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On August 23, the OCC published in the Federal Register a request to renew its information collection titled “Reporting, Recordkeeping, and Disclosure Requirements Associated with Proprietary Trading and Certain Interests in and Relationships with Covered Funds.” Section 13 of the Bank Holding Company Act “generally 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 covered fund, subject to certain exceptions . . . that allow certain types of permissible trading and covered fund activities.” As previously covered by InfoBytes, in 2019, the OCC, FDIC, Federal Reserve Board, CFTC, and SEC published a final rule amending the Volcker Rule to simplify and tailor compliance with Section 13 of the Bank Holding Company Act’s restrictions on a bank’s ability to engage in proprietary trading and own certain funds.
The OCC is seeking comments specifically related to the reporting, disclosure, documentation and information collection requirements under the rule, including: (i) whether the information collections are necessary for the proper function of the agency and if the information has practical utility; (ii) whether the OCC’s estimates of the burden of the information collections are accurate and the methodology and assumptions used are valid; (iii) measures to enhance the quality, utility, and clarity of the information to be collected; (iv) ways to minimize the burden of information collections on respondents, such as using automated collection techniques or other forms of information technology; and (v) capital or start-up cost estimates, as well as costs of operation, maintenance, and purchase of services to provide information. Comments are due October 24.
On November 23, the OCC sent banks a reminder that they are generally prohibited from making most equity investments in venture capital funds. The bulletin warned that simply because an investment in a fund qualifies for the venture capital fund exclusion under the Volcker Rule, it does not mean the fund is a permissible investment for a national bank, federal savings association, or federal branch and agency of a foreign bank. Prior to investing in a venture capital fund, banks must make a determination as to whether the investment is permissible and appropriate for the bank. The OCC reminded banks that engaging in impermissible and inappropriate investments may expose a bank and its institution-affiliated parties to enforcement actions and civil money penalties. Additionally, national bank directors may be held personally liable for losses attributed to impermissible investments. The OCC noted, however, that equity investments in venture capital funds may be allowed provided they are public welfare investments or investments in small business investment companies.
On November 30, the OCC released instructions and technical specifications for preparing and submitting quantitative measurements relating to Section 13 of the Bank Holding Act, commonly known as the Volcker Rule. As previously covered by InfoBytes, in 2019, the OCC, FDIC, Federal Reserve Board, CFTC, and SEC published a final rule amending the regulations implementing the Volcker Rule. Under the amendments, “banking entities with significant trading assets and liabilities” are required to “submit certain quantitative measurements on a quarterly basis and in accordance with the XML schema posted on the OCC’s ‘Volcker Rule Implementation’ web page.” The compliance date for the final rule is January 1, 2021.
On June 25, the Federal Reserve Board, CFTC, FDIC, OCC, and SEC (agencies) finalized the rule, which will amend the Volcker Rule to modify and clarify the regulations implementing Section 13 of the Bank Holding Company Act with respect to covered funds. As covered by InfoBytes in February, the agencies issued the proposed rule, and, after the notice and comment period, finalized the proposal with certain modifications based on the public comments. Among other things, the final rule (i) exempts qualifying foreign excluded funds from certain restrictions, but modifies the anti-evasion provision and compliance program requirements from the proposal; (ii) revises the exclusions from the covered fund provisions for foreign public funds, loan securitizations, and small business investment companies; (iii) adopts several new exclusions from the covered fund provisions, including an exclusion for venture capital funds, family wealth management, and customer facilitation vehicles; (iv) permits established, codified categories of limited low-risk transactions between a banking entity and a related fund; (v) provides an express safe harbor for senior loans and senior debt, and redefines “ownership interest”; and (vi) provides clarity regarding permissible investments in the same investments as a covered fund organized or offered by the same banking entity. The final rule is effective October 1.
The FDIC also released a Fact Sheet on the final rule.
On April 2, the Federal Reserve Board, CFTC, FDIC, OCC, and SEC (agencies) jointly announced that they would extend the comment period to May 1 on their proposal to modify and streamline the “covered funds” requirements under Section 13 of the Bank Holding Company Act, commonly known as the Volcker Rule. As previously covered by InfoBytes, the proposed amendments would, among other things, clarify the regulations concerning covered funds and address certain related issues, including permitting the activities of qualifying foreign excluded funds. The comment period originally was scheduled to end April 1. However, due to potential disruptions as a result of the Covid-19 pandemic, the agencies agreed to extend the comment deadline to May 1.
