United States: The OCC Takes Initiative On Seeking Public Comment For Changes To The Volcker Rule

The Office of the Comptroller of the Currency (OCC), which regulates national banks and, as such, is responsible for administering the Volcker Rule with respect to the largest banking entities in the United States, has released a notice and request for comment (Request for Comment) on the question of how to modify the implementing regulations, as well as the application and administration, of the Volcker Rule.1

While changes to the application and administration of the Volcker Rule by the OCC could be done unilaterally with respect to the national banks and other entities that the OCC regulates, any modifications to the implementing regulations, which were promulgated by five federal financial regulatory agencies in coordination, would require further coordination by those agencies.2 By issuing the Request for Comment, the OCC has indicated that it intends to lead this effort among the agencies to issue a Notice of Proposed Rulemaking to amend the Volcker Rule regulations.

Since the Volcker Rule regulations were finalized in 2013, they have been criticized by various interested parties for being, among other things, difficult to interpret, vague and overly complex, overbroad in scope, overly restrictive, and unduly burdensome to comply with. The Treasury Department issued a report in June that calls for revisions to the Volcker Rule regulations that would reduce their scope and complexity in order to facilitate compliance and promote market liquidity.3 In effect, the Request for Comment is a request for substantive and quantifiable data that would support changes to the regulations such as those recommended in the Treasury Report. This action by the OCC is also an indication that the senior officials appointed by the new Administration are inclined to bring about regulatory change even in the absence of repeal of or amendments to Dodd-Frank.

A proposal to repeal the Volcker Rule in its entirety is contained in the CHOICE Act bill passed by the House of Representatives earlier this year. While the bill has not progressed in the Senate, the bill represents an increasing focus on reconsidering the impact of the Volcker Rule. The OCC's Request for Comment also comes on the heels of two recent interagency releases relating to the Volcker Rule, including a release providing temporary relief for foreign banking entities with respect to their investments in certain foreign private funds,4 and another that provides additional guidance in respect of applications for an extension of time for the seeding period when a banking entity organizes and offers a covered fund as part of its fiduciary or asset management business.5

The Request for Comment invites comment on the Volcker Rule regulations generally, but is focused on the following four broad areas:

  • Reducing the Range of Entities Subject to the Volcker Rule. The Request for Comment notes the broad range of "banking entities" which are subject to the Volcker Rule. The release suggests that several categories of entities that come within the scope of the banking entity definition may benefit from a revision to the coverage of the Volcker Rule.

    The Request for Comment specifically mentions relief for small, community banks. The Request for Comment also suggests that there may be other banks (i.e., not necessarily small) that do not engage in the types of activities, or in activities that present the type of risk, that the Volcker Rule is designed to restrict. The OCC's release suggests that exempting small banks and other banks with minimal trading activities would reduce compliance costs and allow those banks to devote more resources to local lending without materially increasing risk to the financial system.

    The OCC also requests comment on certain foreign funds issues, such as those that are the subject of recent regulatory relief,6 and more generally how the regulations can be tailored to focus on activities with a US nexus.

    The Request for Comment more generally seeks public feedback as to how to tailor the "banking entity" definition to limit the current scope of the regulations. Among other things, the OCC requests comment on how to define the relevant exclusions from "banking entity" and the implications of such exclusions on safety and soundness and financial stability.

  • Simplifying the Proprietary Trading Prohibition. The OCC poses a number of questions generally aimed at how to provide increased clarity and flexibility with respect to certain components of the definition of "proprietary trading." Among these are questions as to how to streamline and simplify the exclusions and exemptions from proprietary trading, including the market-making and risk mitigating hedging exemptions. In particular, the OCC poses a question about whether the Volcker Rule has been effective in limiting risk taking and its impact on market liquidity.

    Specifically, the OCC notes that commenters have stated that the "purpose test" for determining whether an activity constitutes proprietary trading imposes a significant compliance burden on banking entities because it requires banking entities to determine the intent associated with each trade. As a result, the OCC is soliciting from commenters potential objective factors that could be used instead to help define proprietary trading.

