The conditions imposed on the exclusion are specifically intended to prevent the exclusion from being used as a vehicle to raise funds from investors primarily for the purpose of profiting from investment activity in securities for resale or other disposition or otherwise trading in securities.4 Thus, for example, a vehicle that raises funds from investors primarily for the purpose of sharing in the benefits, income, gains or losses from ownership of securitiesas opposed to conducting a business or engaging in operations or other non-investment activitieswould be raising money from investors primarily for the purpose of "investing in securities," even if the vehicle may have other purposes.5. at 5675 ("Section 13's definition of private equity fund and hedge fund by reference to section 3(c)(1) and 3(c)(7) of the Investment Company Act appears to reflect Congress' concerns about banking entities' exposure to and relationships with investment funds that explicitly are excluded from SEC regulation as investment companies.") Volcker Rule: What It Does and Why It's Needed - The Balance A banking entity would thus have until July 21, 2017, to conform its relationships with legacy covered funds. In the view of the Agencies' staffs, the banking entity may hold and dispose of these residual market-making positions, provided (i) the banking entity hedges the risks of any such positions in accordance with the risk-mitigating hedging exemption2 and (ii) the banking entity sells or unwinds the residual market-making positions as soon as commercially practicable. The Office of the Comptroller of the Currency (OCC) is working closely with the other agencies charged with implementing the requirements of section 13 of the Bank Holding Company Act of 1956 ("BHC Act"), including the Federal Reserve Board, the Federal Deposit Insurance Corporation, the U.S. Securities and Exchange Commission, and the U.S. Commodity Futures Trading Commission. As explained in the Board Conformance Order, a banking entity must conform all of its proprietary trading activities and covered fund activities and investments to the prohibitions and requirements of section 13 and the final rule by no later than the end of the conformance period. These requirements in section 44.12 of the final rule do not apply to Qualifying TruPS CDOs held in accordance with section 44.16(a) of the final rules because section 44.16(a) provides an additional and independent exemption for Qualifying TruPS CDOs.8 If, however, a banking entity acts as a market maker with respect to interests in a Qualifying TruPS CDO that is a covered fund, then section 44.11(c) of the final rule makes the capital deduction provision in section 44.12 applicable to those interests.9 Moreover, if a banking entity relies on section 44.12 to hold an interest in a TruPS CDO that is a covered fund but is not a Qualifying TruPS CDO, the banking entity would be required to comply with all the limits and restrictions in section 44.12, including the requirement to deduct its investment from its tier 1 capital for purposes of determining compliance with applicable regulatory capital requirements. Moreover, banking entities should not expand activities and make investments during the conformance period with the expectation that additional time to conform those activities or investments will be granted. Is a banking entity required to deduct from its tier 1 capital an investment in a collateralized debt obligation backed by trust preferred securities retained pursuant to section 44.16(a) of the interim final rule ("Qualifying TruPS CDO")? 3 Under the interim final rule, a "Qualifying TruPS Collateral is defined by reference to the standards in section 171(b)(4)(C) of the Dodd-Frank Act to mean any trust preferred security or subordinated debt instrument issued prior to May 19, 2010 by a depository institution holding company that, for any reporting period within the 12 months immediately preceding the issuance of such instrument, had total consolidated assets of less than $15,000,000,000 or issued prior to May 19, 2010 by a mutual holding company. 1 To the extent that an issuer may rely on section 2(b) of the Investment Company Act, the issuer would be relying on an exemption from regulation under the Investment Company Act other than the exclusions contained in section 3(c)(1) or 3(c)(7), and thus would qualify for the exclusion from the covered fund definition provided by section 44.10(c)(12)(ii) of the final rule. January 30, 2020, Transcripts and other historical materials, Federal Reserve Balance Sheet Developments, Community & Regional Financial Institutions, Federal Reserve Supervision and Regulation Report, Federal Financial Institutions Examination Council (FFIEC), Securities Underwriting & Dealing Subsidiaries, Types of Financial System Vulnerabilities & Risks, Monitoring Risk Across the Financial System, Proactive Monitoring of Markets & Institutions, Responding to Financial System Emergencies, Regulation CC (Availability of Funds and Collection of 1 See Board Order Approving Extension of Conformance Period, available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20131210b1.pdf. Some firms have stated that metrics data reported to the Agencies represent confidential proprietary information of the banking entity. The 2013 Rule exempts from the prohibition on proprietary trading certain risk-mitigating hedging activities that are designed to reduce the specific risks to a banking entity in connection with or related to individual or aggregated positions, contracts, or other holdings. May an issuer that would be a covered fund rely on the joint venture exclusion from the definition of covered fund under section 44.10(c)(3) of the final rule? Would an entity that is formed and operated pursuant to a written plan to become a foreign public fund receive the same treatment? If the marketing restriction were to apply more generally to the activities of any person (including the covered fund itself), the applicability of the SOTUS covered fund exemption would be significantly limited because a third-party foreign fund's offering that targets residents of the United States would make the SOTUS covered fund exemption unavailable for all foreign banking entity investors in the fund. Banking reform updater: Updated Volcker Compliance Program requirements See 79 Fed. 552(b)(4). Following is a high-level summary of certain key features of the final rule. 4 A floating-rate loan does not become a new covered transaction whenever the interest rate changes as a result of an increase or decrease in the index rate. On the other hand, the Agencies' staffs do not believe it would be reasonable for a trading desk to rely solely on either or both the name of the issuer or the title of the issuer's securities; these factors alone would not convey sufficient information about the issuer for a trading desk reasonably to determine whether a security is issued by a covered fund. In the final rule, the agencies have adopted an exclusion for a