• Resolution of TruPS CDO Issue
  • January 21, 2014 | Author: Craig N. Landrum
  • Law Firm: Jones Walker LLP - Jackson Office
  • Late Tuesday afternoon, January 14, 2014, the Department of Treasury, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and the Commodity Futures Trading Board issued a common interim final rule permitting banking entities to retain investments in trust preferred securities ("TruPS CDOs") for purposes of the final rule implementing Section 619 of the Dodd-Frank Act known as the Volcker Rule.

    The Volcker Rule generally prohibits a banking entity from, among other things, acquiring or retaining an ownership interest in a hedge fund or private equity fund, which would be an investment company under the Investment Company Act but for certain exemptions under such Act. This definition generally includes pooled investment vehicles such as TruPS CDO. As a result of this inclusion, commentators have estimated as many as 300 community banks would be required not only to divest any TruPS CDOs held in portfolio by July 15, 2015, but also to write the securities down to market value on December 31, 2013, financial reports. Commentators have estimated the potential writedown against bank capital would exceed $600 million.

    The interim final rule issued January 14 allows community banks to retain their TruPS CDO investments if (1) the issuer of the TruPS CDO was established and the interest was issued prior to May 19, 2010, (2) the banking entity holding the TruPS CDO investment reasonably believes that the offering proceeds received by the issuer were invested in "Qualifying TruPS Collateral" and (3) the interest was acquired prior to December 10, 2013, by the banking entity or predecessor by merger. "Qualifying TruPS Collateral" means any trust preferred security or subordinated debt instrument issued prior to May 19, 2010, by a depository institution holding company that had total consolidated assets of less than $15 billion as of the end of any reporting period within 12 months preceding issuance of such security or debt instrument.

    The three federal banking regulators also issued a non-exclusive list of collateralized debt obligations backed by TruPS CDOs for use in determining compliance with the interim final rule. The listed TruPS CDOs are recognized as meeting the requirements of the rule and are not required to be divested. Non-listed TruPS CDOs are not precluded from treatment as an exempt issuer if a banking entity determines the investment qualifies for exemption.

    Finally, the three regulators emphasized banking entities should continue to measure, monitor, and control the inherent risks of TruPS CDO holdings in accordance with the Uniform Agreement on the Classification and Appraisal of Securities Held by Depositary Institutions (SR 13-18 for member banks, FIL-51-2013 for state non-member banks and OCC Bulletin 2013-08 for national banks), as well as account for their holdings of TruPS CDOs in accordance with the relevant U.S. generally accepted accounting principles.