- Regulators Adopt Final Volcker Rule; Questions Remain
- December 23, 2013 | Author: J. Andrew Gipson
- Law Firm: Jones Walker LLP - Jackson Office
The much-awaited Volcker Rule which regulates and restricts investments which may be made by banks was adopted by the Federal Reserve, the FDIC, the OCC, the SEC, and the CFTC on December 10, 2013. The Volcker Rule was adopted to implement a portion of the Dodd-Frank Act and new Section 13 of the Bank Holding Company which prohibits any banking entity from engaging in proprietary trading or from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with a hedge fund or private equity fund ("covered funds"), subject to certain exemptions.
The rule prohibits a banking entity from having an ownership interest in, or certain relationships with, "covered funds" absent an exception. An important exception is available for securities consisting solely of loans as collateral, such as residential mortgage backed securities, commercial mortgage backed securities, auto securitizations, credit card securitizations, commercial paper backed by conforming asset-backed conduits, and collateralized loan obligations and collateralized debt obligations (including those backed by trust preferred securities), provided that the banking entity is the issuer of the securities. Thus, these assets would not be required to be divested. However, for such assets which were not issued by the banking entity, but are held by another banking entity divestiture will be required, and there are significant unanswered questions concerning accounting treatment for these securities prior to year end.
With respect to proprietary trading prohibition, the Volcker Rule effectively restates the statutory prohibition against proprietary trading by defining the term as engaging as principal "for the trading account of the banking entity" in certain specific types of transactions, subject to certain exceptions. The Volcker Rule defines the term "trading account" as any account used for acquiring or taking positions in the proprietary trading of securities and instruments principally for the purpose of selling in the near term (or otherwise with the intent to resell in order to profit from short-term price movements), and any such other accounts as the Regulators may determine by rule. The Volcker Rule does, however, permit trading transactions in government securities; in connection with underwriting or market-making, to the extent that either does not exceed near term demands of clients, customers, or counterparties; on behalf of customers; or by an insurance business for the general account of the insurance company.
The Volcker Rule establishes requirements for the development of quantitative "metrics reporting" of covered trading activity for banks at certain thresholds. There are phased-in metrics reporting compliance dates for banking entities with trading assets and liabilities of $50 billion or more (June 30, 2014); between $25 billion-$50 billion (April 30, 2016); and between $10 billion-$25 billion (December 31, 2016).
The rule also requires any banking entity engaged in covered trading activities or covered fund activities to develop and implement a program reasonably designed to ensure and monitor compliance with the prohibitions and restrictions on such activities and investments. Banking entities with total consolidated assets of $10 billion or less that engage in covered trading activities and/or covered fund activities or investments may satisfy these requirements by including in their existing compliance policies and procedures appropriate references to the pertinent law and rule, with adjustments as needed. Banking entities with total assets greater than $10 billion and less than $50 billion must meet certain specified minimum compliance plan standards, and those with total consolidated assets of more than $50 billion or more must adopt more detailed enhanced compliance programs.