On August 20, 2019, two of the agencies responsible for implementing the Volcker Rule finalized amendments to the Rule that narrow and simplify the proprietary trading prohibition and significantly reduce compliance burdens. The Final Rule includes only limited revisions to the covered fund provisions. The Agencies deferred to a forthcoming notice of proposed rulemaking all of the significant, more complicated covered fund issues that had been the subject of questions in the Agencies' 2018 proposal.

Accounting Prong and Proprietary Trading: The Final Rule adopted by the FDIC and the OCC resolves the issue of greatest concern to the banking industry by removing the new accounting prong that the Agencies proposed last year to replace the purpose test in the trading account definition.

  • The Agencies had intended the accounting prong to provide a simpler, objective test to address industry concerns about the scope of the subjective purpose test and related 60-day rebuttable presumption. However, it quickly became apparent after the 2018 proposal that the accounting prong would expand the proprietary trading prohibition's scope to sweep in many positions not intended to be prohibited, including some long-term investments.
  • Following months of comments and discussions about whether to modify the new prong or to drop it all together, and whether the Agencies would need to re-propose whatever alternative they chose, the Agencies adopted a simple and final solution by dropping the proposed prong, and placing increased reliance on the market-risk capital prong.
  • The Final Rule also reverses the presumption in the short-term purpose prong so that instruments held for 60 days or longer are presumed not covered. With these and other amendments, the Final Rule provides a simpler proprietary trading prohibition that appears better tailored to the activities that the statute intended to address.

Compliance Program: Consistent with other recent efforts by the Agencies and Congress to reduce compliance burdens, the Final Rule also narrows the application of the rule's most significant compliance program requirements, including the CEO attestation, to institutions with the largest trading operations.

  • The Final Rule went further than last year's proposal, increasing the threshold for metrics reporting and several other requirements from $10 billion to $20 billion in trading assets and liabilities and the threshold for the CEO attestation from $1 billion in the proposal to $20 billion.
  • Although institutions previously subject to these requirements have already incurred the expense of building compliance and reporting structures, relief from these requirements going forward, particularly from the CEO attestation, will significantly reduce ongoing burdens.

Foreign Banking Organizations: The Final Rule included two changes of particular importance for foreign banking organizations.

  • It revised the exemption for foreign banks' trading outside the United States to remove the restriction on trading with or through U.S. counterparties and the prohibition on using U.S. personnel to arrange, negotiate or execute a transaction. This finally resolves one of most significant objections of foreign banks to the extraterritorial scope of original 2013 rule.
  • The Final Rule also resolves a provision of the 2018 proposal that would have extended the CEO attestation and other requirements to many foreign banks with limited U.S. operations.

Covered Funds: The Agencies finalized all of the revisions they specifically proposed last year, including the addition of an exemption permitting acquisition of covered fund interests to hedge transactions facilitating a customer's exposure to a covered fund, and excluding from the aggregate and per-fund limits and the Volcker Rule capital deduction interests in third-party covered funds acquired under the market-making or underwriting exemptions.

  • However, by declining to include in the Final Rule any revisions on the many topics that were the subject of extensive questions but not proposed text in the 2018 proposal, the Agencies have put the most significant covered funds issues on a significantly longer timetable. This decision was likely driven by a combination of concern about delaying finalization of the proprietary trading and compliance revisions, and the potential for criticism if the Agencies had adopted revisions in a final rule without the opportunity to comment on a specific proposal.
  • The significant issues that remain to be addressed include the scope of the covered funds definition (e.g., whether to move to a "characteristics-based" definition and whether venture capital funds and family wealth management vehicles should be covered), the scope of exclusions for foreign public funds and joint ventures, the treatment of certain controlled investment vehicles as "banking entities", and incorporation of Regulation W exclusions into the so-called "Super 23A" prohibition.

  • Effective Date: The effective date of the Final Rule is January 1, 2020, with compliance required by January 1, 2021. Banking entities may elect to apply any rule change sooner, in whole or in part. In the case of metrics reporting, early application is subject to the Agencies adopting certain required technological updates. This ability to opt into the Final Rule early appears to include the revised scope of CEO attestations. This should mean that institutions no longer subject to the CEO attestation requirement should not be required to submit them in March 2020. However, this was not explicitly addressed.

A detailed summary and analysis of the Final Rule follows below, expanding on the key takeaways we summarized in our highlights Alert Memo of August 20, 2019.

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