On August 2, the Office of the Comptroller of the Currency (OCC) issued a notice (the OCC Notice) seeking public comments over the next 45 days to assist in determining how the final rule implementing Section 13 of the Bank Holding Company Act (i.e., the Volcker Rule) should be revised to better accomplish the purposes of the statute. A report issued by the Department of Treasury on June 12, (the Treasury Report), identified problems with the design of the final rule and makes recommendations for revisions to the final rule, including creating a regulatory “off-ramp” for well-capitalized deposit institutions and exempting larger institutions from the proprietary trading restrictions of the Volcker Rule. Revisions to the current rule must be undertaken jointly by the OCC, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation, and in consultation and coordination with the Securities and Exchange Commission and the Commodity Futures Trading Commission.
The Volcker Rule was intended to promote the safety and soundness of banking entities and prevent taxpayer bailouts by minimizing bank exposure to certain proprietary trading and fund activities that could involve undue risk. The final rule’s covered funds provisions generally prohibit any banking entity from holding an ownership interest in, sponsoring, or having certain relationships with hedge funds and private equity funds, and the final rule’s proprietary trading provisions prohibit banking entities from engaging, as principal, in short-term trading of certain securities, derivatives, commodity futures and options.
The OCC is seeking the public’s input on whether aspects of the final rule and its implementation should be revised to better accomplish the purpose of the Volcker Rule, decrease the compliance burden on banking entities and foster economic growth. In particular, the OCC is inviting input on ways to tailor the rule’s requirements and clarify key provisions that define prohibited and permissible activities. The OCC is also inviting input on how the existing rule could be implemented more effectively without revising the rule at all. The OCC Notice identifies four main areas for public consideration: (i) the scope of entities to which the final rule applies, (ii) the proprietary trading restrictions, (iii) the covered fund restrictions and (iv) the compliance program and metrics reporting requirements. Below are some of the key questions that have been asked for public comment in each area:
Scope of Entities Subject to the Volcker Rule
- What evidence is there that the scope of the final rule is too broad?
- How can the final rule be revised to appropriately narrow its scope of application and reduce any unnecessary compliance burden, and what criteria could be used to determine the types of entities or activities that should be excluded?
- How would an exemption for the activities of these banking entities be consistent with the purposes of the Volcker Rule and not compromise safety, soundness and financial stability?
- Are there any other issues related to the scope of the final rule’s application that could be addressed by regulatory action.
Proprietary Trading Prohibition
- What evidence is there that the proprietary trading prohibition has been effective or ineffective in limiting banking entities’ risk-taking and reducing the likelihood of taxpayer bailouts, and what evidence is there that the prohibition does or does not have a negative impact on liquidity in the market?
- What types of objective factors could be used to define proprietary trading?
- What additional activities, if any, should be permitted under the proprietary trading provisions?
- How could the existing exclusions and exemptions from the proprietary trading prohibition be streamlined and simplified?
- How could additional guidance or adjusted implementation of the existing proprietary trading provisions help distinguish more clearly between permissible and impermissible activities?
- Are there any other issues related to the proprietary trading prohibition that should be addressed by regulatory action?
Covered Funds Prohibition
- What evidence is there that the final rule has been effective or ineffective in limiting entity exposure to private equity funds and hedge funds, and what evidence is there that the covered fund definition is too broad?
- Would replacing the current covered fund definition that references Sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 with a definition that references characteristics of the fund (such as investment strategy, fee structure, etc.) reduce the compliance burden associated with the covered fund provisions?
- What types of additional activities and investments should be permitted or excluded under the covered funds provisions?
- How could additional guidance or adjusted implementation of the existing covered funds provisions help distinguish more clearly between permissible and impermissible activities?
- Are there any other issues related to the covered funds prohibition that should be addressed by regulatory action?
Compliance Program and Metrics Reporting Requirements
- What evidence is there that the compliance program and metrics reporting requirements have facilitated banking entity compliance with the substantive provisions of the Volcker Rule, and what evidence is there that the compliance program and metrics reporting requirements present a disproportionate or undue burden on banking entities?
- How could the final rule be revised to reduce burden associated with the compliance program and reporting requirements?
- Are there categories of entities for which compliance program requirements should be reduced or eliminated?
- How effective are the quantitative measurements currently required by the final rule, and are any of them unnecessary to evaluate Volcker Rule compliance?
- Are there any other measurements that would be more useful in evaluating Volcker Rule compliance?
- How could additional guidance or adjusted implementation of the existing compliance program and metrics reporting provisions reduce the compliance burden?
- What additional changes could be made to any other aspect of the final rule to provide additional clarity, remove unnecessary burden or address any other issues?