at 5732 ("[F]or purposes of section 13 of the BHC Act and the final rule, a registered investment company, SEC-regulated business development company, and a foreign public fund as described in __.10(c)(1) of the final rule will not be considered to be an affiliate of the banking entity if the banking entity owns, controls, or holds with the power to vote less than 25 percent of the voting shares of the company or fund, and provides investment advisory, commodity trading advisory, administrative, and other services to the company or fund only in a manner that complies with other limitations under applicable regulation, order, or other authority."). As noted in the Board Order extending the conformance period under section 13 of the BHC Act, each banking entity must conform its proprietary trading activities and covered fund activities and investments to the prohibitions and requirements of section 13 and the final rule by no later than the end of the conformance period. basis, provided to promote safe-and-sound operations. The final rule excludes from the trading account any purchase or sale of a financial instrument that does not meet the definition of trading asset or trading liability under the banking entitys applicable reporting form. An official website of the United States government. Since the limits required by 44.4 and 44.5 of the final rule are not required to be established prior to the end of the conformance period, when would a banking entity need to report metrics that include these limits? The limitations in the joint venture exclusion are meant to ensure that the joint venture is not an investment vehicle and that the joint venture exclusion is not used as a means to evade the limitations in the BHC Act on investing in covered funds.3, This exclusion is not met by an issuer that raises money from a small number of investors primarily for the purpose of investing in securities, whether the securities are intended to be traded frequently, held for a longer duration, held to maturity, or held until the dissolution of the entity. Section 44.11 of the final rule provides that a banking entity may acquire and retain an ownership interest in a covered fund that the banking entity organizes and offers, subject to a number of conditions. The final rule removes the requirements in the 2013 Rule that a banking entity relying on the risk-mitigating hedging exemption must perform correlation analysis and show that the risk-mitigating hedging activity demonstrably reduces or otherwise significantly mitigates the specific risks being hedged. 5 The Board granted banking entities until July 21, 2016, to conform investments in and relationships with covered funds that were in place prior to December 31, 2013, and announced its intention to act next year to grant banking entities until July 21, 2017, to conform investments in and relationships with legacy covered funds. Reg. If a banking entity exits a market-making business permitted under the final rule, how may the banking entity sell or unwind its residual market-making positions? The instructions and technical specifications conveyed by this bulletin provide the relevant XML schema and additional guidance on how to prepare and submit quantitative measurements relating to the Volcker rule. Branches and Agencies of The agencies published a notice of proposed rulemaking on July 17, 2018, that proposed amendments to the 2013 rule. Senior Deputy Comptroller and Chief Counsel, Third-Party Relationships: Interagency Guidance on Risk Management, Central Application Tracking System (CATS), Office of Thrift Supervision Archive Search. 3 Notably, the reasonableness of a particular objective factor may vary based on the type of issuer, and relying on objective factors may not be reasonable for all types of issuers. The Volcker rule generally prohibits banking entities from engaging in proprietary trading or investing in or sponsoring hedge funds or private equity funds. . The regulations have been developed by five federal financial regulatory agencies, including the Federal Reserve Board, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission. This view is consistent with limiting the extraterritorial application of section 13 to foreign banking entities while seeking to ensure that the risks of covered fund investments by foreign banking entities occur and remain solely outside of the United States.2 If the marketing restriction were applied to the activities of third parties, such as the sponsor of a third-party covered fund (rather than the foreign banking entity investing in a third-party covered fund), the SOTUS covered fund exemption may not be available in certain circumstances where the risks and activities of a foreign banking entity with respect to its investment in the covered fund are solely outside the United States.3. Banking entities subject to the reporting requirement must report these metrics within 30 days of the end of each calendar quarter unless the OCC notifies the banking entity in writing that it must report on a different basis. Would an entity that is formed and operated pursuant to a written plan to become a foreign public fund receive the same treatment? However, any servicing asset that is a security must be a permitted security under 44.10(c)(8)(iii). Learn about the FDICs mission, leadership, In any case, a banking entity should provide the CEO certification annually within one year of its prior certification. Browse our extensive research tools and reports. U.S. banking organizations exceeding $10 billion in trading assets plus trading liabilities will need to report certainquantitative measures to their regulators. Under the 2013 Rule, banking entities are permitted to engage in only limited risk-mitigating hedging activities involving ownership interests in a covered fund in connection with hedging employee compensation arrangements (i.e., where the ownership interest in the covered fund hedges risks to the banking entity in connection with a compensation arrangement