On December 19, three federal financial institution regulatory agencies (the Board of Governors of the Federal Reserve System (Board), the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC)) issued a Frequently Asked Questions release (FAQ) to provide “clarification and guidance” to banking entities regarding investments in “Covered Funds.” The FAQ discusses in particular whether collateralized debt obligations (CDOs) backed by trust preferred securities (TruPS) are Covered Funds under the final rules to implement Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The final rules were approved by the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Board, the FDIC and the OCC on December 10.
According to the three agencies, the FAQs “are intended to clarify that banking entities that have holdings in TruPS. CDOs are not required to sell these holdings immediately under the final rules, but instead may use the conformance period to determine if they can be brought into conformance by the end of the conformance period, which is July 21, 2015.” While immediate divestiture is not required, the FAQ was immediately criticized by three prominent bank trade association groups for ignoring the mark-to-market accounting effect and the related adverse effect on capital that the rule is expected to have on smaller insured institutions and community banks across the nation.
It is not clear what effect, if any, Congressional interest in the TruPS CDO controversy will have on the upcoming Senate vote, now expected in January, to name Janet Yellin as the new Chair of the Board.
The FAQ may be found here.