On February 28, the OCC, Federal Reserve Board, FDIC, SEC, and CFTC issued a notice of proposed rulemaking (NPR) to modify and streamline the “covered funds” requirements under Section 13 of the Bank Holding Company Act, commonly known as the Volcker Rule. (Previous InfoBytes coverage of the Volcker Rule here). According to the press release, the proposed amendments “would modify and clarify the regulations concerning covered funds and would address certain related issues, including qualifying foreign excluded funds.” Among other things, the amendments to the regulations would (i) “permit the activities of qualifying foreign excluded funds”; (ii) “revise the exclusions from the definition of covered fund for foreign public funds, loan securitizations, and small business investment companies”; (iii) create exclusions from “covered fund credit funds, qualifying venture capital funds, family wealth management vehicles, and customer facilitation vehicles”; (iv) allow certain transactions that would otherwise be prohibited under the so-called “Super 23A” restrictions; (v) redefine “ownership interest”; and (vi) exclude certain investments from “a banking entity’s calculation of its ownership interest in the covered fund.” Comments in response to the NPR must be submitted by April 1.
On November 14, the OCC, FDIC, Federal Reserve Board, CFTC, and SEC published a final rule, which will amend the Volcker Rule to simplify and tailor compliance with Section 13 of the Bank Holding Company Act’s restrictions on a bank’s ability to engage in proprietary trading and own certain funds. As previously covered by InfoBytes, the five financial regulators released a joint notice of proposed rulemaking in July 2018 designed to reduce compliance costs for banks and tailor Volcker Rule requirements to better align with a bank’s size and level of trading activity and risks. The final rule clarifies prohibited activities and simplifies compliance burdens by tailoring compliance obligations to reflect the size and scope of a bank’s trading activities, with more stringent requirements imposed on entities with greater activity. The final rule also addresses the activities of foreign banking entities outside of the United States.
Specifically, the final rule focuses on the following areas:
- Compliance program requirements and thresholds. The final rule includes a three-tiered approach to compliance program requirements, based on the level of a banking entity’s trading assets and liabilities. Banks with total consolidated trading assets and liabilities of at least $20 billion will be considered to have “significant” trading activities and will be subject to a six-pillar compliance program. Banks with “moderate” trading activities (total consolidated trading assets and liabilities between $1 billion and $20 billion) will be subject to a simplified compliance program. Finally, banks with “limited” trading activities (less than $1 billion in total consolidated trading assets and liabilities) will be subject to a rebuttable presumption of compliance with the final rule.
- Proprietary trading. Among other changes, the final rule (i) retains a modified version of the short-term intent prong; (ii) eliminates the agencies’ rebuttable presumption that financial instruments held for fewer than 60 days are within the short-term intent prong of the trading account; and (iii) adds a rebuttable presumption that financial instruments held for 60 days or longer are not within the short-term intent prong of the trading account. Additionally, banks subject to the market risk capital prong will be exempt from the short-term intent prong.
- Proprietary trading exclusions. The final rule modifies the liquidity management exclusion to allow banks to use a broader range of financial instruments to manage liquidity. In addition, exclusions have been added for error trades, certain customer-driven swaps, hedges of mortgage servicing rights, and certain purchases or sales of instruments that do not meet the definition of “trading assets and liabilities.”
- Proprietary trading exemptions. The final rule includes changes from the proposed rule related to the exemptions for underwriting and market making-related activities, risk-mitigating hedging, and trading by foreign entities outside the U.S.
- Covered funds. Among other things, the final rule incorporates proposed changes to the covered funds provision concerning permitted underwriting and market making and risk-mitigating hedging with respect to such funds, as well as investments in and sponsorships of covered funds by foreign banking entities located solely outside the U.S.
- Application to foreign banks. The final rule aligns the methodologies for calculating the “limited” and “significant” compliance thresholds for foreign banking organizations by basing both thresholds on the trading assets and liabilities of the firm’s U.S. operations. The final rule includes changes to the exemptions from the prohibitions for underwriting and market making-related activities, risk mitigating hedging, and trading by foreign banking entities solely outside the U.S. Additionally, the final rule also includes changes to the covered funds provisions, including with respect to permitted underwriting and market making and risk-mitigating hedging with respect to a covered fund, as well as investment in or sponsorship of covered funds by foreign banking entities solely outside the U.S. and the exemption for prime brokerage transactions.
FDIC board member Martin J. Gruenberg voted against the rule, stating the “final rule before the FDIC Board today would effectively undo the Volcker Rule prohibition on proprietary trading by severely narrowing the scope of financial instruments subject to the Volcker Rule. It would thereby allow the largest, most systemically important banks and bank holding companies to engage in speculative proprietary trading funded with FDIC-insured deposits.” Gruenberg emphasized that the final rule “includes within the definition of trading account only one of these categories of fair valued financial instruments—those reported on the bank’s balance sheet as trading assets and liabilities. This significantly narrows the scope of financial instruments subject to the Volcker Rule.”