with an employee who directly provides services to the covered fund). Following is a high-level summary of certain key features of the final rule. The rule implementing section 13 of the BHC Act and the accompanying preamble make clear that a registered investment company (RIC) and a foreign public fund (FPF) are not covered funds for purposes of the statute or implementing rules.1 The preamble to the implementing rules also recognizes that a banking entity may own a significant portion of the shares of a RIC or FPF during a brief period during which the banking entity is testing the fund's investment strategy, establishing a track record of the fund's performance for marketing purposes, and attempting to distribute the fund's shares (the so-called seeding period).2, Staff of the Agencies would not advise the Agencies to treat a RIC or FPF as a banking entity under the final rule solely on the basis that the RIC or FPF is established with a limited seeding period, absent other evidence that the RIC or FPF is being used to evade section 13 and the final rule. The final rule eliminates the 2013 rules CEO attestation requirement for all banking entities except for banking entities with significant trading assets and liabilities. 5 The final rule requires a vehicle that is a covered fund (as opposed to a RIC or FPF) during its seeding period and that is formed and operated pursuant to a written plan to become a RIC to apply to the Board for an extension of the one-year seeding period already granted to such covered funds. revises the definition of trading account by (a) eliminating the presumption that the purchase (or sale) of a financial instrument held for 60 days or fewer is within the short-term intent prong of the trading account, (b) establishing a presumption that the purchase (or sale) of a financial instrument held for 60 days or more is not within the short-term intent prong of the trading account, (c) providing that firms that are subject to the market risk rule prong are not subject to the short-term intent prong, and (d) allowing firms to opt into the market risk rule prong. Under the Department of the Treasury's Separate Trading of Registered Interest and Principal of Securities program, eligible Treasury securities are authorized to be separated into principal and interest components and transferred separately.1 These separate principal and interest components are also referred to as "STRIPS." Notably, the final rule entirely eliminates the enhanced compliance program requirements, which are currently applicable to banking entities with over $50 billion in total consolidated assets or significant trading assets and liabilities. Similarly, the exclusion would not apply to entities or arrangements that raise money from investors primarily for the purpose of investing in securities for the benefit of one or more investors and sharing the income, gain or losses on securities acquired by that entity. This means that metrics for the month of July 2015 must be reported within 30 days of the end of the month, or August 31, 2015. See 79 Fed. An official website of the United States government. important initiatives, and more. at 5675 ("Section 13's definition of private equity fund and hedge fund by reference to section 3(c)(1) and 3(c)(7) of the Investment Company Act appears to reflect Congress' concerns about banking entities' exposure to and relationships with investment funds that explicitly are excluded from SEC regulation as investment companies.") Is not, and does not hold itself out as being, an entity or arrangement that raises money from investors primarily for the purpose of investing in securities for resale or other disposition or otherwise trading in securities. at 5681 (stating that the limit on the number of co-venturers "allows flexibility in structuring larger business ventures without involving such a large number of partners as to suggest the venture is in reality a hedge fund or private equity fund established for investment purposes" and that "[t]he Agencies will monitor joint venturesand other excluded entitiesto ensure that they are not used by banking entities to evade the provisions of section 13"; also stating that "[t]he final rule's requirement that a joint venture not be an entity or arrangement that raises money from investors primarily for the purpose of investing in securities for resale or other disposition or otherwise trading in securities prevents a banking entity from relying on this exclusion to evade section 13 of the BHC Act by owning or sponsoring what is or will become a covered fund"). FED Revises Reporting Requirements Associated with Volcker Rule See Board of Governors of the Federal Reserve System, "Order Approving Extension of Conformance Period under Section 13 of the Bank Holding Company Act" (December 18, 2014) (Board's Conformance Period Order), available at http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20141218a1.pdf. Federal Reserve Board - Reporting Forms November 14, 2019, Chief Executive Officers of All National Banks, Federal Savings Associations, and Federal Branches and Agencies; Department and Division Heads; All Examining Personnel; and Other Interested Parties, On November 14, 2019, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System, the U.S. Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, and the U.S. Securities and Exchange Commission (collectively, the agencies) published a final rule amending the regulations that implement section 13 of the Bank Holding Company (BHC) Act, commonly known as the Volcker rule. Additionally, the OCC may notify a banking entity that does not have significant trading assets and liabilities in writing that it must satisfy the reporting requirements contained in 12 CFR part 44, Appendix A. 5 In the context of market making-related activity, it generally would not be reasonable for the compliance program to permit the trading desk to rely on objective factors, shared utilities, or third-party service providers in determining whether an issuer is a covered fund if the banking entity has already determined that the issuer is a covered fund in connection with sponsoring the issuer or acquiring an ownership interest in the issuer as an investment. Appendix A to the final rule provides that a banking entity with significant trading assets and liabilities must furnish periodic reports to the Agencies regarding a variety of quantitative measurements of their covered trading activities. The Volcker rule generally prohibits banking entities from engaging in proprietary trading or investing in or sponsoring hedge funds or private equity funds. Reg. Instead, the final rule replaces the rebuttable presumption in the 2013 Rule (under which a purchase or sale of a financial instrument is presumed to be for the trading account if the banking entity holds the financial instrument for fewer than 60 days or substantially transfers the risk of the financial instrument within 60 days of purchase or sale) with a rebuttable presumption that financial instruments held for 60 days or more are not included in the banking entitys trading account under the short-term intent prong. 76560, 76570 n.67. The Volcker Rule prohibits any "banking entity" from (i) engaging in proprietary trading and (ii) acquiring and retaining an ownership interest in, sponsoring or having certain relationships with hedge funds, private equity funds and certain other private funds ("covered funds"), subject to certain exemptions. . In addition, staff in the SEC's Division of Investment Management have taken the position, based on the facts and representations presented to the staff in each case, that certain GSE-sponsored mortgage-backed securities issuers would not be required to register under the Investment Company Act in reliance on section 2(b) of that Act. Staffs of the Agencies believe that, with respect to determining whether an entity is a covered fund, it would be appropriate that an issuer that will become an excluded foreign public fund be treated during its seeding period the same as an issuer that will become an excluded RIC. Volcker Rule: Quantitative Measurements | OCC Where a banking entity organizes and offers, including sponsors, an entity that may be a covered fund, the banking entity should know if the issuer is a covered fund and may not rely on objective factors. Government."). The final rule revises this compliance regime by categorizing banking entities based only the banking entitys trading assets and liabilities (without reference to the banking entitys total asset size). Under the proposal, the agencies would have reserved authority to determine, on a case-by-case basis, that any purchase or sale of one or more financial instruments by a banking entity either is or is not for the trading account of the banking entity (including by considering the impact of the activity on the safety and soundness of the banking entity or the financial stability of the United States, the risk characteristics of the particular activity, or any other relevant factor). Volcker Rule | Wex | US Law | LII / Legal Information Institute The final rule is broadly similar to the proposed rule from January. Services, Sponsorship for Priority Telecommunication Services, Supervision & Oversight of Financial Market The final rule amends the definition of trading account, adopts new exclusions from the definition of proprietary trading, streamlines existing exclusions and exemptions, and tailors compliance program obligations for banking entities. PDF 2191 Volcker Rule - Deloitte US FOR IMMEDIATE RELEASE 2020-143 Washington D.C., June 25, 2020 Five federal regulatory agencies today finalized a rule modifying the Volcker rule's prohibition on banking entities investing in or sponsoring hedge funds or private equity fundsknown as covered funds. Any written plan would be expected to document the banking entity's determination that the seeding vehicle will become a foreign public fund, the period of time during which the vehicle will operate as a seeding vehicle, the banking entity's plan to market the vehicle to third-party investors and convert it into a foreign public fund within the time period specified in 44.12(a)(2)(i)(B) of subpart C, and the banking entity's plan to operate the seeding vehicle in a manner consistent with the investment strategy, including leverage, of the issuer upon becoming a foreign public fund. In describing the marketing restriction in the preamble, the Agencies stated that the marketing restriction serves to limit the SOTUS covered fund exemption so that it "does not advantage foreign banking entities relative to U.S. banking entities with respect to providing their covered fund services in the United States by prohibiting the offer or sale of ownership interests in related covered funds to residents of the United States."1. The final rule increased the threshold for "significant" trading activity from $10 billion to $20 billion based on the average gross sum of trading assets and liabilities over the previous consecutive four quarters as measured on the last day of quarter-end. No. 1 See, e.g., 79 Fed. H.8, Assets and Liabilities of U.S. This FAQ only addresses the compliance program for a trading desk engaged in market making-related activity.5, Importantly, the banking entity's reliance on objective factors, a shared utility, or a third-party service provider must be subject to independent testing and audit requirements applicable to the banking entity's compliance program.6 If independent testing or other review of the banking entity's compliance program shows that the objective factors used by the banking entity, shared utility, or third-party service provider are not effective in identifying whether a security is issued by a covered fund, then the banking entity must promptly update its compliance program to remedy such issues and, as necessary, take action under section 44.21 of the final rule implementing section 13 of the BHC Act.
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