Last week, federal regulators finalized a rule to exempt community banks from proprietary trading at banks. In addition, the revised rule will also allow certain hedge funds or private equity funds to share the same name or similar name with an investment adviser. The investment adviser, however, cannot be an insured depository institution, a company that controls an insured depository institution, or a bank holding company.

The Volcker Rule generally prohibits proprietary trading at banks and restricts banks from having ownership or certain other relationships with hedge funds and private equity funds. The intent of the Volcker Rule was to prevent financial institutions that can take advantage of the federal safety net from putting federal funds at risk through their trading and investment activities.

Community banks that will be exempt from the Volcker Rule are those with $10 billion or less in total consolidated assets and have total trading assets and liabilities of 5 percent or less of total consolidated assets. Proponents of exempting community banks from the proprietary trading ban argued the Volcker Rule was unnecessarily stringent on smaller banks. 

The Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission, and the Securities and Exchange Commission adopted the final rule, which will be effective upon publication in the Federal Register.