On August 20, 2019, the Federal Deposit Insurance Corporation (FDIC)1 and the Office of the Comptroller of the Currency (OCC) approved amendments to the regulations implementing Section 13 of the Bank Holding Company Act,2 commonly referred to as the Volcker Rule.3 Joint issuance of amendments to the current Volcker Rule (the “final rule”) are subject to the approval of Board of Governors of the Federal Reserve System (Federal Reserve), Security and Exchange Commission (SEC) and Treasury (together with the OCC and FDIC, the “agencies”).4 Subject to various exclusions and exemptions, the Volcker Rule prohibits banking entities from engaging in proprietary trading and holding certain investments in, and having relationships with, hedge funds and private equity funds. The purpose of the Volcker Rule is to prevent banking entities that have access to federal backing in the form of deposit insurance from putting funds backed by such federal protections at risk through proprietary trading or certain investments. The final rules address some, but not all of the concerns addressed by banks and other market participants regarding the scope of the Volcker Rule and other changes to the Volcker Rule are anticipated in the future. The current Volcker Rule will remain in effect until January 1, 2021, when compliance with the amendments under the final rule will be required. This Legal Alert discusses significant amendments introduced by the final rule.
Three-Tiered Compliance Approach
The final rule applies a three-tiered approach to tailor the compliance program requirements of the Volcker Rule based on an entity’s trading activity. The first and most heavily regulated category, which includes entities with $20 billion or more in consolidated trading assets and liabilities, will be subject to the most rigorous compliance requirements, including a CEO attestation requirement. The second category, which includes entities with $1 billion or more but with less than $20 billion in consolidated trading assets and liabilities, will be allowed to implement a simplified compliance program. The third category, entities that have less than $1 billion in consolidated trading assets and liabilities, benefit from a presumption of compliance.
Proprietary Trading Prohibition
In 2018, the agencies issued a Notice of Proposed Rulemaking that proposed revisions to the trading account definition, including replacing the short-term intent prong with a new prong that was based on the accounting treatment of a position (the “accounting prong”).5 The accounting prong allowed firms to benefit from a presumption of compliance with the prohibition on proprietary trading. Due to the strong opposition that the agencies received on this proposal, they are including a modified version of the original short-term intent prong with a rebuttable presumption that financial instruments held for 60 days or more are not included for purposes of the short-term intent prong.6 In addition, the final rule clarifies that an entity that is subject to the market risk capital rule prong is not also subject to the short-intent prong.7
The final rule also clarifies how banking entities may qualify for some of the exemptions and exclusions from the prohibition on proprietary trading, including exemptions for underwriting and market making activities and risk-mitigating hedging activities.
1 The FDIC’s memorandum on the final rule is available at https://www.fdic.gov/news/board/2019/2019-08-20-notice-dis-a-mem.pdf.
2 12 U.S.C. §1851.
3 For an overview of the current Volcker Rule, please see https://us.eversheds-sutherland.com/NewsCommentary/Legal-Alerts/160506/Legal-Alert-Final-Volcker-Rule-Update-and-Key-Takeaways.
4 The final rule is available at https://www.fdic.gov/news/board/2019/2019-08-20-notice-dis-a-fr.pdf.
5 83 FR 33432, the Notice of Proposed Rulemaking is available at https://www.govinfo.gov/content/pkg/FR-2018-07-17/pdf/2018-13502.pdf.
6 See pages 52-56 of the final rule.
7 See page 57 of the final rule.