It was a modest proposal: following the 2008 financial crisis, former chairman of the Federal Reserve Board Paul Volcker suggested banning banks from trading and investing with their own capital. Included as section 619 of the Dodd-Frank Act, the Volcker Rule is intended to prohibit proprietary trading and certain relationships with various types of funds. The Volcker Rule is conceptually simple, but the layered, interconnected, and complex reality of the financial system all but guaranteed a cumbersome snarl of implementation.
When the federal financial regulators finally issued the Volcker Rule regulations in late 2013 (2013 Rule), they pleased nobody. The 2013 Rule was ambiguously broad, overly rigid, and difficult to effectuate. Even with interagency answers to frequently asked questions (FAQs) and efforts to tailor its implementation, the Volcker Rule remained a source of uncertainty and risk for a wide range of banking and investment entities.
On June 16, 2020, the Board of Governors of the Federal Reserve System (Federal Reserve), Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), Securities and Exchange Commission, and Commodity Futures Tradition Commission (collectively, the Agencies) issued a final rule (Final Rule) amending the covered fund provisions of the 2013 Rule. With these amendments the Agencies seek to (i) reduce the extraterritorial impact of the regulations, (ii) permit additional covered fund activities that do not present the risks the Volcker Rule was intended to address, and (iii) clarify and simplify compliance. The Final Rule adopts the amendments substantially as proposed in January 2020. The Final Rule will become effective October 1, 2020, without any transition period.
The Volcker Rule restricts banking entities and certain nonbank financial companies from engaging in proprietary trading and from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with a hedge fund or a private equity fund (covered funds). With respect to covered funds, the Final Rule simplifies certain existing exclusions, adds additional exclusions, clarifies the definition of ownership interest, clarifies certain permitted investments and activities, and amends "Super 23A" to permit certain low-risk transactions with covered funds.
The breadth of the changes is extensive, and the regulatory relief and greater certainty provided by the Final Rule will touch nearly all of the financial system. Every financial institution, fund manager, and intuitional investor will want to evaluate the Final Rule to understand how a now simplified Volcker Rule creates new opportunities. Interested parties should contact the authors for more information on the modified covered fund provisions.
For a comprehensive analysis of the Final Rule, please see the attached PDF.