Volcker Rule Agencies Issue Interim Final Rule Exempting TruPS-backed CDOs

by Ballard Spahr LLP

Last week, the five agencies that jointly issued the final regulation implementing the Volcker Rule (the Final Rule) in December issued an interim final rule (the Interim Rule) that exempts collateralized debt obligations backed by trust-preferred securities, also known as TruPS CDOs, from the Final Rule’s broad restrictions.

As noted in a previous alert, inclusion of these securities within the coverage of the Final Rule led to a petition for judicial review filed by some banks and the American Bankers Association (ABA). While the Interim Rule will provide relief to smaller banking entities that qualify for the exemption, it is narrowly drawn and will not cover all similarly situated institutions.

The agencies that promulgated the Volcker Rule (collectively, the Agencies) are the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the Commodity Futures Trading Commission (CFTC), and the Securities and Exchange Commission. Though only the three bank regulators (OCC, the Federal Reserve, and FDIC) were named respondents in the litigation, the two market regulators (SEC and CFTC) also participated in this effort to resolve the dispute.

The petitioners in the litigation assert that TruPS CDOs are debt securities, whereas the Volcker Rule, enacted by Section 619 of the Dodd-Frank legislation, is targeted only at equity investments. Another provision of Dodd-Frank, Section 171 (commonly referred to as the Collins Amendment), grandfathered, for purposes of regulatory capital, TruPS CDOs issued before May 19, 2010, by holding companies with $15 billion or less in total consolidated assets.

The Agencies are attempting to reconcile Volcker Rule interests with those of the Collins Amendment. The Interim Rule does not formally amend the Final Rule but co-exists as a separate but complementary regulation. It provides that the covered fund restrictions of the Final Rule are inapplicable to a banking entity’s owning an interest in, or sponsoring, any issuer of TruPS CDOs provided three conditions are met:

  • The issuer was established, and the interest was issued, before the Collins Amendment grandfathering date, May 19, 2010.
  • The banking entity reasonably believes that the offering proceeds received by the issuer were “invested primarily” in “Qualifying TruPS Collateral.”
  • The banking entity acquired the interest on or before December 10, 2013 (the date the Final Rule was issued), or acquired the interest in the course of a merger with or acquisition of a banking entity that itself acquired the interest on or before that date.

Regarding the second condition, according to the Agencies, the term “invested primarily” focuses on securitizations where a majority of the offering proceeds were invested in “Qualifying TruPS Collateral.” Such collateral is defined as “any trust preferred security or subordinated debt instrument issued prior to May 19, 2010 by a depository institution holding company that, as of the end of any reporting period within 12 months immediately preceding the issuance of such trust preferred security or subordinated debt instrument, had total consolidated assets of less than [$15 billion] or issued prior to May 19, 2010 by a mutual holding company.”

According to the Agencies, the exemption is targeted only at issuers formed primarily for the purpose of investing primarily in “Qualifying TruPS Collateral.” The exemption will not, however, cover obligations that display some similarities with TruPS CDOs, such as debt securities of collateralized loan obligations.

Following issuance of the Interim Rule, the ABA announced that it was dropping its request for emergency judicial relief but will maintain the litigation, at least for now, while the association consults with its membership on the “impact and implications” of the Interim Rule.

The Interim Rule is open for comment. Some issues worthy of comment are:

  • Whether the exemption should be enlarged to cover issuers that were not formed (primarily or otherwise) for the purpose of “investing primarily” in “Qualifying TruPS Collateral”
  • Whether the Interim Rule is fully consistent with both the Volcker Rule and the Collins Amendment

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.

© Ballard Spahr LLP | Attorney Advertising

Written by:

Ballard Spahr LLP

Ballard Spahr LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.