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Federal Agencies Issue Statement On Subjecting TruPS CDOs To Volcker Rule
On December 27, in response to substantial criticism and legal action by banking trade groups, the Federal Reserve Board, the OCC, the FDIC, and the SEC stated that they are reviewing whether it is appropriate and consistent with the provisions of the Dodd-Frank Act (DFA) not to subject pooled investment vehicles for Trust Preferred Securities (TruPS), such as collateralized debt obligations backed by TruPS, to the prohibitions on ownership of covered funds in section 619 of the DFA, as implemented by the recently finalized Volcker Rule. Community banks and their trade group representatives state that the Volcker rule treatment of TruPS conflicts with a separate section of the DFA that requires TruPS issued by depository institution holding companies to be phased out of such companies’ calculation of Tier 1 capital, but provides for the permanent grandfathering of TruPS issued before May 19, 2010, by certain holding companies with total consolidated assets of less than $15 billion. The banks assert that banking entities investing in pooled TruPS are facing “unexpected and precipitous write-downs” that are not justified by any safety and soundness concern, and that the resulting write-downs are actually causing safety and soundness concerns. The agencies promised to address the matter by January 15, 2014.
Federal Agencies Finalize Volcker Rule
On December 10, the Federal Reserve Board, the OCC, the FDIC, the SEC, and the CFTC issued a final rule to implement Section 619 of the Dodd-Frank Act, the so-called Volcker Rule. Section 619 was a central component of the Dodd-Frank Act reforms, and the final rule and its preamble are lengthy and complex. The Federal Reserve Board released a fact sheet, as well as a guide for community banks. Generally, the final rule implements statutory requirements prohibiting certain banking entities from (i) engaging in short-term proprietary trading of any security, derivative, and certain other financial instruments for a banking entity's own account, (ii) owning, sponsoring, or having certain relationships with a hedge fund or private equity fund, (iii) engaging in an exempted transaction or activity if it would involve or result in a material conflict of interest between the banking entity and its clients, customers, or counterparties, or that would result in a material exposure to high-risk assets or trading strategies, and (iv) engaging in an exempted transaction or activity if it would pose a threat to the safety and soundness of the banking entity or to the financial stability of the U.S. Exempted activities include: (i) market making; (ii) underwriting; (iii) risk-mitigating hedging; (iv) trading in certain government obligations; (v) certain trading activities of foreign banking entities; and (vi) certain other permitted activities. The compliance requirements under the final rules vary based on the size of the institution and the scope of activities conducted. Those with significant trading operations will be required to establish a detailed compliance program, which will be subject to independent testing and analysis, and their CEOs will be required to attest that the program is reasonably designed to achieve compliance with the final rule. The regulators state that the final rules reduce the burden on smaller, less-complex, institutions by limiting their compliance and reporting requirements. The rule takes effect on April 1 2014; however, the Federal Reserve Board announced that banking organizations covered by section 619 will not be required to fully conform their activities and investments until July 21, 2015.
Banking Regulators Clarify Volcker Rule Compliance Timeline, Senators Push for Final Rule
Recently, the Federal Reserve Board approved a statement clarifying that an entity covered by the Volcker Rule, section 619 of the Dodd-Frank Act, has until July 21, 2014 to comply unless the Board extends the conformance period. The clarified compliance date reflects the full two-year period provided by the statute for covered institutions to fully conform activities and investments. Generally, the Volcker Rule imposes certain prohibitions and requirements on banking entities and nonbank financial companies supervised by the Board that engage in proprietary trading and have certain interests in, or relationships with, a hedge fund or private equity fund. The Federal Reserve Board and other federal banking regulators continue their efforts to adopt regulations implementing the statutory restrictions. In October 2011, the Federal Reserve Board sought comment on a proposed rulemaking, as did the Commodities Futures Trading Commission in January 2012, but no final rules have emerged. On April 26, 22 Senators sent a letter to the regulators urging that they adopt a strong clear rule this summer.