originated by QPF are extensions of credit to commercial policyholders for the purpose of financing insurance premiums. In a typical transaction, QPF advances the premium amount to the insurance carrier or its agent on behalf of the policyholder and enters into a premium finance agreement (or receives a promissory note) under which the policyholder is obligated to repay the advanced amount, plus interest, in periodic installments. Each receivable is secured by the policyholder's assignment to QPF of the right to receive a refund of unearned premiums from the insurance carrier in the event of policy cancellation — a feature that provides built-in collateral and enhances recovery rates in the event of borrower default.
The QPF receivables that will comprise the QRF 2022-1 pool are short-term loans to commercial policyholders, with a weighted average original term of 9.2 months and a weighted average APR of 7.85%. They are extensions of credit secured by unearned premium refund rights. As such, they squarely fit within the definition of "loan" for purposes of the Volcker Rule's loan securitization exclusion, whether characterized as "loans," "extensions of credit," or "secured receivables."
It is equally important to confirm that the receivables are not any of the asset types that are excluded from the loan definition. The receivables are not securities, derivatives, or commodity forward contracts. They are bilateral credit arrangements between QPF and its commercial policyholder customers, documented by premium finance agreements that create debtor-creditor relationships. There is no secondary trading market for individual premium finance receivables, and they do not possess the characteristics of securities or derivative instruments.
C. Conditions for the Loan Securitization Exclusion
To qualify for the loan securitization exclusion, the issuing entity must satisfy several conditions prescribed by the implementing regulations. We analyze each of these conditions as applied to QRF 2022-1 below.
Condition 1: Purpose of the Issuing Entity. The issuing entity must be established for the purpose of holding loans and certain permissible assets. QRF 2022-1 was organized as a Delaware limited liability company for the sole purpose of acquiring and holding insurance premium finance receivables and issuing notes backed by such receivables. Its limited liability company agreement restricts its activities to this purpose, and it has no authority to engage in any other business. This condition is satisfied.
Condition 2: Permissible Assets. The issuing entity may hold only loans and certain other categories of permissible assets. The regulations enumerate the following categories of permissible assets:
(i) The loans themselves — here, the insurance premium finance receivables constituting the pool;
(ii) Rights or assets directly arising from the loans — including QPF's security interests in the unearned premium refund rights assigned by the policyholders, as well as any late fees, prepayment charges, or other amounts payable under the premium finance agreements;
(iii) Servicing assets — including rights under the Servicing Agreement between QRF 2022-1 and QPF;
(iv) Cash and cash equivalents — including amounts on deposit in the collection account, the payment account, the reserve account, and the liquidity reserve account, each of which is maintained at Calvoneth Trust Company, N.A.;
(v) Interest rate or currency derivatives — if entered into solely for hedging purposes. No interest rate or currency derivatives are currently contemplated for QRF 2022-1; and
(vi) Certain other specified asset types — including certain contractual rights relating to the servicing of the loans and rights under credit support or liquidity arrangements.
QRF 2022-1's assets consist exclusively of: (a) the insurance premium finance receivables; (b) the related security interests in unearned premium refund rights; (c) collections on the receivables held in trust accounts; (d) rights under the Servicing Agreement with QPF; and (e) rights under the $25,000,000 liquidity facility provided by Northvane Bank, N.A. All of these assets fall within the categories of permissible assets enumerated in the regulations. QRF 2022-1 does not hold, and is not permitted by its governing documents to hold, any assets outside of these permissible categories. This condition is satisfied.
Condition 3: Prohibition on Impermissible Assets. The issuing entity may not hold assets that are "securities" (other than ABS interests issued by the entity itself or cash equivalents qualifying as permitted investments), "derivatives" (other than hedging derivatives), or "commodity forward contracts" as non-de minimis holdings. As discussed above, QRF 2022-1's assets consist solely of receivables, related rights, cash, and contractual rights under the servicing and liquidity arrangements — none of which are securities, derivatives, or commodity forward contracts. This condition is satisfied.
