{"id":2821,"date":"2020-03-18T13:55:27","date_gmt":"2020-03-18T18:55:27","guid":{"rendered":"http:\/\/blogs.luc.edu\/compliance\/?p=2821"},"modified":"2020-03-18T13:55:27","modified_gmt":"2020-03-18T18:55:27","slug":"agencies-approve-notice-of-proposed-changes-to-volcker-rule","status":"publish","type":"post","link":"https:\/\/blogs.luc.edu\/compliance\/?p=2821","title":{"rendered":"Agencies Approve Notice of Proposed Changes to Volcker Rule"},"content":{"rendered":"

Mary Donohue<\/em><\/p>\n

Senior Editor<\/em><\/p>\n

Loyola University Chicago School of Law, JD 2020<\/em><\/p>\n

At the end of January, the Federal Reserve Board, the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the U.S. Securities and Exchange Commission, and the U.S. Commodity Futures Trading Commission (the \u201cAgencies\u201d) approved a notice of proposed rulemaking (\u201cProposed Rule\u201d) to amend<\/a> the \u201ccovered fund\u201d provisions of section 13 of the Bank Holding Company Act, also known as the \u201cVolcker Rule\u201d (the \u201cRule\u201d). \u00a0The Volcker Rule is a regulation<\/a> that generally prohibits banks from certain investment activities with their own accounts and limits their dealings with private equity and hedge funds, also known as \u201ccovered funds.\u201d<\/p>\n

<\/p>\n

The Rule in a Nutshell<\/strong><\/p>\n

The Rule was enacted in response to the 2008 financial crisis as a way to mitigate customer loss from banks making certain short-term investments. In August of last year, the Office of the Comptroller of the Currency voted to amend the Rule to clarify what types of securities trading was restricted. By restricting<\/a> banks\u2019 abilities to use their customers\u2019 accounts for proprietary trading of securities, derivatives, and commodity futures, it prohibits banks from taking on too much risk by using accounts to increase profits. The debate over whether the Volcker Rule should extend to venture capital funds has been ongoing since its enactment.<\/p>\n

Critics of the Volcker Rule worry that limitations on banks\u2019 abilities to engage in trading would reduce overall liquidity because of a reduction in banks\u2019 market-making power. The International Monetary Fund\u2019s top risk official warned that these restrictions might significantly diminish liquidity in the bond market.<\/p>\n

The changes<\/strong><\/p>\n

Generally, the Volcker Rule prohibits a banking entity from having ownership in a \u201ccovered fund\u201d including an \u201cinvestment company\u201d under the Investment Company Act of 1940 but for the exclusions set forth in Section 3(c)(1) and (3)(c)(7) of the Act. The Rule<\/a> implemented this prohibition and created a number of exclusions from the definition of a covered fund. One exclusion relates to issuers of asset-backed securities that meet the requirements of the \u201cLoan Securitization Exclusion.\u201d The Proposed Rule would exempt<\/a> a fund whose assets consist solely of (1) loans; (2) debt instruments; (3) and other assets that are related or incidental to holding, acquiring, or selling such loans or debt instruments; and (4) certain interest rate or foreign exchange derivatives.<\/p>\n

The proposed changes would weaken the overall reach of the Rule. Under the new version of the Rule, venture capital investments are no longer covered. Chair Jay Clayton of the Securities and Exchange Commission said<\/a> that enacting these amendments could \u201cfacilitate capital formation, improve competition and market efficiency along an number of dimensions, and do so without increasing risks to investors.\u201d Clayton points<\/a> to the ability of banks to now extend financing to start-ups and medium-sized businesses through qualifying venture capital funds, which could benefit the financial system by improving the flow of financing and allowing banking entities to compete effectively with other sources of financing.<\/p>\n

The namesake of the Volcker Rule, Paul Volcker, passed away late last year. Consumer advocates have since expressed concern that the latest amendments<\/a> to the Rule might permit risky behavior by banks, and that it undermines the Rule\u2019s objectives by opening more loopholes for taxpayer-backed banks to engage in substantial proprietary trading.<\/p>\n

Dissenters warn of possible consequences<\/strong><\/p>\n

Some key players in the regulatory and rulemaking space have been vocal about their concerns over the changes proposed. SEC Commissioner<\/a> Allison Herren Lee said the revision \u201cignores \u2026 risk-reducing public policy\u201d and according to CFTC Commissioner Dan Verkovitz, is \u201cdriven by complaints from the very banks the rule is intended to make safer.\u201d Maxine Walters, House Financial Services Committee Chair accused regulators<\/a> of \u201cworking overtime to weaken a regulation\u201d that is designed to protect taxpayer money from risky investments by bigger banks.<\/p>\n

The biggest question is what the FDIC is signaling by backing these revisions. If a bank is to fail because of its excessive-risk taking, the FDIC is empowered<\/a> to trigger Dodd-Frank\u2019s Title II to liquidate a large, complex financial company that is close to failing. Some analysts warn<\/a> that banks have barely even begun to implement the Volcker Rule, and that we haven\u2019t experienced a full credit cycle to test its effectiveness in an economic downturn.<\/p>\n

In the interim, comments on the proposed rules are due April 1, 2020. The full text of the proposed amendments can be found here<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

At the end of January, the Federal Reserve Board, the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the U.S. Securities and Exchange Commission, and the U.S. Commodity Futures Trading Commission (the \u201cAgencies\u201d) approved a notice of proposed rulemaking (\u201cProposed Rule\u201d) to amend the \u201ccovered fund\u201d provisions of section 13 of the Bank Holding Company Act, also known as the \u201cVolcker Rule\u201d (the \u201cRule\u201d). \u00a0The Volcker Rule is a regulation that generally prohibits banks from certain investment activities with their own accounts and limits their dealings with private equity and hedge funds, also known as \u201ccovered funds.\u201d<\/p>\n","protected":false},"author":20,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[371,817,1788,2102],"class_list":["post-2821","post","type-post","status-publish","format-standard","hentry","category-uncategorized","tag-cftc","tag-fdic","tag-sec","tag-volcker-rule"],"_links":{"self":[{"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=\/wp\/v2\/posts\/2821","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=\/wp\/v2\/users\/20"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=2821"}],"version-history":[{"count":0,"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=\/wp\/v2\/posts\/2821\/revisions"}],"wp:attachment":[{"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=2821"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=2821"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=2821"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}