The final rule will take effect January 1, 2020, with banks having until January 1, 2021, to comply. Prior to the compliance date, the 2013 rule will remain in effect. Alternatively, banking entities may elect to voluntarily comply, in whole or in part, with the final rule’s amendments prior to January 1, 2021, provided the agencies have implemented necessary technological changes.
On October 17, House Financial Services Committee Chairwoman Maxine Waters (D-Calif) and Senate Banking Committee Ranking Member Sherrod Brown (D-Ohio) wrote to the heads of the Federal Reserve Board, FDIC, OCC, SEC, and CFTC to oppose the federal financial regulators’ recent approval of changes to the Volcker Rule. (Previous InfoBytes coverage here.) According to Waters and Brown, the final revisions—which are designed to simplify and tailor compliance with Section 13 of the Bank Holding Company Act’s restrictions on a bank’s ability to engage in proprietary trading and own certain funds—“open the door to the very risky, speculative activities that Congress sought to prohibit.” Specifically, the letter addresses rollback concerns such as (i) narrowing the definition of a “trading account,” which would weaken the short-term intent prong; (ii) “eliminating metrics reporting”; (iii) “removing activity restrictions on non-U.S. banks”; and (iv) “expanding permitted activity related to covered funds.” Waters and Brown urged the regulators to reconsider their decision to adopt the revisions, and requested that they be provided with the data and metrics used by the regulators during their analysis, as well as the regulators’ justification for “eliminating or reducing the information and data reported by banking entities.”
On October 8, the Federal Reserve Board announced that all five federal financial regulators have signed off on final revisions to the Volker Rule (the Rule) to simplify and tailor compliance with Section 13 of the Bank Holding Company Act’s restrictions on a bank’s ability to engage in proprietary trading and own certain funds. As previously covered by InfoBytes, the other four regulators approved the revisions last month. The revisions, which take full effect on January 1, 2021, clarify prohibited activities and simplify compliance burdens by tailoring compliance obligations to reflect the size and scope of a bank’s trading activities, with more stringent requirements imposed on entities with greater activity. The Fed noted that community banks are generally exempt from the Rule by statute, and stressed that the “revisions continue to prohibit proprietary trading, while providing greater clarity and certainty for activities allowed under the law,” and that the regulators “expect that the universe of trades that are considered prohibited proprietary trading will remain generally the same as under the agencies’ 2013 rule.” However, Federal Reserve Governor Lael Brainard issued a dissenting statement, stressing that the revised Rule “weakens the core protections against speculative trading within the banking federal safety net,” and that the elimination without replacement of the “‘short-term intent’ test for firms engaged in higher levels of trading activities… materially narrows the scope of covered activities.” Brainard also expressed concern about “examiners’ ability to assess compliance with the final rule because it relies on firms’ internal self-policing to set limits to distinguish permissible market making from illegal proprietary trading, no longer requires firms to promptly report limit breaches and increases, and narrows the scope of the CEO attestation requirement.”
On September 18, the SEC announced the approval of final revisions to the Volker Rule (the Rule) to simplify and tailor compliance with Section 13 of the Bank Holding Company Act’s restrictions on a bank’s ability to engage in proprietary trading and own certain funds. As previously covered by InfoBytes, the final revisions were approved by the OCC and FDIC at the end of August, and the Federal Reserve Board is expected to adopt the changes in the near future. In approving the revisions, Chairman Jay Clayton stated that the SEC collaborated with the other federal regulatory agencies to ensure the changes would “effectively implement statutory mandates without imposing undue burdens on participants in our markets, including imposing unnecessary costs or reducing access to capital and liquidity.” Chairman Clayton emphasized that the revisions draw on the agencies’ “collective experience in implementing the rule and overseeing compliance in our complex marketplace over a number of years.”
Earlier, on September 16, the CFTC announced a 3-2 vote to approve the final revisions. Commissioner Tarbert stated that the final revisions would provide banking entities and their affiliates with “greater clarity and certainty about what activities are permitted under” the Rule as well as reduce compliance burdens. In voting against the approval, Commissioner Behnam issued a dissenting statement expressing, among other things, concerns about “narrowing the scope of financial instruments subject to the  Rule,” which would limit the Rule’s scope “so significantly that it no longer will provide meaningful constraints on speculative proprietary trading by banks.” Commissioner Berkovitz also dissented, arguing that the revisions “will render enforcement of the [R]ule difficult if not impossible by leaving implementation of significant requirements to the discretion of the banking entities, creating presumptions of compliance that would be nearly impossible to overcome, and eliminating numerous reporting requirements.” Commissioner Berkovitz also criticized the rulemaking process that led to the final revisions, arguing that a number of the changes were not adequately discussed in the notice of proposed rulemaking process, including amendments to the “accounting prong” and the rebuttable presumption of proprietary trading.
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