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ADVI SORY February 2014
Need To Know
Volcker Rule – Final Implementing Rules
In December 2013, the federal banking agencies, SEC and CFTC adopted final rules
implementing the “Volcker Rule.” The Volcker Rule was enacted in 2010 as section 619 of the
Dodd-Frank Act and is codified as section 13 of the Bank Holding Company Act (12 USC § 1851).
The final implementing rules are codified at 12 C.F.R. §§ 44 (OCC), 248 (Federal Reserve),
and 351 (FDIC), and 17 C.F.R. §§ 75 (CFTC) and 255 (SEC). The final implementing rules are
effective April 1, 2014 and activities and investments must be conformed by July 21, 2015.
The Volcker Rule prohibits short-term proprietary trading in securities or derivatives by
“banking entities.” “Banking entities” include FDIC-insured depository institutions (banks, thrifts,
industrial loan companies, credit card banks and certain other nonbank banks) and their parent
companies, subsidiaries, sister affiliates and other companies under their common control.
Also included are non-U.S. banks that have a U.S. branch, agency office, Edge Act or other
commercial lending subsidiary or subsidiary U.S. bank. Non-depository trust companies are
not “banking entities” unless they are affiliated with a “banking entity.” Financial entities that
have been designated as “systemically important” by the FSOC may be subject to some or all
of the Volcker Rule at the discretion of the Federal Reserve.
The Volcker Rule also prohibits banking entities from “sponsoring,” having an “ownership
interest” in or engaging in certain “covered transactions” with, “covered funds.” “Covered funds”
are privately-placed issuers that rely on either the section 3(c)(1) (fewer than 100 beneficial
owners) or section 3(c)(7) (beneficial owners limited to high net worth and institutional qualified
purchasers) exemptions from the Investment Company Act. The Volcker Rule also limits the
term of relationships between banking entities and covered funds, and imposes new disclosure
obligations for covered funds serviced by banking entities.
The Volcker Rule contains detailed, highly technical exemptions that permit certain proprietary
trading and covered funds activities by banking entities.
The Volcker Rule imposes corporate governance, compliance and control program, record
keeping, regulatory reporting, training and audit requirements on banking entities. These
requirements become more stringent and detailed based upon the size of the banking
organization and scope and nature of its activities.
Proprietary Trading Restrictions
Under the Volcker Rule and the implementing regulations, subject to certain exemptions,
banking entities are prohibited from “proprietary trading” in financial instruments (broadly,