Federal Deposit Insurance Corporation (FDIC)

The Five Regulators Overseeing the Volcker Rule Pushed Back Regulations for Certain Foreign Excluded Funds

Federal Deposit Insurance Corporation (FDIC)Three  regulators overseeing the Volcker rule pushed back regulations for certain foreign excluded funds. Three of the  five regulators- the Office of Comptroller of Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve- jointly announced the decision

“The Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency today announced that they will not take action related to restrictions under the Volcker Rule for certain foreign funds for an additional two years.  The three federal banking regulatory agencies have consulted with the staffs of the Securities and Exchange Commission and the Commodity Futures Trading Commission regarding this matter.

“The Volcker Rule generally restricts banking entities from engaging in proprietary trading and from owning, sponsoring, or having certain relationships with hedge funds or private equity funds, known as ‘covered funds.’

“Certain foreign funds that are organized and offered outside of the United States are excluded from the definition of covered fund under the agencies’ implementing regulations.  However, these foreign funds could become subject to restrictions under the Volcker Rule because of governance arrangements with or investment by foreign banking entities.”

The Volcker rule is also regulated by the Commodities Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC), but they did not participate in the release. 

The statement continued, “Currently, the Agencies have not finalized any revisions to the regulations implementing section 13 of the BHC Act, including any revisions that may mitigate the concerns noted above regarding the treatment of qualifying foreign excluded funds(as defined below). To provide interested parties greater certainty about the treatment of qualifying foreign excluded funds in the near term, the Banking Agencies would not propose to take action during the two-year period ending July 21, 2021, against a foreign banking entity based.”

The qualifying foreign excluded funds were defined as:

  1. Is organized or established outside the United States and the ownership interests of which are offered and sold solely outside the United States; 
  2. Would be a covered fund were the entity organized or established in the United States, or is, or holds itself out as being, an entity or arrangement that raises money from investors primarily for the purpose of investing in financial instruments for resale or other disposition or otherwise trading in financial instruments; 
  3. Would not otherwise be a banking entity except by virtue of the foreign banking entity’s acquisition or retention of an ownership interest in, or sponsorship of, the entity; 
  4. Is established and operated as part of a bona fide asset management business;and 
  5. Is not operated in a manner that enables the foreign banking entity to evade the requirements of section 13 or implementing regulations.

The Volcker rule forbids banking from proprietary trading. It was implemented as part of Dodd/Frank.

Last week, all five regulators augmented their regulations to exclude banks with less than $10 billion in assets from compliance with Volcker rule, in a bid to keep community banks for dealing with the burdensome regulation, even though their trading activity is minimal.