On Monday, the Financial Times reported that JPMorgan Chase & Co (JPM) is undergoing preliminary negotiations to acquire a large Brazilian investment and hedge fund with Gávea Investimentos. The company is going ahead with the talks despite the fact that the impending Volcker Rule will limit the participation of U.S. banks in such activities. The Volcker Rule would restrict banks from making speculative investments like investing in a hedge fund and private equity if these are not on behalf of their customers.

JPMorgan’s plan to move ahead with the discussions reflects its confidence that the Volcker Rule will not stop the banks from buying and owning hedge funds. However, the deal has not been finalized and could still fall apart.

The language of the proposed Volcker Rule regulation, which is expected to be discussed later this week, is vague and some interpret it as regulation that would disallow banks to own hedge funds and private equity. However, JPMorgan and other major U.S. banks like Bank of America Corporation (BAC), Goldman Sachs Group Inc. (GS) and Citigroup Inc. (C) believe that they could be allowed to keep these high risk activities, provided they do not invest their own money into them.

However, JPMorgan is awaiting the details of the reforms before finalizing the deal with Gávea. The deal could be finalized as early as next month, if talks are successful.

Gávea is an independent asset management company with $5.3 billion in assets and is regulated by the Brazilian Central Bank and the Comissão de Valores Mobiliários (equivalent to the Securities and Exchange Commission in the U.S.).

JPMorgan’s asset management segment will get a boost in revenue base with the addition of Gávea. The company has already completed the acquisition of Highbridge Capital Management (alternative investment management firm) in June 2009 and One Equity Partners (a private equity business) in 2004.

While expanding its geographic presence to enter emerging markets globally in recent weeks, JPMorgan has announced its foray into the Chinese market through a joint venture with First Capital and has received the approval from European Union (EU) to acquire Royal Bank of Scotland Group plc‘s (RBS) non-U.S. commodities joint venture RBS Sempra Commodities LLP for $1.7 billion.

JPMorgan continues to diversify its business and expects to enhance its revenue base and market share. The proposed acquisition of Gávea will further strengthen the company’s existing business strategy.

While we anticipate continued synergies from JPMorgan’s diversification and strong capital position, stressed credit quality and reduced levels of client activity is expected to drag future earnings. However, we are impressed to see some improvement in credit quality during the last couple of quarters.

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