The federal banking agencies, the SEC and the CFTC have issued an interim final rule to permit banking organizations to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities (“TruPS-backed CDOs”) from the investment prohibitions of the Volcker Rule, Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Under the interim final rule issued on January 14, a banking organization may retain an investment in a TruPS-backed CDO if the CDO was established, and the investment instrument was issued, before May 19, 2010, the banking organization reasonably believes that the offering proceeds received by the TruPS-backed CDO were invested primarily in “Qualifying TruPS Collateral,” and the banking organization’s investment in the TruPS-backed CDO was acquired on or before December 10, 2013 (the date the agencies issued final rules implementing the Volcker Rule). The term Qualifying TruPS Collateral means any trust preferred security or subordinated debt instrument that was issued prior to May 19, 2010 by a depository institution holding company that had total consolidated assets of less than $15 billion or was issued prior to May 19, 2010 by a mutual holding company. The federal banking agencies also released a non-exclusive list of TruPS-backed CDO issuers that meet the requirements described above. The interim final rule becomes effective on April 1, when the rules implementing the Volcker Rule also become effective. Comments on the interim final rule are due within 30 days after publication in the Federal Register, which is expected shortly.

Nutter Notes: The interim final rule on TruPS-backed CDOs also provides clarification that the exemption from the Volcker Rule extends to activities of the banking organization as a sponsor or trustee of securitizations that meet the exemption criteria described above, and that banking organizations may continue to act as market makers in those TruPS-backed CDOs. The final rules that implement the Volcker Rule also impose a ban on short-term proprietary trading of certain securities, derivatives, commodity futures and options on such financial instruments by banking organizations for their own accounts, and impose restrictions on banking organizations owning, sponsoring or having certain relationships with hedge funds or private equity funds, referred to as “covered funds.” Following the issuance of the final rules on December 10, 2013, a number of community banking organizations and trade associations expressed concern that the final rules would have the unintended consequence of requiring banking organizations to divest their interests in TruPS-backed CDOs because such CDOs often qualify as covered funds. Many banking organizations with investments in TruPS-backed CDOs had determined that generally accepted accounting principles required that such investments be reclassified from held-to-maturity to available-for-sale, resulting in charges based on the current fair market value of the investments. On December 27, 2013, the federal banking agencies announced that they would reevaluate whether it would be appropriate and consistent with the Dodd-Frank Act to exempt TruPS-backed CDOs from the prohibitions of the Volcker Rule.