Background on the Final Rule
On December 10, 2013, the Board of Governors of the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and the Commodity Futures Trading Commission (collectively, "Agencies") released the final rule ("Final Rule") implementing Section 13 of the Bank Holding Company Act ("BHCA"), as added by Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, also known as the Volcker Rule. The Volcker Rule was one of the signature reforms of the Dodd-Frank Act and has been the subject of much debate since it was first proposed in Congress. As enacted, the Volcker Rule prohibits banking entities from engaging in proprietary trading and from investing in, sponsoring, or having certain relationships with, hedge funds and private equity funds, subject to several important exemptions. The Agencies issued proposed rules to implement the Volcker Rule in October of 2011, and received more than 18,000 comments, including more than 600 unique comment letters.
The Final Rule significantly limits the trading and investing operations of banking entities, and requires banking entities engaged in permitted trading or permitted covered fund activities to establish and maintain extensive compliance programs and satisfy new reporting requirements. Although the Volcker Rule is often portrayed as directed at the largest, most complex financial institutions, the provisions of the Final Rule apply to any banking entity. Accordingly, every banking entity needs to understand the extent to which it must adhere to the compliance and reporting requirements set forth in the Final Rule.
Simultaneous with the issuance of the Final Rule, the Federal Reserve also extended the conformance period to July 21, 2015, giving banking entities an additional year to comply. The extension, however, does not apply to the Final Rule's reporting requirements, which will be phased in starting June 30, 2014. The Federal Reserve also indicated that banking entities will be expected to use good faith efforts to bring their activities and investments into compliance during the conformance period. In particular, it stated that banking entities should not expand any activities or make investments with the expectation of receiving another extension in the conformance period.
Update. On January 14, 2014, in response to a lawsuit over the Final Rule, the Agencies issued an interim final rule to permit the retention of interests or sponsorship of certain collateralized debt obligations backed by trust preferred securities.
This overview provides a summary of the Final Rule, including its compliance and reporting requirements. Because the Final Rule is more than 70 pages and the accompanying Preamble contains more than 900 pages of guidance, it is advised that banking entities engage counsel for questions about how the Final Rule will apply to specific transactions and activities.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
