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OCC Issues Request for Information on the Volcker Rule

This morning, the Office of the Comptroller of the Currency (“OCC”) released a Request for Information (“RFI”) to determine how regulations implementing the Volcker Rule should be revised to better accomplish the purposes of the statute.

The OCC’s release notes that the information the agency is soliciting could support revisions to the regulation that are consistent with the recommendations identified in the U.S. Department of the Treasury’s June 2017 regulatory reform report, which we summarized in a client alert.  However, broad-based reform of the Volcker Rule, including some of the changes recommended in the Treasury Report, would require legislative changes to the underlying statute, and the OCC’s RFI does not seek comments on changes to the statute.

Notably, the other federal financial agencies with concurrent rulewriting authority over the Volcker Rule – the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Securities and Exchange Commission, and Commodity Futures Trading Commission – did not release the RFI jointly with the OCC.  The preamble to the RFI acknowledges that any revisions to the current regulation will need to involve those agencies.  As we discussed in a previous blog post, some of the other agencies are still led by appointees of President Obama and may be less likely to support reform of the regulation in the near-term.

The RFI seeks comment on the following questions, and comments are due 45 days after publication of the RFI in the Federal Register.

Questions on Scope of Entities Subject to the Rule

  1. What evidence is there that the scope of the final rule is too broad?
  2. How could the final rule be revised to appropriately narrow its scope of application and reduce any unnecessary compliance burden?  What criteria could be used to determine the types of entities or activities that should be excluded? Please provide supporting data or other appropriate information.
  3. How would an exemption for the activities of these banking entities be consistent with the purposes of the Volcker Rule, and not compromise safety and soundness and financial stability?  Please include supporting data or other appropriate information.
  4. How could the rule provide a carve-out from the banking entity definition for certain controlled foreign excluded funds? How could the rule be tailored further to focus on activities with a U.S. nexus?
  5. Are there other issues related to the scope of the final rule’s application that could be addressed by regulatory action?

Questions on the Proprietary Trading Prohibition

  1. 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?  What evidence is there that the proprietary trading prohibition does or does not have a negative impact on market liquidity?
  2. What type of objective factors could be used to define proprietary trading?
  3. Should the rebuttable presumption provision be revised, whether by elimination, narrowing, or introduction of a reverse presumption that presumes activities are not proprietary trading?  Are there activities for which rebuttal should not be available? Should rebuttal be available for specified categories of activity?  Could the rebuttable presumption provision be implemented in a way that decreases the compliance burden for banking entities?
  4. What additional activities, if any, should be permitted under the proprietary trading provisions? Please provide a description of the activity and discuss why it would be appropriate to permit the activity, including supporting data or other appropriate information.
  5. How could the existing exclusions and exemptions from the proprietary trading prohibition—including the requirements for permissible market-making and risk mitigating hedging activities—be streamlined and simplified?  For example, does the distinction between “market-maker inventory” and “financial exposure” help ensure that trading desks using the market-making exemption are providing liquidity or otherwise functioning as market makers?
  6. How could additional guidance or adjusted implementation of the existing proprietary trading provisions help to distinguish more clearly between permissible and impermissible activities?
  7. Are there any other issues related to the proprietary trading prohibition that should be addressed by regulatory action?

Questions on the Covered Funds Prohibition

  1. What evidence is there that the final rule has been effective or ineffective in limiting banking entity exposure to private equity funds and hedge funds?  What evidence is there that the covered fund definition is too broad in practice?
  2. 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?  If so, what specific characteristics could be used to narrow the covered fund definition?  Does data or other appropriate information support the use of a characteristics-based approach to fund investments?
  3. What types of additional activities and investments, if any, should be permitted or excluded under the covered funds provisions?  Please provide a description of the activity or investment and discuss why it would be appropriate to permit the activity or investment, including supporting data or other appropriate information.
  4. Is Section 14 of the final rule (the “Super 23A” provision) effective at limiting bank exposure to covered funds? Are there additional categories of transactions and relationships that should be permitted under this section?
  5. How could additional guidance or adjusted implementation of the existing covered fund provisions help to distinguish more clearly between permissible and impermissible activities?  For example, should the final rule be revised to clarify how the definition of “ownership interest” applies to securitizations?
  6. Are there any other issues related to the covered funds prohibition that could be addressed by regulatory action?

Questions on the Compliance Program, Metrics Reporting Requirements and Additional Issues

  1. 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?  What evidence is there that the compliance program and metrics reporting requirements present a disproportionate or undue burden on banking entities?
  2. How could the final rule be revised to reduce burden associated with the compliance program and reporting requirements? Responses should include supporting data or other appropriate information.
  3. Are there categories of entities for which compliance program requirements should be reduced or eliminated? If so, please describe and include supporting data or other appropriate information.
  4. How effective are the quantitative measurements currently required by the final rule?  Are any of the measurements unnecessary to evaluate Volcker Rule compliance?  Are there other measurements that would be more useful in evaluating Volcker Rule compliance?
  5. How could additional guidance or adjusted implementation of the existing compliance program and metrics reporting provisions reduce the compliance burden?  For example, should the rule permit banking entities to self-define their trading desks, subject to supervisory approval, so that banking entities report metrics on the most meaningful units of organization?
  6. How could the final rule be revised to enable banking entities to incorporate technology-based systems when fulfilling their compliance obligations under the Volcker Rule?  Could banking entities implement technology-based compliance systems that allow banking entities and regulators to more objectively evaluate compliance with the final rule?  What are the advantages and disadvantages of using technology-based compliance systems when establishing and maintaining reasonably designed compliance programs?
  7. 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?
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About this Author

Randy Benjenk, Covington, foreign financial institutions attorney, trade associations lawyer
Associate

Randy Benjenk helps clients navigate the bank regulatory landscape. He represents domestic and foreign financial institutions and trade associations on a variety of bank regulatory issues, including compliance, government affairs, and transactional matters.

Mr. Benjenk regularly advises clients on compliance with provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Bank Holding Company Act, the Change in Bank Control Act and U.S. and international capital and liquidity regulations.

Mr....

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