What you need to know about the Volcker Rule - CNBC The existing Volcker Rule regulations Public Welfare Fund Exclusion40excludes from the covered fund definition a fund that conforms to the requirements of the public welfare investing authority set forth in the National Bank Act.41 The reference to public welfare investing authority in the Volcker Rule regulations does not explicitly include investments made under banking agency regulations, including qualifying investments made pursuant to banking agency regulations implementing the Community Reinvestment Act.42 In the 2020 Final Regulations, the Agencies modified the Public Welfare Exclusion specifically to include investments that qualify for consideration under the regulations implementing the Community Reinvestment Act, as well as investments in rural business investment companies and qualified opportunity funds. However, the preamble accompanying the issuance of the final regulations in 2013 stated that such parallel investments could be construed as an evasion of the Volcker Rule. Title VII, FLSA Amendments Expand Protections for Pregnant and Mississippis New Software Direct Pay Permit Now Available Online, Podcast Episode 101: Claude Treece, Partner. Intellectual Property Practice Group at Mintz Levin. 63This provision relates to whether restricted profit interests held by banking entity employees or directors with respect to Related Covered Funds should be attributed to the banking entity. Federal Reserve Board - Volcker Rule He represents investment banks and other institutional lenders and underwriters in secured commercial lending transactions (both syndicated and bilateral) andCLOs. Somewhat More Clarity on The Reach of The New Foreign Subsidies Option Grant Practices: A Trap for the Unwary Spring-Loading and Unpatched Fortinet Vulnerability Being Exploited by Threat Actors, U.S. Executive Branch Update July 7, 2023, FDA Publishes Updated List of Priority Guidance Topics, BNSF Awarded New Trial for BIPA $228M Award. A credit fund is defined as an issuer the assets of which consist solely of: rights and other assets that are related or incidental to acquiring, holding, servicing, or selling loans, or debt instruments (excluding commodity forward contracts); and, certain interest rate and foreign exchange derivatives the terms of which relate to the loan and debt instruments and which reduce the interest rate or foreign exchange risk.44. 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. To limit the application of the Volcker Rule to foreign excluded funds, in 2017 the Agencies issued a policy statement that stated that the Agencies would take no enforcement action against a qualifying foreign excluded fund regarding its compliance with the Volcker Rule34; this policy statement was renewed in 2019. He received his J.D.,with distinction, from The University of Iowa College of Law, andhis B.S. Attorney Advertising Notice: Prior results do not guarantee a similar outcome. Notice of Proposed Rulemaking: Volcker Rule Small Bank Exemption December 18, 2018 Included on the Summary Agenda for today's FDIC Board meeting is a Notice of Proposed Rulemaking (NPR) that would exempt from the Volcker Rule small banks that have . The existing Volcker Rule regulations do not specifically address the treatment of parallel investments in which the banking entity invests directly in the same portfolio companies as does the Related Covered Fund. Key Takeaways The Volcker Rule prohibits banks from using their own accounts for short-term proprietary trading of securities, derivatives, and commodity futures, as well as options on any of. Thus, issuers typically rely on 34 Act concepts when determining whether an instrument is eligible to be included in a securitization relying on the Loan Securitization Exclusion. 2Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds,; Final Rule, 84 Fed. FTC Finalizes Revisions to the Endorsement Guides, Proposes New Rule CFPB Highlights Banking and Credit Hurdles for Minority and Rural ISSB Takes The Lead On Global Sustainability Disclosure Standards SCOTUS Increases Burden on Employers to Deny Religious Accommodations. Reg. OCC staff FDIC | Banker Resource Center: Volcker Rule PDF Volcker Rule Board Memo - Federal Reserve Board Special Characters . In addition, Stuart has broad experience representing issuers, Gregg Jubin is a partner inthe Capital Markets Group and Managing Partner of the Washington, D.C., office. As amended, this aspect of the Volcker Rule regulations now provides that: With respect to a banking entity that is, or is controlled directly or indirectly by a banking entity that is, located in or organized under the laws of the United States or of any State and any issuer for which such banking entity acts as sponsor, the sponsoring banking entity may not rely on the exemption in paragraph (c)(1)(i) of this section for such issuer unless more than 75 percent of the ownership interests in the issuer are sold to persons other than: (C) affiliates of such sponsoring banking entity or such issuer; and. The Volcker