Volcker Rule

Financial Regulators Modify Volcker Rule

 

On June 25, financial regulatory agencies modified the Volcker rule’s prohibition on banking entities investing in or sponsoring hedge funds or private equity funds, known as covered funds. The final rule permits banking entities to offer financial services and engage in other activities that fall outside of the issues that the rule was intended to address, and it streamlines the covered funds portion of the rule. The rule will be effective as of October 1. Release. Final Rule.

Agencies Publish Rule Excluding Community Banks from Volcker Rule

 

On July 9, the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board, the Commodity Futures Trading Commission (CFTC), the Office of the Comptroller of the Currency (OCC) and the Securities and Exchange Commission (SEC) adopted a final rule that excludes community banks from the Volcker Rule, which restricts banking entities from engaging in proprietary trading and from owning, sponsoring or having certain relationships with hedge funds or private equity funds. Under the final rule that was adopted, community banks with $10 billion or less in total consolidated assets, and which have total trading assets and liabilities that are 5% or less than such community bank’s total consolidated assets, will be excluded from the Volcker Rule.

 

Federal Reserve Board Provides New Details on Volcker Rule’s Illiquid Funds Requirements

On December 12, 2016, the Federal Reserve Board announced additional details regarding how banking entities may seek an extension to conform their investments in a narrow class of funds that qualify as “illiquid funds” to the requirements of Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly known as the Volcker Rule. An illiquid fund is defined by the statute as a fund that is “principally invested” in illiquid assets and holds itself out as employing a strategy to invest principally in illiquid assets.

The Volcker Rule generally prohibits insured depository institutions and any company affiliated with an insured depository institution from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring or having certain relationships with a hedge fund or private equity fund. These prohibitions are subject to a number of statutory exemptions, restrictions and definitions.

The Dodd-Frank Act permits the Board, upon an application by a banking entity, to provide up to an additional five years to conform investments in certain legacy illiquid funds where the banking entity had a contractual commitment to invest in the fund as of May 1, 2010. The five-year extension for certain legacy illiquid funds is the last conformance period extension that the Board is authorized to provide banking entities under the statute.

According to the guidelines adopted by the Board, firms seeking an extension should submit information, including details about the funds for which an extension is requested, a certification that each fund meets the definition of illiquid fund, a description of the specific efforts made to divest or conform the illiquid funds, and the length of the requested extension and the plan to divest or conform each illiquid fund within the requested extension period.

The Board expects that the illiquid funds of banking entities will generally qualify for extensions, though extensions may not be granted in certain cases – for example, where the banking entity has not demonstrated meaningful progress to conform or divest its illiquid funds, has a deficient compliance program under the Volcker Rule or where the Board has concerns about evasion.

The Board consulted with staffs of the other agencies charged with enforcing the requirements of the Volcker Rule, and the agencies plan to administer their oversight of banking entities under their respective jurisdictions in accordance with the Board’s conformance rule and the attached guidance.

Federal Reserve Board Formalizes Previously Announced One-Year Conformance Period Extension for Certain Volcker Rule Legacy Fund Investments

On July 7, 2016, the Federal Reserve Board approved the final extension – to July 21, 2017 – for bank entities to comply with the Volcker Rule and “to divest ownership in certain legacy investment funds and terminate relationships with funds that are prohibited under the rule.” Release.

Federal Reserve Announces Extension of Conformance Period under Section 13 of the Bank Holding Company Act

On July 7, 2016, the Federal Reserve announced that it will extend until July 21, 2017 the conformance period for banking entities to divest ownership in certain legacy investment funds and terminate relationships with funds that are prohibited under Section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule. The Board had announced in December 2014 that it would make this extension to provide for orderly divestitures and to prevent market disruptions. This is the final of the three one-year extensions that the Board is authorized to grant.

In making this announcement, the Federal Reserve emphasized that: “This extension would permit banking entities additional time to divest or conform only ‘legacy covered fund’ investments, such as prohibited investments in hedge funds and private equity funds that were made prior to December 31, 2013. This extension does not apply to investments in and relationships with a covered fund made after December 31, 2013 or to proprietary trading activities; banking entities were required to conform those activities to the final rule by July 21, 2015.”

The Federal Reserve also noted that the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and the Commodity Futures Trading Commission: “plan to administer their oversight of banking entities under their respective jurisdictions in accordance with the Board’s conformance rule and this extension of the conformance period.”

Finally, the Board noted that: “upon the application of a banking entity, the Board is permitted under section 619 to provide up to an additional five years to conform investments in certain illiquid funds, where the banking entity had a contractual commitment to invest in the fund as of May 1, 2010.” Release.