Condition 4: Characteristics of ABS Interests. The ABS interests (Notes) issued by QRF 2022-1 may not provide holders with certain features characteristic of equity securities, including:
(a) voting rights beyond limited protective voting rights on matters directly affecting the interests of noteholders;
(b) the right to participate in the profits or gains of the issuing entity beyond the receipt of stated interest and principal;
(c) the ability to select, remove, or replace the investment manager, general partner, managing member, or equivalent controlling person of the issuing entity; or
(d) the right to receive the underlying assets of the issuing entity upon its dissolution, other than in satisfaction of outstanding debt obligations.
The Class A, B, and C Notes are fixed-income debt instruments with SOFR-based floating rate coupons, sequential amortization, stated maturities, and a priority payment waterfall. Noteholders are entitled to receive interest at the applicable coupon rate and repayment of principal in accordance with the payment waterfall. They do not participate in the profits or residual value of QRF 2022-1 beyond their stated interest and principal — any residual amounts flow to QRH as the holder of the equity/retained interest. The Indenture provides limited voting rights to noteholders solely for protective purposes, such as consenting to amendments of the payment waterfall or voting on the acceleration of the Notes upon the occurrence of events of default. Noteholders do not have the right to select, appoint, remove, or replace the servicer (QPF), the administrator (QIH), or the independent managers (Mr. Callan and Ms. Vasquez) in the ordinary course — the right to direct the trustee to replace the servicer arises only upon the occurrence of a servicer event of default, which is a protective right consistent with standard debt documentation and is expressly permitted under the regulations. This condition is satisfied.
D. Application to QRF 2022-1
Based on the foregoing analysis, QRF 2022-1 satisfies all conditions for the loan securitization exclusion from the covered fund definition under the Volcker Rule:
1. The receivables pool consists entirely of insurance premium finance loans, each of which is a "loan" under the expanded definition adopted in the 2020 Amendments.
2. QRF 2022-1 holds no securities, derivatives, or commodity forward contracts outside the permitted categories of assets.
3. The Notes are structured as debt instruments with no equity-like features — no profit participation, no ability to select or remove managers, and limited protective voting rights only.
4. The revolving period feature does not disqualify the vehicle from the loan securitization exclusion. The 2020 Amendments do not require a static pool for purposes of this exclusion, and revolving pools of loans are commonplace in securitization structures that rely on the loan securitization exclusion, including credit card receivables master trusts, auto loan warehouse facilities, and other revolving receivables vehicles.
Conclusion. QRF 2022-1 satisfies all conditions for the loan securitization exclusion from the covered fund definition under 12 C.F.R. § 248.10(c)(8). Even if QRF 2022-1 were deemed to rely on Section 3(c)(1) or Section 3(c)(7) of the 1940 Act (which, as discussed in Section IV.A, it does not), the loan securitization exclusion would independently exclude QRF 2022-1 from the covered fund definition.
VI. Ownership Interest Analysis
A. Definition of "Ownership Interest"
Even if an entity is a covered fund under the Volcker Rule, the Rule's prohibitions are triggered only when a banking entity acquires or retains an "ownership interest" in the covered fund. The term "ownership interest" is defined in the implementing regulations (12 C.F.R. § 248.10(d)(6)) to include any equity, partnership, or other similar interest in the covered fund, regardless of how the interest is designated or labeled. The regulations identify several specific indicia of an ownership interest, including:
(a) the right to participate in the selection or removal of a general partner, managing member, investment manager, investment adviser, or commodity trading advisor of the covered fund (excluding the right to participate in such selection or removal as a result of a default, event of default, or acceleration event);
(b) the right to receive a share of the income, gains, or profits of the covered fund;
(c) the right to receive the underlying assets of the covered fund after all other interests have been redeemed or repaid (i.e., a residual or equity interest);
(d) the right to receive all or a portion of excess spread (i.e., the positive difference between the income earned on the assets of the covered fund and the amounts owed to the holders of other outstanding interests);
(e) the right to receive a variable rate of return based on the performance of the covered fund's assets, rather than a fixed interest rate; or
(f) any synthetic right to obtain any of the foregoing.