Rule debate is a diversion from a broader discussion about the structure of the U.S. banking system. European Commission Proposes Regulation on the Harmonization of Rules Hunton Andrews Kurths Privacy and Cybersecurity, SCOTUS Update: Administrative Law Takeaways from Biden v. Nebraska. Ten Minute Interview: Ways to Plan for the Next Generations Made in the USA-ish: FTC Charges Clothing Accessories Companies for International Entrepreneur Parole Series Part 2: Document Requirements, The FTC Sets Its Sights on Biometric Information, Regulation of Digital Health Products by FDA. FinReg Round-Up Vol. 1 No. 5 | Loeb & Loeb LLP The final clause in the above definition appears to grant issuers fairly broad latitude to define cause with respect to the manager removal provisions in the management agreement or other transaction documents, provided that the concept of cause cannot be related solely to the performance of the fund or decisions made by the manager for which the relevant documents provide the manager discretion. For example, a senior loan or a senior debt interest involving other potential covered funds (such as a private equity fund or a commercial paper conduit) would be deemed to not constitute an ownership interest in these entities. (D) the role of the banking entity and its affiliates and employees in sponsoring or providing any services to the covered fund. The other similar interest definition in the current Volcker Rule regulations sets forth seven criteria, the existence of any one which criteria in an instrument could cause the instrument to be an ownership interest.9 If the instrument is an ownership interest and has been issued by a covered fund, then any banking entity would not be permitted to purchase or retain the instrument (subject to certain minor exceptions, for example, in order to comply with U.S. risk retention requirements). It should be noted that the above three conditions comprise three of the seven other similar interest criteria. This proposed change was intended to prevent a Volcker Rule violation if a banking entity were to invest in a third-party foreign public fund and it is later determined that such third-party fund failed to comply with all applicable requirements.. There are many headlines today that "nearly half" of our Congress Cracks Down on Sales of Stolen and Counterfeit Goods, HRSA Initiates Audits and Requires Return of Provider Relief Funds, The Comprehensive Privacy Law Deluge: Approaching Notice Obligations. 54For the purpose of the Family Wealth Management Vehicle Exclusion, a closely related person is a natural person (including the estate and estate planning vehicles of such person) who has longstanding business or personal relationships with any family customer.. WASHINGTON Banks notched a clear victory this past week when regulators approved a significant rollback of the Volcker Rule. In addition, the banking entitys transactions with (apart from its ownership interest in) the qualifying venture capital fund must comply with the Super 23A restrictions (discussed previously) as well as the restrictions in Section 15 of the Volcker Rule regulations,52and must be conducted in compliance with all applicable banking laws and regulations, including safety and soundness standards. As a result, issuers relying on the Loan Securitization Exclusion (in particular, CLOs) may resume including a bond bucket a common practice for CLOs prior to the implementation of the Volcker Rule although of a very limited size. The banking entity is barred from guaranteeing, assuming, or otherwise insuring the obligations or performance of the customer facilitation vehicle. The ownership interest definition includes not only traditional equity and partnership interests in the issuer, but also other interests (including potentially limited liability company, derivative, or even debt interests) that contain certain prescribed features referred to as other similar interests.8. 223.42(m). While the prospects for enactment for the Volcker Rule in its current form are dim, it is There are 256 ASCII characters, including the extended ASCII character set. While such a sponsorship in or investment in a foreign excluded fund would not be prohibited by the Volcker Rule, if such FBOs investment in or relationship with the foreign excluded fund is sufficient to cause the foreign excluded fund to be deemed controlled by the FBO, the foreign excluded fund would be deemed an affiliate of the FBO, would be deemed a banking entity for Volcker Rule purposes, and thus itself would be obligated to conform its own activities and investments with the requirements of the Volcker Rule. Rather, a banking entitys transactions with a family wealth management vehicle are subject to the arms length requirements of Super 23B,56although the banking entity generally is barred from purchasing a low-quality asset from the family wealth management vehicle except on a riskless principal basis.57 In addition, a banking entitys transactions with a family wealth management vehicle must comply with the restrictions in