Broadly, the Volcker Rule prevents insured depository institutions, their parent holding companies and foreign banks that have US subsidiary banks or US banking offices, as well as the affiliates or subsidiaries of any of the foregoing, from (i) engaging in "proprietary trading" in securities, derivatives or commodities futures contracts and options on futures contracts, (ii) acquiring or retaining any equity, partnership or other ownership interest in hedge funds or private equity funds, or (iii) sponsoring such funds. The Volcker Rule regulations were jointly issued by five federal regulators – the OCC, the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation and the Securities and Exchange Commission (together, the "Agencies"). As such, any changes to the Volcker Rule regulations would require joint action by the Agencies. Nonetheless, the issuance of the Request by the OCC appears to be an effort to pave the way for a rewrite or clarification of at least some discrete sections of the Volcker Rule regulations. Comments to the Request were requested by 21 September 2017.
Particular Areas of Focus
In recognition that the term "Volcker Rule" is commonly used to refer to both the statutory provisions included in the Dodd-Frank Act and the implementing regulations, the OCC specifies in the Request that it is "not requesting comment on changes to the underlying Volcker statute" but rather only those changes that could be implemented through action at the regulatory level. The Request notes that many banking entities find the Volcker Rule regulations to be "overly complex and vague" such that it is at times difficult to distinguish if particular trading or fund activity is permitted or prohibited under the regulations, as well as being overly broad in terms of the trading and fund activities that are subject to the Volcker Rule's prohibitions. The Request did not propose any specific changes to the existing Volcker Rule regulations, but rather included questions seeking public comment on various aspects of the regulations. The Request identified the following topics as being of particular interest to the OCC.
- Scope of Entities Subject to the Volcker Rule. The OCC recognised that the Volcker Rule definition of banking entity captures entities that may not pose a systemic risk concern or that do not engage in the types of activities that present the type of risk that the Volcker Rule was designed to restrict (e.g., foreign subsidiaries of foreign banking entities). The Request sought comment on how the banking entity definition in the Volcker Rule regulations could be refined to include exemptions for these entities and others in a manner consistent with the purposes of the Volcker Rule and the statutory definition of banking entity.
- Proprietary Trading Prohibition. The Request noted that complying with the short-term trading prong of the trading account definition in the Volcker Rule regulations presents a significant compliance burden for banking entities. It further noted that the rebuttable presumption in the regulations that positions held for fewer than 60 days fall within this prong covers trades not intended to be covered by the proprietary trading prohibition. The Request sought public comment as to whether the rebuttable presumption should be eliminated or how it could be changed, including whether a reverse presumption should be adopted to make clear that positions held for 60 days or more are not proprietary trading. The Request also asked for comment on how the requirements for permissible trading activities in the Volcker Rule regulations could be revised to make compliance less burdensome, as well as whether other types of trading activities should be permissible under the Volcker Rule.
- Covered Fund Prohibition. The OCC recognised that defining a "covered fund" (which is the term used in the Volcker Rule regulations for hedge funds and private equity funds subject to the covered fund prohibition) by reference to certain exemptions in the US Investment Company Act may have resulted in capturing issuers that were not intended to be covered by the Volcker Rule. The Request asked for comment on whether replacing the US Investment Company Act references with a definition of covered fund focusing on the particular characteristics of hedge funds and private equity funds would yield a less burdensome alternative. The Request also sought comment on whether additional categories of transactions or relationships between banking entities and covered funds should be permitted under the Super 23A prohibition of the Volcker Rule.
- Compliance Program and Metrics Reporting Requirements. The OCC acknowledged that smaller banking entities and those not engaged in significant levels of trading and fund activities have indicated that even the simplified compliance program available to smaller institutions under the Volcker Rule regulations presents a substantial compliance burden. The Request asked whether there are any categories of entities for which the compliance program requirements should be reduced or eliminated. Finally, the Request sought comment on the effectiveness of current metrics for measuring compliance and the ways in which technology-based systems used by banking entities could be incorporated into Volcker Rule compliance.