A debt instrument that does not carry any of the foregoing rights or characteristics is NOT an ownership interest under the Volcker Rule. This distinction between debt and equity is fundamental to the Volcker Rule's operation in the structured finance context and provides an important independent basis for banking entity participation in ABS transactions.
B. Application to the Notes
The Class A Notes, Class B Notes, and Class C Notes issued by QRF 2022-1 are debt instruments with the following characteristics:
• Stated maturity: 42 months (legal final) from the closing date.
• Interest rate: SOFR-based floating rate coupon at the applicable spread (SOFR + 125 bps for Class A, SOFR + 210 bps for Class B, SOFR + 375 bps for Class C).
• Payment waterfall: Principal and interest paid in accordance with a sequential priority waterfall, with Class A Notes receiving priority of payment over Class B and Class C Notes.
• No profit participation: Noteholders are entitled to receive their stated interest and principal, but do not participate in the profits, gains, or residual value of QRF 2022-1.
• No right to select or remove managers: Noteholders do not have the right to participate in the selection or removal of the independent managers (Timothy R. Callan and Eleanor M. Vasquez, appointed by Fortbridge Corporate Services LLC), the servicer (QPF), or the administrator (QIH). The limited right of noteholders to direct the indenture trustee to replace the servicer upon the occurrence of a servicer event of default is a protective right that is expressly excluded from the definition of ownership interest under the implementing regulations.
• No right to underlying assets: Noteholders are not entitled to receive the underlying receivables upon dissolution of QRF 2022-1. Rather, upon the maturity, acceleration, or winding down of the vehicle, assets are liquidated and proceeds are distributed in accordance with the payment waterfall — noteholders receive only their outstanding principal and accrued interest, and any residual amounts flow to QRH as the equity holder.
• Limited voting rights: The Indenture (execution draft v4, dated October 12, 2022) provides limited voting rights to noteholders solely for protective purposes. These include the right to consent to certain amendments to the Indenture or the payment waterfall that would adversely affect noteholder interests, and the right to direct the indenture trustee to accelerate the Notes upon the occurrence and continuance of events of default. These limited protective voting rights are consistent with standard indenture provisions for asset-backed debt securities and do not constitute the type of management participation or control rights that would characterize an ownership interest.
Conclusion. The Class A, B, and C Notes are not "ownership interests" under the Volcker Rule. They are debt instruments that provide holders with the right to receive fixed (SOFR-based floating rate) interest and scheduled principal payments, without any right to participate in profits, select or remove managers, receive residual assets, or exercise control over the Issuer's operations. This conclusion provides an independent basis — separate from and in addition to the conclusion that QRF 2022-1 is not a covered fund — for banking entities to acquire and hold the Notes without restriction under the Volcker Rule's covered fund provisions.
C. Retained Interest / Overcollateralization
In contrast to the Notes, the $15,000,000 retained interest (overcollateralization, 3.0% of the total capital structure) constitutes an "ownership interest" under the Volcker Rule. The retained interest represents the residual or equity interest in QRF 2022-1 — it is entitled to receive excess spread and residual cash flows after all obligations on the Notes have been satisfied. As such, it exhibits the classic indicia of an ownership interest, including the right to receive a share of the income and gains of the vehicle and the right to receive the underlying assets (or their value) after all other interests have been redeemed or repaid.
This retained interest will be held by QRH (the depositor), and indirectly by QPF (the originator and sole member of QRH) and QIH (the sponsor and sole member of QPF). Critically, QIH is not a banking entity. QIH is an insurance and financial technology company; it is not an insured depository institution, it does not control an insured depository institution, it is not treated as a bank holding company, and it is not an affiliate or subsidiary of any such entity. Accordingly, QIH's retention of the equity interest in QRF 2022-1 does not implicate the Volcker Rule's prohibition on banking entity ownership of covered fund interests.