Section 15 of the Volcker Rule regulations.58, The Agencies adopted a new exclusion from the covered fund definition for customer facilitation vehicles, largely as proposed in the 2020 Proposal. Federal Reserve Board - Frequently Asked Questions What is the Volcker Rule? | GoCardless Volcker Rule Implementation | OCC 26Unlike its Volcker Rule counterpart, Section 23A of the Federal Reserve Act restricts, but generally does not prohibit, covered transactions between a member bank and its affiliates. The Agencies elected to limit the bucket to debt securities only, and capped the size of the bucket at 5% of the loans, cash equivalents, and other debt securities then held by the issuer, with the valuation made solely at the time the debt securities are acquired, with such valuations based on par value in most cases. 5535 (Jan. 31, 2014). The final rule is broadly similar to the proposed rule from January. As noted earlier, the Loan Securitization Exclusion limits the ability of an issuer to hold securities except certain permitted securities, which include cash equivalents. The existing Volcker Rule regulations do not define the term cash equivalent. Rather, the preamble accompanying the original Volcker Rule regulations contained a representative description of cash equivalents,15and in June 2014 the Agencies issued a FAQ incorporating this description, referring to cash equivalents as high quality, highly liquid short term investments whose maturity corresponds to the securitization's expected or potential need for funds and whose currency corresponds to either the underlying loans or the asset-backed securities.16, In the 2020 Final Regulations, the Agencies incorporate this description from the FAQ into the Volcker Rule regulations as a new definition of cash equivalents, with minor changes, including the removal of the reference to short term.17. Under the 2020 Final Regulations, a customer facilitation vehicle is defined as an issuer that is formed by or at the request of a customer of the banking entity for the purpose of providing such customer (which may include one or more affiliates of such customer) with exposure to a transaction, investment strategy, or other service provided by the banking entity., A banking entity is permitted to sponsor a customer facilitation vehicle, but may not acquire an ownership interest in the customer facilitation vehicle other than possibly a de minimis portion. (viii) other similar events that constitute cause for removal of an investment manager, provided that such events are not solely related to the performance of the covered fund or the investment managers exercise of investment discretion under the covered funds transaction agreements. As most readers will know, the Volcker Rule (13 of the Bank Holding Company (BHC) Act) and its implementing regulations (jointly with 13 of the BHC Act, the Volcker Rule) prohibit "banking entities" (generally, insured banks and their affiliates, and non- US banks with US banking operations) from engaging in proprietary trading or sponsoring o. 4Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds;Proposed Rule, 85 Fed. Dodd-Frank and Supporting Rulemaking 53 Dodd-Frank lists a number of objectives of the Volcker Rule: promoting the safety and soundness of banks and the financial SEC.gov | Financial Regulators Modify Volcker Rule 2023 Texas Legislative Update Issues Affecting Real Estate SCOTUS Limits Extraterritorial Reach of Lanham Act. Relaxing the Volcker Rule would be a real mistake. One of those seven criteria defining an other similar interest is whether the instrument confers on the holder the right to participate in the selection or removal of the issuers manager, adviser, director, trustee, or general partner (generally referred to as manager removal rights).10 Because the notes of the senior tranche of asset-backed securities often carry this right (and thus could be considered ownership interests), this aspect of the regulations has forced banking entities to confirm (or attempt to confirm) that a particular issuer is not a covered fund prior to acquiring its senior tranche of notes a sometimes difficult and time-consuming process. the Volcker rule actually provide support, not opposition, for the Volcker rule. 223.15(a). The Parallel Universe of the Volcker Rule - The Harvard Law School MaRisk- European Commission Adopts Proposal on Regulation of New Genomic How Law Firms Can More Effectively Repurpose High-Performing Content. However, the Volcker Rule regulations applicable to restricted profit interests attributeallownership interests held by employees or directors to the banking entity, regardless whether financed.63 To simplify the calculation of thede minimislimits and capital deductions, in the 2020 Proposal the Agencies proposed to make this aspect of the Volcker Rule regulations uniform, such that all employee or director ownership interests are attributable to the banking entity and thus includable in thede minimislimits and capital deduction calculations only if financed by the banking entity. PDF How will latest changes to Volcker Rule affect non-US banks? The final rule relieves this burden by stating that those smaller (under $10B in assets) banks with no covered 31Although Regulation W contains an exemption for riskless principal transactions, the exemption is limited to transactions involving a securities affiliate. 