customer-driven swap or a customer-driven security-based swap and a matched swap or security-based swap if: (i) the transactions are entered into contemporaneously; (ii) the banking entity retains no more than minimal price risk; and (iii) the banking entity is not a registered dealer, swap dealer, or security-based swap dealer. The final rule modifies the proposal to specify that the agencies will take into account the liquidity, maturity, and depth of the market for the relevant types of financial instruments when determining whether to rebut the presumption of compliance. http://www.treasurydirect.gov/instit/marketables/strips/strips.htm, https://www.occ.gov/topics/capital-markets/financial-markets/trading/volcker-rule-implementation/volcker-rule-implementation-faqs.html#metrics, https://www.occ.gov/topics/capital-markets/financial-markets/trading/volcker-rule-implementation/volcker-rule-implementation-faqs.html#foreign, https://www.occ.gov/topics/capital-markets/financial-markets/trading/volcker-rule-implementation/volcker-rule-implementation-faqs.html#ceoattestation, http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20141218a1.pdf. Thus, the relevant banking entity must collect metrics data for the month of July and report that data by September 2, 2014. A banking entity may provide the required annual attestation in writing at any time prior to the March 31 deadline to the relevant Agency. Section 13 of the BHC Act generally prohibits a banking entity from acquiring or retaining any ownership interest in, or acting as a sponsor to, a hedge fund or private equity fund ("covered fund"),1 subject to a number of exemptions. Reg. While these frequently asked questions (FAQs) apply to banking entities for which the OCC has jurisdiction under section 13 of the BHC Act, they have been developed by staffs of the agencies and substantively identical versions will appear on the public websites of each agency. (go back), Posted by Lee Meyerson and Keith Noreika, Simpson Thacher & Bartlett LLP, on, Harvard Law School Forum on Corporate Governance, benefitting from short-term price movements, (iii) realizing short-term arbitrage profits, or (iv) hedging another trading account position covered by the short-term intent prong., Six Pillar Program (Currently applicable to, Between $1 Billion and $20 Billion (Moderate), Simplified (Update existing policies and procedures). 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? 1 In particular, 44.20(d)(3) of the rule provides that, unless the appropriate Agency notifies the banking entity in writing that it must report on a different basis . The 2013 Rule contains various exclusions and exemptions from the scope of prohibited proprietary trading. No, a banking entity is not required to deduct from its tier 1 capital an investment in a Qualifying TruPS CDO retained pursuant to section 44.16(a) of the interim final rule. Staffs of the Agencies previously issued an FAQ stating that a banking entity with trading assets and liabilities of at least $50 billion, as calculated under 44.20(d)(1), must begin to measure and record the required metrics on a daily basis starting July 1, 2014 and report its daily metrics recorded during the month of July by September 2, 2014. Staffs of the Agencies understand that, unlike in the case of U.S. registered investment companies,5 sponsors of foreign public funds in some foreign jurisdictions select the majority of the fund's directors or trustees, or otherwise control the fund for purposes of the BHC Act by contract or through a controlled corporate director. banking industry research, including quarterly banking A banking entity that reports metrics under Appendix A prior to the end of the conformance period need not report the limits required by 44.4(a)(2)(iii),44.4(b)(2)(iii), and 44.5(b)(1)(i) until the end of the conformance period. 2 See "Treatment of Certain Collateralized Debt Obligations Backed Primarily by Trust Preferred Securities With Regard to Prohibitions and Restrictions on Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds," 79 Fed. The https:// ensures that you are connecting to The final rule removes the requirements in the 2013 Rule that a banking entity relying on the risk-mitigating hedging exemption must perform correlation analysis and show that the risk-mitigating hedging activity demonstrably reduces or otherwise significantly mitigates the specific risks being hedged. In addition, staff in the SEC's Division of Investment Management have taken the position, based on the facts and representations presented to the staff in each case, that certain GSE-sponsored mortgage-backed securities issuers would not be required to register under the Investment Company Act in reliance on section 2(b) of that Act. Institution Letters, Policy The regulations have been developed by five federal financial regulatory agencies, including the Federal Reserve Board, the Commodity Futures Trading Commission, the Federal Deposit . Reporting and record keeping guidelines require banks to furnish quantitative measurements of their trading desk activities on an ongoing basis. The staffs of the Agencies have explained that an issuer that will become a foreign public fund would be treated during its seeding period in the same manner as an issuer that will become an excluded registered investment company. Services, Sponsorship for Priority Telecommunication Services, Supervision & Oversight of Financial Market Contrary to the proposal, the final rule eliminates the CEO attestation requirement for banking entities without significant trading assets and liabilities (unless otherwise required on a case-by-case basis). As of October 8, 2019, the five agencies responsible for administering the Volcker Rule- the Commodity Futures Trading Commission (CFTC), the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board (FRB), the Office of the Comptroller of the Currency (OCC) and the Securities and Exchange Commission (SEC) - have approved a final . Senior Deputy Comptroller and Chief Counsel, Third-Party Relationships: Interagency Guidance on Risk Management, Central Application Tracking System (CATS), Office of Thrift Supervision Archive Search, Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds. stability and public confidence in the nations financial history, career opportunities, and more. | other information issued by the FDIC alone, or on an interagency the official website and that any information you provide is 33,949 (June 8, 2012). 5 This is based on the definition of "extension of credit" under the Board's Regulation W promulgated under the Federal Reserve Act. Volcker Rule Implementation | OCC The 2019 Final Rule follows a July 2018 proposal (2018 Proposal), which was the subject of significant criticism throughout the comment process. As noted above, the agencies noted that they continue to consider covered fund-related provisions other than those for which specific rule text was proposed, which they intend to address in a separately issued future proposal.