The retention of the equity interest by QIH also serves the separate regulatory objective of credit risk retention under Section 941 of the Dodd-Frank Act and the implementing regulations at 17 C.F.R. Part 246 (Regulation RR). The risk retention requirements applicable to this transaction are being addressed in a separate memorandum dated August 1, 2022, prepared by Carlos Espinoza of this firm. We note that the retained interest structure has been designed to achieve compliance with both the Volcker Rule (by ensuring that the equity interest is not held by a banking entity) and the risk retention requirements (by ensuring that QIH, as sponsor, retains an economic interest in the credit risk of the securitized assets in the required amount and form).
VII. Permissible Activities for Banking Entity Investors
A. Acquiring Notes as Non-Ownership Interests in a Non-Covered Fund
The primary pathway for banking entity investment in the Notes is straightforward and does not require reliance on any Volcker Rule exemption. As established in the preceding sections:
1. QRF 2022-1 is not a covered fund under the Volcker Rule, because (a) it relies on Rule 3a-7 of the 1940 Act (not Section 3(c)(1) or 3(c)(7)) for its exclusion from investment company registration, and (b) independently, it qualifies for the loan securitization exclusion from the covered fund definition.
2. The Notes are not ownership interests under the Volcker Rule, because they are debt instruments that do not carry profit participation rights, management control rights, residual rights, or other indicia of equity ownership.
Because QRF 2022-1 is not a covered fund, and because the Notes are not ownership interests, the Volcker Rule's covered fund provisions simply do not apply to banking entity investments in the Notes. Banking entities may freely acquire and hold the Notes — whether through their investment portfolios, asset management businesses, or other capacities — without any Volcker Rule impediment arising from the covered fund provisions. This is the expected pathway for banking entity investors in the Class A, B, and C Notes, and it is the conclusion that will be reflected in the Offering Memorandum.
B. Underwriting and Market-Making Exemptions (if Applicable)
For completeness, we note that even if the Notes were ownership interests in a covered fund (which they are not), the Volcker Rule provides exemptions from the covered fund prohibitions for certain underwriting and market-making activities conducted by banking entities. Specifically, a banking entity may acquire or retain an ownership interest in a covered fund in connection with bona fide underwriting activities, provided that:
(i) the banking entity's underwriting position is designed not to exceed the reasonably expected near-term demand of investors ("RENTD");
(ii) the banking entity has established an internal compliance program that includes reasonably designed written policies and procedures, internal controls, and independent testing;
(iii) the underwriting activities are designed to generate revenues primarily from fees, commissions, or spreads and not from appreciation in the value of the covered fund interests; and
(iv) the banking entity complies with applicable capital, reporting, and other requirements.
Ridgeline Capital Markets LLC is serving as the sole placement agent and lead bookrunner for the offering. We have not yet confirmed whether Ridgeline is, or is affiliated with, a banking entity for Volcker Rule purposes. If Ridgeline is or is affiliated with a banking entity, it would be able to rely on the underwriting exemption for its placement activities in the offering, subject to compliance with the conditions described above. Ridgeline's counsel, Calloway & Brandt LLP, will independently advise Ridgeline on these matters.
Similarly, the Volcker Rule provides an exemption for market-making activities, which could permit a banking entity to acquire and hold covered fund interests in connection with providing ongoing secondary market liquidity in the Notes following the initial offering. This exemption is subject to conditions analogous to those applicable to the underwriting exemption.
These exemptions are noted for the sake of completeness. They are not expected to be the primary basis for Ridgeline's or any investor's participation in the offering, given the strong conclusions that QRF 2022-1 is not a covered fund and that the Notes are not ownership interests.
C. Proprietary Trading Considerations
The Volcker Rule's proprietary trading prohibition restricts banking entities from engaging in short-term trading of securities and other financial instruments for their own trading account. This prohibition is separate from, and in addition to, the covered fund provisions discussed above. It is important to note that the proprietary trading prohibition may apply even when the covered fund provisions do not.
