‘You Know It When You See It’ – Or Do You?
This is first in Pepper’s series of Client Alerts dealing with specific effects of the ‘Volcker Rule’ on various market segments.
On December 10, 2013, after more than three years of intensive development, the Board of Governors of the Federal Reserve System (FRB), Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) adopted final regulations implementing the “Volcker Rule,” added to the Bank Holding Company Act of 1956 by Section 619 of the Dodd-Frank Act, which prohibits banking entities and non-bank financial companies from engaging in proprietary trading and severely restricts their relationships with hedge funds and private equity funds. In taking this action, the agencies have caused a sea change in the way many financial institutions will conduct their operations.
This Alert provides an overview of the significant features of the Volcker Rule. Future Alerts will include a discussion of the following issues:
- affiliated transaction restrictions under Section 23A of the Federal Reserve Act and conflicts of interest under Dodd-Frank Section 621, Section 27B of the Securities Act of 1933, Rule 127B and affiliated covered funds
- money market mutual funds
- private pools of capital
- government-sponsored enterprises
- foreign banking organizations: exemption planning for trading in foreign sovereign debt and extra-territorial issues potentially beyond congressional intent
- syndicated loans and asset-backed securities
- compliance/CEO certifications, and
- acquisition and disposition of non-conforming trading businesses and bank-affiliated funds.
With a regulation of 71 pages and an explanatory preamble running well over 800 pages, the only certainty is that waves of agency guidance and interpretations will fill the coming months and years. As new as the regulations may be, several industry groups are threatening legal challenges. Calls for delay or re-proposal are coming from Capitol Hill and dissenting regulatory officials. Because of the complexities of the regulations, even proponents fear that enforcement will be inconsistent across the agencies and harmful dislocations will occur in the financial markets. How much compliance infrastructure will be required to understand and green-light a business line and a transaction? Since more than three years have passed since the Volcker Rule became law, banking entities already have begun to adjust their business models. Expect that the regulations will create new opportunities for non-banking entities to take over spin-offs of nonconforming trading businesses and bank-affiliated funds.