On December 10, 2013, five federal financial services regulatory agencies ("Agencies") promulgated the final rule ("Final Rule")1 implementing Section 619 of the Dodd-Frank Act,2 commonly known as the "Volcker Rule." The Final Rule is a broad and exceedingly complex set of interlocking provisions that are applicable to a large number of banking entities. It is most accurately described as two related, but largely separable, rules: one bans proprietary trading and one strictly limits investments in "covered funds," both subject to detailed exemptions. The Final Rule applies to any bank holding company and any company that is treated as a bank holding company for purposes of U.S. banking law, as well as all of their affiliates and subsidiaries, whether inside or outside the United States. It also imposes heavy compliance and reporting obligations on covered banking entities.
Because the Final Rule is so complex, we plan to analyze its impact through a series of Client Alerts over the coming weeks, each addressing a smaller set of specific issues. In this first installment, we begin to address the impact of the provisions that apply to non-U.S. banking entities and to cross-border financial transactions. Any non-U.S. banking entity that operates a branch or agency office in the U.S., or that controls a U.S. subsidiary bank, and the parent of each such entity ("foreign banking organization" or "FBO"), is subject to the Final Rule's restrictions. In broad terms, these prohibit the banking entity from purchasing or selling certain types of securities, derivatives, and futures transactions for its trading account unless it can demonstrate that such purchase or sale is undertaken pursuant to one of the enumerated exemptions, such as for market-making, underwriting or risk-mitigating hedging. Accordingly, all banking entities in the U.S. will need to establish detailed compliance systems in order to allow their trading desks to continue to engage in the various types of short-term trading permitted by the Final Rule. The Final Rule also severely limits an FBO's ability to invest in, or sponsor, covered funds, unless the FBO can also demonstrate that such relationship is within an exemption.
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