However, ABS notes held by a banking entity for investment purposes — rather than for short-term trading — are generally not subject to the proprietary trading ban. The implementing regulations define "trading account" by reference to short-term trading intent, and securities acquired and held for longer-term investment purposes are excluded from the trading account. The Notes, which have a legal final maturity of 42 months from the closing date and are designed to be held as investment-grade, yield-bearing assets in banking entity investment portfolios, are the type of securities that banking entities typically acquire on an investment (rather than trading) basis. Accordingly, the acquisition of the Notes by banking entities for their investment portfolios is not expected to implicate the proprietary trading ban.
Furthermore, the implementing regulations provide exemptions from the proprietary trading prohibition for bona fide market-making and underwriting activities, which would be available to Ridgeline and any other banking entity engaged in distributing the Notes to investors or making a secondary market in the Notes following the initial offering.
Finally, we note the participation of two banking entities in the transaction in administrative and fiduciary capacities. Calvoneth Trust Company, N.A., as indenture trustee and paying agent, is a national banking association and therefore a banking entity under the Volcker Rule. Its role is purely fiduciary — it holds the receivables and collections on behalf of the noteholders, distributes payments in accordance with the waterfall, and performs other ministerial and trustee functions as directed by the Indenture. Calvoneth Trust does not acquire any ownership interest in QRF 2022-1 and does not engage in any proprietary trading in the Notes. Similarly, Northvane Bank, N.A., as back-up servicer and provider of the $25,000,000 liquidity facility, is a national banking association. Its liquidity facility is a lending arrangement (an extension of credit to QRF 2022-1), not an investment in the Notes or an ownership interest in the Issuer. Neither Calvoneth Trust's nor Northvane Bank's participation raises Volcker Rule concerns.
VIII. Offering Memorandum Disclosure Recommendations
The Preliminary Offering Memorandum (currently v3, dated October 12, 2022) should include a dedicated section addressing Volcker Rule considerations for the benefit of prospective investors, particularly banking entity investors. We recommend that this section include the following elements:
1. Non-Covered Fund Statement. A clear, affirmative statement that QRF 2022-1 is not a "covered fund" as defined in the regulations implementing Section 13 of the Bank Holding Company Act of 1956 (the Volcker Rule).
2. 1940 Act Reliance Specification. A statement specifying that QRF 2022-1 relies on the exemption from the definition of "investment company" provided by Rule 3a-7 under the Investment Company Act of 1940 (and, as applicable, the exclusion provided by Section 3(c)(5) of the 1940 Act). The disclosure should further state that QRF 2022-1 does not rely on Section 3(c)(1) or Section 3(c)(7) of the 1940 Act for its exclusion from investment company registration.
3. Non-Ownership Interest Statement. A statement that the Notes constitute debt instruments and do not constitute "ownership interests" as defined in the Volcker Rule implementing regulations, and that the acquisition and holding of the Notes by banking entities does not implicate the Volcker Rule's prohibitions on the ownership of covered fund interests.
4. Loan Securitization Exclusion Statement. A statement that the loan securitization exclusion from the covered fund definition, as set forth in 12 C.F.R. § 248.10(c)(8) and the parallel provisions of the other agencies' implementing regulations, is available as an independent basis for the exclusion of QRF 2022-1 from the covered fund definition.
5. Investor Responsibility Risk Factor. A standard risk factor, customary in 144A offerings of asset-backed securities, to the effect that each prospective investor that is, or is affiliated with, a banking entity should make its own determination regarding its Volcker Rule compliance status and should consult with its own legal counsel regarding the applicability of the Volcker Rule to its particular circumstances. The risk factor should further state that none of QRF 2022-1, QIH, QPF, Calderwood & Harkness LLP, Ridgeline Capital Markets LLC, or Calloway & Brandt LLP makes any representation or warranty regarding any investor's compliance with the Volcker Rule, and that no assurance can be given that any particular investor's acquisition or holding of the Notes is permissible under the Volcker Rule or any other applicable law.
