On February 8, 2019, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and the Commodity Futures Trading Commission (collectively, the “Agencies”) published for public comment a Notice of Proposed Rulemaking (the “NPRM”) to amend the Volcker Rule to comply with amendments made to the Rule under the May 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA). Our previous blog post that provides additional information and background on the legislation can be found here.
The Volcker Rule, also known as section 13 of the US Bank Holding Company Act, generally prohibits banking entities (which include insured depository institutions and their affiliates and non-US banks with US direct branches or agencies) from engaging in proprietary trading, and from having an ownership interest in, sponsoring, or having certain kinds of relationships with a hedge fund or private equity fund. It was enacted as part of the Dodd-Frank major regulatory reform law in 2010.
The NPRM proposes two amendments to the Volcker Rule to comply with EGRRCPA.
First, the Agencies’ proposed amendments would exempt from the restrictions of the Volcker Rule a bank with federal deposit insurance provided that it (and any entity that controls it) has total consolidated assets equal to $10 billion or less and total trading assets and liabilities of 5% or less of total consolidated assets. This exclusion would be available only if both thresholds are not exceeded. The Agencies believe that showing that both thresholds are met will not impose any additional burdens on banking institutions, because the Agencies likely will use information already available in regulatory reporting forms to make their own determination whether the exclusion can be applied. This proposed change would not be applicable to non-US banks with direct US branches or agencies because EGRRCPA amended the definition of “insured depository institution” and not “banking entity.”
Second, the Agencies are proposing to amend the restrictions regarding the name of a hedge fund or private equity fund. Currently, a banking entity is prohibited from organizing or offering a hedge fund or private equity fund using the name of the banking entity in the name of the fund. Under the proposed revision, a hedge fund or private equity fund that is sponsored by a banking entity would be able to have the same name or variation of the same name as an investment adviser to the fund, provided the name does not include the word “bank” and the investment adviser is not (and does not share the same name or variant thereof as) an insured depository institution, a company that controls an insured depository institution or a foreign bank with direct U.S. branches or agencies.
The Agencies invite comment from the public on all aspects of the proposed revisions, including whether the NPRM provides enough clarity for a banking entity to: (a) evaluate whether it qualifies for the exclusion from the definition of “banking entity,” and (b) evaluate whether a hedge fund or private equity fund sponsored by a banking entity is allowed to share the same name or its variation with an affiliated banking entity.
The deadline for comments is March 11, 2019, and interested commenters are encouraged to submit written comments jointly to all of the Agencies in order to facilitate them being reviewed by each agency.