New FAQ’s Regarding the Scope and Implementation of the Volcker Rule Issued by the U.S. Banking, Securities and Commodities Regulatory Agencies

On February 27, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission and the Commodity Futures Trading Commission issued a new set of frequently asked questions and responses regarding the scope and implementation of Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly referred to as the “Volcker Rule.”  Among the issues addressed are:

  • Loan Securitization Servicing Assets:  Are the “rights or other assets” described in § 44.10(c)(8)(i)(B) of the Volcker Rule (“servicing assets”) limited to “permitted securities,” or can other assets be servicing assets for purposes of the loan securitization exclusion?
  • Mortgage-Backed Securities of Government-Sponsored Enterprise:  How are certain mortgage-backed securities issuers sponsored by government-sponsored enterprises treated under the final rule’s covered funds provisions?
  • Covered Fund Exemption; Marketing Restriction on Foreign Banking Organization:  The Volcker Rule provides an exemption for certain covered fund activities conducted by foreign banking entities (known as the “SOTUS Covered Fund Exemption”) provided that, among other conditions, “no ownership interest in such hedge fund or private equity fund is offered for sale or sold to a resident of the United States” (the “marketing restriction”).  Does the marketing restriction apply only to the activities of a foreign banking entity that is seeking to rely on the SOTUS covered fund exemption or does it apply more generally to the activities of any person offering for sale or selling ownership interests in the covered fund?
  • Conformance PeriodHow do the requirements of the Volcker Rule apply to a banking entity during the conformance period? For instance, must a banking entity deduct its investment in a covered fund from its tier 1 capital prior to the end of the conformance period?
  • Foreign Public Fund Seeding Vehicles:  The Volcker Rule excludes from the definition of covered fund a registered investment company and business development company, including an entity that is formed and operated pursuant to a written plan to become one of these entities.  Would an entity that is formed and operated pursuant to a written plan to become a foreign public fund receive the same treatment?

Link to the website of the Office of the Comptroller of the Currency that sets forth the FAQ’s.

Federal Reserve Acts to Extend Conformance Period Under Volcker Rule for Legacy Covered Funds Until July 2017

On December 18, the Federal Reserve Board announced that it has acted under Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly known as the Volcker Rule, to give banking entities until July 21, 2016, to conform investments in and relationships with covered funds (i.e., most private equity and hedge funds) and foreign funds that were in place prior to December 31, 2013 (“Legacy Covered Funds”). The Board also announced its intention to act next year to grant banking entities an additional one-year extension of the conformance period until July 21, 2017, to conform ownership interests in and relationships with Legacy Covered Funds.

Section 619 generally prohibits insured depository institutions and any company affiliated with an insured depository institution from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring, or having certain relationships with a hedge fund or private equity fund.

The Board previously extended the conformance period to July 21, 2015, when the agencies adopted rules to implement Section 619. The Board also previously issued a statement in April 2014 indicating that it intended to grant two additional one-year extensions of the conformance period for banking entities to conform ownership interests in and sponsorship activities of collateralized loan obligations (“CLOs”) that are backed in part by non-loan assets and that were in place as of December 31, 2013. The December 18 action is consistent with the Board’s previous announcement regarding CLOs and extends the conformance period for other types of Legacy Covered Funds.

SEC Issues Responses to Frequently Asked Questions on the Volcker Rule

On June 10, the staff of the Divisions of Trading and Markets, Investment Management and Corporation Finance provided guidance on the commission’s final rule implementing Section 13 of the Bank Holding Company Act of 1956, commonly referred to as the “Volcker Rule,” through the issuance of Responses to Frequently Asked Questions. FAQs.

Volcker Rule Exclusion for TruPS CDOs

On January 14, the Fed, CFTC, FDIC, OCC and SEC issued an interim final rule which will permit banking entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities (TruPS CDOs) if the following conditions are met: (i) the TruPS CDO was established and the interest was issued before May 19, 2010; (ii) the banking entity reasonably believes that the offering proceeds received by the TruPS CDO were invested primarily in Qualifying TruPS Collateral (as defined by the rule); and (iii) the banking entity’s interest in the TruPS CDO was acquired on or before December 10, 2013, the date the agencies issued final rules implementing section 619 of the Dodd-Frank Act (the Volcker Rule).  The agencies also released a non-exclusive list of issuers which meet the requirements of the interim final rule.  Comments must be submitted within 30 days of publication in the Federal Register.  Joint ReleaseJoint Interim Final RuleList of Excluded CDO Issuers.

Three Agencies Issue FAQ Regarding CDOs Backed by Trust Preferred Securities Under the Volcker Rule

On December 19, Fed, FDIC and OCC issued Frequently Asked Questions to clarify rules applicable to investments in covered funds and whether collateralized debt obligations backed by trust preferred securities (TruPS CDOs) could be determined to be covered funds under the Volcker Rule.  The FAQs clarify that banking entities that have holdings in TruPS CDOs may use the conformance period to determine if they can be brought into conformance by July 21, 2015ReleaseFAQ.