6. Regulatory Change Caveat. A statement noting that the Volcker Rule and its implementing regulations are complex and have been subject to significant rulemaking activity, regulatory guidance, and evolving interpretations since their initial adoption. The disclosure should note that the Volcker Rule remains subject to further rulemaking, guidance, and interpretation by the five implementing agencies, and that banking entity investors should monitor regulatory developments that may affect the analysis described in the Offering Memorandum.
We recommend coordinating the drafting of the Volcker Rule disclosure section with Calloway & Brandt LLP (Harrison Collier, Partner, and Megan O'Shaughnessy, Counsel), which is serving as underwriter's counsel, to ensure consistency between the Offering Memorandum disclosure and any representations or undertakings provided by Ridgeline Capital Markets LLC in the placement agreement or other transaction documents.
IX. Structural Recommendations
Based on the foregoing analysis, we recommend the following structural measures to ensure that QRF 2022-1's Volcker Rule position is robust and well-documented:
1. LLC Agreement Representation. The Limited Liability Company Agreement of QRF 2022-1 should include an express representation and covenant that QRF 2022-1 does not rely, and will not rely, on Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act of 1940 for its exclusion from the definition of "investment company" under the 1940 Act. This representation should be a condition to the issuance of the Notes and should be included among the ongoing covenants of the Issuer.
2. Indenture Review — Voting Rights. The Indenture should be carefully reviewed to confirm that the voting rights granted to noteholders are limited to protective provisions and do not confer any right to select, remove, or replace the servicer, manager, administrator, or any other person exercising control over QRF 2022-1, except in the context of a servicer event of default. The right of noteholders to direct the indenture trustee to terminate the servicer and appoint a successor upon the occurrence and continuance of a servicer event of default is a protective right that is expressly permitted under the Volcker Rule regulations and is consistent with the treatment of the Notes as debt (rather than ownership interests). Any broader voting or consent rights — for example, a right to remove and replace the servicer absent a default — could undermine the non-ownership-interest characterization and should be avoided.
3. Servicing Fee Confirmation. The servicing fee payable to QPF under the Servicing Agreement (currently set at 1.00% per annum on the outstanding pool balance) should be reviewed to confirm that it is reasonable and consistent with market terms for comparable premium finance receivables servicing arrangements. A servicing fee that is significantly above or below market rates could raise questions about whether the fee arrangement embeds a disguised profit participation or other equity-like feature. The 1.00% per annum servicing fee appears to be within the range of market norms for insurance premium finance receivables servicing, but this should be confirmed against comparable benchmarks.
4. Asset Characterization Confirmation. All assets held by QRF 2022-1 should be confirmed to be either "loans" (as defined in the Volcker Rule implementing regulations) or other permissible assets within the meaning of the loan securitization exclusion. In particular, the $25,000,000 liquidity facility provided by Northvane Bank, N.A. should be confirmed to be structured as a lending arrangement (i.e., a revolving credit facility or similar arrangement) rather than a security. The liquidity facility, as currently structured, provides for advances to QRF 2022-1 secured by the receivables and collections, with repayment in accordance with the payment waterfall. This is a lending arrangement, not a security, and its presence in the QRF 2022-1 asset pool does not implicate the restrictions on holding securities under the loan securitization exclusion.
5. Eligibility Criteria Consistency. The eligible receivables criteria set forth in the Receivables Purchase Agreement and the Indenture should be reviewed to ensure that all receivables acquired by QRF 2022-1 during the revolving period satisfy the definition of "loan" under the expanded Volcker Rule definition. The existing eligibility criteria — which require that each receivable be originated by QPF in the ordinary course of business, denominated in U.S. dollars, secured by unearned premium refund rights, with an original term of 12 months or less, owed by a U.S. commercial policyholder obligor, not in default a

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