On December 10, 2013, the Board of Governors of the Federal Reserve System, Commodity Futures Trading Commission, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and Securities Exchange Commission announced the “final rules” implementing § 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Volcker Rule, which some call the centerpiece of the Dodd-Frank Act, prohibits banks from engaging in most proprietary trading (“engaging as principal for the trading account of the banking entity in any purchase or sale of one or more financial instruments”), while allowing for certain underwriting activities, market making activities, and trading in certain domestic government obligations and foreign government obligations, limits hedging by requiring that hedging be against “specific, identifiable risks to the banking entity,” and limits ownership of hedge funds and private equity firms. The rule was designed to limit excessive risk-taking and to end a “too big to fail” mentality.

Immediately after issuance of the final Volcker Rule, the American Bankers Association filed suit in American Bankers Association, et al v. Federal Deposit Insurance Corporation, et al, Civil Action No. 1:13-cv-02050-RJL, pending in the United States District Court for the District of Columbia, asking the court to void the final rule’s definition of “other similar interest” in order to prevent banks from being required to “divest their holdings in a commonly held debt instrument known as a ‘TruPS-backed CDO’ by 2015 and, under Generally Accepted Accounting Principles (‘GAAP’), [and] take an immediate and irrevocable hit to earnings and capital as a result.” The suit sought temporary injunctive relief and a preliminary injunction. At the same time, members of Congress from both sides of the aisle questioned the final rule and some introduced bills to limit or rollback application of the rule.

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Topics:  American Bankers Association, Banking Sector, Collateralized Debt Obligations, Dodd-Frank, FDIC, Final Rules, Financial Regulatory Reform, Hedge Funds, Market Making, Private Equity, Proprietary Trading, Trust Preferred Securities, Underwriting, Volcker Rule

Published In: General Business Updates, Finance & Banking Updates, International Trade Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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