    The Request for Comment also notes that the regulations' rebuttable presumption of proprietary trading for financial instruments held for fewer than 60 days (or where the risk of a position is transferred within 60 days) could be overbroad and seeks specific input as to how to revise the rebuttable presumption.
  • Narrowing the Covered Funds Definition. Noting that the statutory construction of the "covered fund" definition, through its reference to Sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940, may be overbroad, and seeking evidence of that assertion, the Request for Comment also seeks feedback as to whether a regulatory definition that instead references characteristics of covered funds intended to be captured by the Volcker Rule would assist in tailoring and narrowing the types of entities presently included in covered funds. The OCC notes the position of some industry participants that funds such as venture capital funds should not be treated as covered funds. Feedback is also solicited as to the effectiveness of the regulations in limiting banking entities' exposure to hedge funds and private equity funds.

    The Request for Comment also seeks feedback as to whether the restriction on certain transactions between banking entities and certain covered funds, known as "Super 23A," is effective and whether any additional exceptions to this restriction should be permitted. The OCC also inquires as to whether any additional activities or investments should generally be permitted under the covered funds provisions, such as ownership interests in securitizations.
  • Eliminating Compliance Program and Metrics Reporting for Certain Banking Entities. The Request for Comment notes the regulations' tiered compliance program framework, and seeks feedback as to whether the compliance program and metrics reporting pose an undue burden on banking entities and how the compliance burden could be reduced, including through the potential reduction or elimination of compliance program requirements for certain categories of banking entities.7 These questions align the OCC's approach with the suggestions in the Treasury Report. The OCC also requests feedback as to whether certain of the metrics reporting requirements are unnecessary and whether additional guidance or adjusted implementation of the compliance program and metric reporting requirements could reduce the compliance burden. The OCC also inquires as to whether technology-based systems could facilitate compliance program requirements.

Comments must be submitted to the OCC by September 21, 2017.


1 See OCC, "Notice Seeking Public Input on the Volcker Rule" (August 2, 2017), available at: https://occ.gov/news-issuances/news-releases/2017/nr-occ-2017-89a.pdf.

2  The federal agencies responsible for implementing the Volcker Rule are the OCC, the Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).

3  US Department of the Treasury, "A Financial System That Creates Economic Opportunities: Banks and Credit Unions" (June 2017), Appendix B, pp. 132-133. The revisions proposed in the Treasury Report include an exemption from compliance with the Volcker Rule for banking organizations with $10 billion or less in consolidated assets, revisions to the definitions of "proprietary trading" and "covered fund," increased flexibility around certain proprietary trading exemptions, including market-making, and increased tailoring of the compliance program requirements.

See Federal Reserve, FDIC, OCC, "Statement regarding Treatment of Certain Foreign Funds under the Rules Implementing Section 13 of the Bank Holding Company Act" (July 21, 2017), available at: https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20170721a1.pdf; Federal Reserve, FDIC, OCC, SEC and CFTC, "Federal regulatory agencies announce coordination of reviews for certain foreign funds under 'Volcker Rule'" (July 17, 2017), available at: https://www.sec.gov/news/press-release/2017-128.

For additional information regarding the temporary relief provided to foreign banks with respect to certain foreign private investment funds, please see our firm's publication, available at: http://www.shearman.com/en/newsinsights/publications/2017/07/us-banking-volcker-rule-to-foreign-banks.

See Federal Reserve, "SR 17-5: Procedures for a Banking Entity to Request an Extension of the One-Year Seeding Period for a Covered Fund" (July 24, 2017), available at: https://www.federalreserve.gov/supervisionreg/srletters/sr1705.htm; Federal Reserve, "Order Delegating Authority to Approve Extensions of Time to Divest an Ownership Interest in Certain Covered Funds under the Bank Holding Company Act" (July 24, 2017), available at: https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20170724a1.pdf.

6  See footnote 4 above.

7  Under the Volcker Rule tiered compliance program framework, banking entities that do not engage in activities subject to the Volcker Rule (other than trading in government obligations) are not required to establish a compliance program, while banking entities with assets of $10 billion or less are eligible for a simplified compliance program and the largest banking entities engaged in significant trading activities must collect and report certain quantitative metrics as part of an enhanced compliance program.

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