12 C.F.R. What Is Good Cause When Seeking to Compel Otherwise Inaccessible Pre-Merger Non-Solicitation Ban Yields No Antitrust Claim, New Washington State Geofencing Ban Set to Take Effect in July. In the 2020 Final Regulations, the Agencies are adopting an exclusion from the covered fund definition with respect to certain credit funds, as was originally proposed, with only minor modifications. Moreover, the credit fund may not engage in proprietary trading (as defined in the Volcker Rule regulations46) as if it were a banking entity. 83 Fed. The 2020 Final Regulations address this issue by creating a safe harbor for senior loans and senior debt interests. The safe harbor provides that a senior loan or a senior debt interest is not considered an ownership interest if the obligation (or interest) satisfies the following conditions: (1) under the terms of the interest the holders of such interest do not have the right to receive a share of the income, gains, or profits of the covered fund, but are entitled to receive only: (i) interest at a stated interest rate, as well as commitment fees or other fees, which are not determined by reference to the performance of the underlying assets of the covered fund; and. 11These three criteria parallel the language of existing clauses (B), (C) and (E) of the other similar interest definition. The Volcker rule generally prohibits banking entities from engaging in proprietary trading or investing in or sponsoring hedge funds or private equity funds. But the agencies aren't finished revamping the Dodd-Frank Act restrictions on bank trading. Consistent with the 2020 Proposal, the Agencies are creating a new exclusion from the covered fund definition for family wealth management vehicles. A family wealth management vehicle is defined as any entity that 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, provided further, that: if the entity is a trust, the grantor(s) of the entity are all family customers53; and. Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act added a new section 13 to the Bank Holding Company Act of 1956 ("BHC Act"), commonly referred to as the Volcker rule, that generally prohibits insured depository institutions and any company affiliated with an insured depository institution from engaging in proprietary . If you would ike to contact us via email please click here. 23Note that the prohibition applies not only to transactions with the Related Covered Fund, but also to transactions with a covered fund controlled by that Related Covered Fund (excluding prime brokerage transactions). The Volcker Rule regulations were first issued in 2014. For Oops! The Volcker Rule does provide an exemption for non-US banking entities conducting transactions subject to the Volcker Rule that are conducted solely outside the United States in accordance with certain requirements. . Regulators aren't done rolling back Volcker Rule 45In the 2020 Final Regulations, the Agencies added a requirement that any such debt or equity securities received on customary terms must also be of the type that would be permissible for the banking entity to acquire and hold directly under applicable federal banking laws and regulations.. PDF The Volcker Rule and Regulations of Scope - NYU Stern The express inclusion of the riskless principal exemption in the Volcker Rule regulations is intended to allow reliance on the exemption even though the Related Covered Fund is not a securities affiliate. In the Preamble to the 2020 Final Regulations, the Agencies make clear that other exemptions in Regulation W applicable to transactions with a securities affiliate would not be available to a banking entitys transactions with a Related Covered Fund. Reg. Such purchases or extensions of credit are subject to the following conditions: each extension of credit must be repaid, sold, or terminated within five business days; the banking entity must adopt certain policies and procedures comparable to those prescribed under Regulation W with respect to intra-day transactions32; and, the banking entity must have no reason to believe that the [Related Covered Fund] will have difficulty repaying the extension of credit in accordance with its terms.33, With respect to the Volcker Rules application to foreign banking organizations (FBOs), the definition of covered fund does not include a fund organized outside the U.S. provided that the fund is not subject to the Investment Company Act or the Commodity Exchange Act. The 2020 Proposal provided that an employees or directors parallel investments alongside the Related Covered Fund in portfolio companies are not attributable to the banking entity for purposes of thede minimislimits and capital deduction requirements, even if financed by the banking entity.